One week after Goldman raised its odds for a government shutdown from 33% to 50%, days after Treasury Secretary Steven Mnuchin issued the loudest warning yet that the debt ceiling situation has to be resolved over the next month, and one day after Compass Point said that after Trump's Phoenix rally shutdown threat, the "odds of a government shutdown are now dramatically higher", this morning the market-implied odds of a government shutdown have spiked to the highest yet, with the Oct. 12 - Sept. 28 T-Bill spread spiking by another 4bps to 20bps...
... the highest since the Bill "kink" first emerged.
Confirming the market's increasingly gloomy sentiment - or at least the bond market's, stocks continue to trade on whatever is the latest CTA momentum whim - this morning Axios reports "top White House and GOP leadership officials tell us the chances of a market-rattling government shutdown are rising by the day — and were even before Trump threatened at his raucous Phoenix rally on Tuesday night to use a shutdown as leverage to get funding for a border wall." Quoting a "top Republican source" who puts the chance as high as 75%, Axios adds that "the peculiar part is that almost everyone I talk to on the Hill agrees that it is more likely than not."
Axio's Jonathan Swan also notes that it may all come down to Trump's mood, as "Trump is spoiling for a fight and the [conservative House] Freedom Caucus haven't had a fight for a while. That's a dangerous dynamic."
Meanwhile, away from the bond market, the Vix-term structure suggests that a government crisis will take place not in late September but the end of the year.
This makes sense as based on the Treasury's funding mechanisms, the showdown could come either in September or December, or both. Axios notes that according to "officials at both ends of Pennsylvania Avenue who are up to their necks in tax reform think passage probably doesn't happen until early next year" and adds that "a September shutdown could be better for tax reform than a Christmas shutdown, because it would allow conservatives and Trump to get it out of their system."
Meanwhile, Trump should not expect any help from Democrats who feel that Trump is "boxed in" largely due to the brewing war with Senate majority leader Mitch McConnell.
“Democrats have made clear we will not support funding for President Trump’s misguided, ineffective border wall,” Rep. Joseph Crowley (N.Y.), chairman of the House Democratic Caucus, warned Wednesday in an email to The Hill.
“If President Trump and Republicans insist on wasting taxpayers’ money, they will be to blame for any government shutdown.”
The sentiment is widely shared among Democrats –– Senate Minority Leader Chuck Schumer (D-N.Y) and House Minority Leader Nancy Pelosi (D-Calif.) issued similar statements Wednesday –– and they’ll have plenty of leverage in the fight.
As a result:
- Trump is at war with Senate Leader McConnell and several other Republicans, complicating communications and compromising trust.
- Congressional leadership doesn't want a shutdown and can pass the fall bare necessities — continuing resolution / debt ceiling / Children's Health Insurance Program extension — using mostly Democratic votes.
- But the Freedom Caucus will hammer Speaker Ryan for doing so, and conservatives in the Senate will hammer Leader McConnell.
Adding to the uncertainty Axios also points out that following Bannon's departure, "Trump is surrounded more and more by conventional/mainstream folks, which could actually make him feel more compelled to buck them."
Finally, in a separate report from The Hill this moring, "with just 12 legislative days scheduled for September –– and the spending debate complicated by a Sept. 29 deadline to raise the debt ceiling –– the Republicans have little room for error. And Trump’s prime-time shutdown threat poses yet another hurdle, forcing GOP leaders to find a legislative sweet-spot that satisfies the president’s border-wall demand without alienating the Democrats, whose votes will be essential to keep the government running."
The question then becomes how long before the stock market finally "notices" what is going on with T-Bills and panicks, adding urgency to the process. As we reported earlier this week, according to Deutsche Bank, "it is not unusual for equity markets to be comparatively sanguine until it is within the month of the deadline", according to Deutsche Bank.
In 2011, the VIX oscillated somewhat in the months ahead (with modest rises at a roughly similar lead to the debt ceiling deadline as the current rise in vol), but the meaningful move higher did not come until about a week prior to the eventual resolution. In 2013 (when the debt ceiling deadline coincided with a government shutdown), the larger pop in equity vol occurred about three weeks before, peaking about a week prior to the resolution. It has not been uncommon to see some degree of equity drawdown about two months ahead of the debt ceiling deadline, with another more muted sell-off arising alongside with the aforementioned rise in volatility, though through this lens the evidence is perhaps somewhat less conclusive.
We are now within one month of the month deadline...