Markets Are Unprepared for a Government Shutdown
Markets Are Unprepared for a Government Shutdown by Jim Rickards – Daily Reckoning
Will Republicans and Democrats agree on a budget, and avoid a government shutdown after midnight Friday?
I’d say the odds are 50/50. Actually, I put the odds of a shutdown at about 55%. There’s certainly enough substance here to be wary.
The government could shut down because of disagreements over defense spending, funding for Trump’s wall with Mexico, deportation of illegal immigrants brought to the U.S. as children (the “Dreamer Act” also referred to as “DACA”), funding for Planned Parenthood, funding for Obamacare (called “SCHIP”), disaster relief and more.
There’s not much middle ground between Democrats and Republicans on many of these hot button issues.
How would a shutdown affect the Fed’s plans to raise rates on the 13th?
If an agreement can’t be reached and the government does shut down, it’s very difficult to imagine that the Fed would go forward with its planned interest rate hike on Dec 13.
Meanwhile, markets are almost certain the Fed will raise rates. It’s already “baked into the cake.”
The euro, yen, gold and Treasury notes are all fully priced for rate hike. If it happens, those instruments won’t change much because the event is priced.
But we could see a violent market reaction if Janet Yellen stays put and doesn’t raise rates.
If the Fed doesn’t raise rates, gold could soar as the Fed passes on its best chance to raise rates and markets perceive that easy money is here to stay. Euros, yen and Treasury notes will also soar.
Of course, saying the government could shut down is different than saying the government will shut down. Again, I give it about a 55% chance at this point.
And there are lots of ways for things to go wrong.
Late last week the Commerce Department released the October PCE core inflation data. This is important because that’s the number the Fed watches. There are plenty of other inflation readings out there (CPI, PPI, core, non-core, trimmed mean, etc), but PCE Core year-over-year is the one the Fed uses to benchmark their performance in terms of their inflation goal.
The Fed’s target for PCE Core is 2%. The October reading was 1.4%. For weeks I’d been saying that a 1.3% reading would put the rate hike on hold, and a 1.6% reading would make the rate hike a done deal. So, the actual reading of 1.4% was in the mushy middle of that easy-to-forecast range.