Markets Brace for Government Shutdown
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Investors are bracing for the first U.S. government shutdown in 17 years Monday after this weekend's battle of the wills in Congress.
On Friday, the Senate passed a bill to keep the government operating through November 15th, removing the House's defunding of Obamacare provision. The House then took up the bill on Saturday, adding a provision which will delay the implementation of Obamacare for one year and remove the medical device tax. The Senate is expected to vote down the House's bill today, which could force a government shutdown.
Those on both sides of the isle have insisted they want to avoid a shutdown, although neither side seems willing to budge. It is still possible that a one-or-two week short-term extension is announced. Although, many say that doesn't change the debate or likely outcome, and they would rather see the government shutdown now versus delaying it.
If the government is shutdown, 800,000 non-essential government employees would be sent home tomorrow. Strategists at FBR Capital note the shutdown would include the Bureau of Labor Statistics, which could delay Friday's jobs report. The SEC would continue to process data from companies via EDGAR but will be unable to process filings. National security functions will be largely unaffected. TSA and air traffic control functions would also remain open. They also note that under previous shutdowns, employees were paid retroactively for the time they spent furloughed. Although that seems unlikely in this case.
According to FBR's Edward Mills both parties see political benefit and potential peril from these fights. "Democrats believe Republicans will suffer politically if the government is shut down, improving their standing politically in the next election," he comments. "Democrats are also concerned that, if they cave on this debate, they will be forced to accept ever more onerous conditions in future. The Republican leadership recognizes the 1995 shutdown was a political disaster for the party, but a large enough group of rank-and-file members believes now is the time to show they are willing to "shoot the hostage." They think the only way that they can force President Obama to the negotiation table and win on some key policy objectives is to force the shutdown."
Commenting on how this ends, Mills notes: "The public and market reactions to the shutdown will be key to how long this lasts and how it will be resolved. The more external pressure there is on Congress, the more likely we will see a clean debt-limit increase and a government funding bill getting signed into law. We believe there is majority support for such a bill in both houses of Congress currently. Members have just not been allowed to vote on such a provision. There is an outside chance that Congress will be unable to resolve this before the October 17 deadline for raising the debt ceiling. At that point, we think that Treasury would ensure all interest payments are made, but it might refuse to make payments on other obligations in order to keep pressure on Congress to complete a deal."
Heading into the market open, S&P 500 futures are down 15 points, or 0.9%. The 10-year bond yield dropped 1.7% to 2.599% and gold is down 0.5% to 1,333 per ounce.
On Friday, the Senate passed a bill to keep the government operating through November 15th, removing the House's defunding of Obamacare provision. The House then took up the bill on Saturday, adding a provision which will delay the implementation of Obamacare for one year and remove the medical device tax. The Senate is expected to vote down the House's bill today, which could force a government shutdown.
Those on both sides of the isle have insisted they want to avoid a shutdown, although neither side seems willing to budge. It is still possible that a one-or-two week short-term extension is announced. Although, many say that doesn't change the debate or likely outcome, and they would rather see the government shutdown now versus delaying it.
If the government is shutdown, 800,000 non-essential government employees would be sent home tomorrow. Strategists at FBR Capital note the shutdown would include the Bureau of Labor Statistics, which could delay Friday's jobs report. The SEC would continue to process data from companies via EDGAR but will be unable to process filings. National security functions will be largely unaffected. TSA and air traffic control functions would also remain open. They also note that under previous shutdowns, employees were paid retroactively for the time they spent furloughed. Although that seems unlikely in this case.
According to FBR's Edward Mills both parties see political benefit and potential peril from these fights. "Democrats believe Republicans will suffer politically if the government is shut down, improving their standing politically in the next election," he comments. "Democrats are also concerned that, if they cave on this debate, they will be forced to accept ever more onerous conditions in future. The Republican leadership recognizes the 1995 shutdown was a political disaster for the party, but a large enough group of rank-and-file members believes now is the time to show they are willing to "shoot the hostage." They think the only way that they can force President Obama to the negotiation table and win on some key policy objectives is to force the shutdown."
Commenting on how this ends, Mills notes: "The public and market reactions to the shutdown will be key to how long this lasts and how it will be resolved. The more external pressure there is on Congress, the more likely we will see a clean debt-limit increase and a government funding bill getting signed into law. We believe there is majority support for such a bill in both houses of Congress currently. Members have just not been allowed to vote on such a provision. There is an outside chance that Congress will be unable to resolve this before the October 17 deadline for raising the debt ceiling. At that point, we think that Treasury would ensure all interest payments are made, but it might refuse to make payments on other obligations in order to keep pressure on Congress to complete a deal."
Heading into the market open, S&P 500 futures are down 15 points, or 0.9%. The 10-year bond yield dropped 1.7% to 2.599% and gold is down 0.5% to 1,333 per ounce.
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