11 Sep 2018
Market Brief: US government in shutdown
Republicans were unable to muster enough support for a stopgap funding bill to keep the federal government funded through February 16, causing the government to go into shutdown from midnight on Friday.
|Today's data release
||Chicago Fed Nat Activity Index
The knee-jerk response was a touch of dollar weakness but nothing of substance. Though Republicans have a marginal 51-48 majority in the Senate, the funding bill under debate requires 60 votes in favour meaning the Republicans need to bring some Democrats on board. Democrats are seeking to use their leverage to try and shield the "Dreamers" (i.e. illegal immigrants brought to the US as children) from deportation after the Trump administration ends Obama's Deferred Action for Childhood Arrivals (DACA) programme. Friday’s shutdown presents a headache for President Trump, who was due to head to his Floridian golf resort to celebrate his first year in office, while a scheduled trip to the World Economic Forum in Davos may now not go ahead.
Bipartisan talks have continued over the weekend but the two parties have yet to come to an agreement, with Republicans refusing to specific concessions on immigration until Democrats provide the votes to re-open the government. According to House Speaker Paul Ryan, an alternative bill that would see the government funded through February 8 has the support of the House of Representatives but the proposal at this stage does not look likely to pass the Senate. Senate Majority Leader Mitch McConnell has attempted to break the stalemate by pledging to bring immigration legislation up for debate after February 8 if the issue is still unresolved by then but the Democrats continue to look for a more solid commitment. A vote is tabled in the Senate for 12:00 EST today (17:00 GMT), though Republican Senator Jeff Flake has told reporters that the Republicans are still six or seven Democratic votes short of breaking the impasse in the Senate.
Meanwhile over in the Germany a working coalition appears to be a step closer. A special SPD conference in Bonn over the weekend approved party leaders to enter into full talks with the CDU and CSU parties to re-form a centre-right/centre-left Grand Coalition. However the margin in favour was a relatively narrow 56-44% and the resulting detailed proposals will have to be put to the full party membership for further approval. Even so, yesterday’s vote paves the way to end the stalemate and observers hope that the new government will be in place by Easter. The euro was given a boost by this news.
On Friday we received worse than expected UK retail sales figures for the month of a December. The figures disappointed against expectations with a 1.5% month-on-month drop recorded (+1.4% year-on-year) whilst consensus expectations had been for -1.0% month-on-month and our own forecast for -0.6%. The sharp decline was in contrast to the (revised) 1.0% month-on-month rise recorded in November and likely reflects the problems the Office for National Statistics has in seasonally adjusting for the relatively new phenomenon of Black Friday, to produce a fully seasonally adjusted number. Indeed, the ONS has said that consumers continue to move Christmas purchases earlier with higher spending in November around Black Friday. Comparing the three months to December with the three months to September, retail sales growth has weakened. But it will not be until the January retail sales figures are published next month that we are able to gauge how consumer momentum has performed over the full seasonal period. Overall, after taking an initial leg down, sterling is now relatively unchanged.
The day ahead
Today is an incredibly light day on the data front with the Chicago Fed National Activity Index (Dec) out of the US the only data point of note. More importantly the market will be watching how talks and the 1700 GMT vote in particular develop with regards to the US shutdown.
Have a good start to the week.
Thought of the day
The US Government failed to end their self imposed shutdown this weekend. Federal shutdown occurs when spending bills expire and means hundreds of thousands of federal workers will be unable to report for work today. During a shutdown, some Government functions may continue, however many activities cease for as long as a shutdown is under way. A few examples of the last US Government shutdown in 2013 included the closure of national parks service sites, national museums and monuments; furthermore, new patients were not accepted into clinical research at the National Institutes of Health, and hotline calls about diseases went unanswered. According to a Office of Management and Budget analysis, during the 2013 shutdown $500 million was lost due to a lower visitor spending in National Parks and $2.5bn was lost in compensation costs for furloughed workers (whose lack of pay for two weeks hampered consumer spending). What is surprising is that this is the first time a government shutdown has happened while one party, the Republicans, controls both Congress and the White House. What will happen next? The Government will continue their talks this week and hope to come to an agreement as soon as possible. The USD hasn’t been hugely impacted by this event so far; but if the shutdown continues for a few more days or even weeks, will the USD weaken? To find out more or hedge your FX exposure against any adverse FX moves, call the Investec FX team today.
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