Investors will be closely monitoring developments in Washington, DC this week as lawmakers scramble to pass laws to avoid a government shutdown by the end of the month and discuss raising the debt ceiling. Elsewhere, economic data on consumer confidence is also pending publication.
The Senate is expected to vote on Monday on a procedural motion on the bill passed by the House of Representatives last week. This bill included a plan to temporarily fund the government through early December and was accompanied by a measure to raise the national debt ceiling through December 2022.
The latter point has been a point of contention for Senate Republicans, who are only marginally outnumbered by Democratic lawmakers in both houses, and who have threatened to block the law in its current form.
Senate Republicans, including minority leader Mitch McConnell, have suggested that Democratic lawmakers should use the budget balancing process to raise the debt ceiling without Republican support. McConnell, however, has endorsed a short-term government funding bill that precludes suspension of the debt ceiling.
“If you [the Democrats] want to tax, lend and spend historical sums of money without our assistance, they have to raise the debt limit without our help. That’s the reality, ”McConnell said in the Senate last week.
For its part, democratic lawmakers have called for the debt ceiling to be raised across parties to prevent the government from failing to meet its obligations. The Treasury Department has warned that if Congress fails to act, the US could default its debt as early as October.
The story goes on
“The US has always paid its bills on time, but the overwhelming consensus among economists and tax officials from both parties is that failure to raise the debt ceiling would cause widespread economic disaster,” Treasury Secretary Janet Yellen wrote in a comment in the Wall Street Journal last week .
Federal Reserve Chairman Jerome Powell also warned of the consequences of failing to raise the debt ceiling during his press conference following the FOMC meeting last week.
“It’s just very important that the debt ceiling be raised in time so that the United States can pay its bills when they are due. It’s an extremely important thing, ”he said. “Failure to do so can lead to violent reactions, serious damage to the economy and financial markets … no one should assume that the Fed or anyone else will damage the markets or the economy in the event of a failure.”
A dead elm tree will be removed on the western front of the Capitol in Washington on Friday, September 10, 2021. (AP Photo / J. Scott Applewhite)
Amid the stalemate, the Office of Management and Budget began warning federal agencies last week to prepare for a possible government shutdown. The reminder served as a standard warning one week before the deadline for Congress to reach an agreement on at least a temporary continuation of the government’s funding.
Although leaders of both parties agreed that an ongoing resolution is needed to avoid the closure at the end of the month, ongoing tensions over raising the debt ceiling have served as a potential obstacle to those efforts.
“We still expect Congress to avert a partial government shutdown in early October. Republicans will not vote for the current ongoing resolution, touted by the Democratic leadership, which includes a new debt ceiling suspension,” Paul wrote Ashworth, Chief North American Economist for Capital Economics, in a Friday note. “But we expect a Plan B to emerge next week to remove the latter, which the Republicans will support.”
“The bigger problem is that there doesn’t seem to be an easy way to raise the debt ceiling by mid-October. he added.
Investors have also grown more nervous as the debates progressed, with stocks recording their worst day since May last week amid an accumulation of worries that included debt concerns with China Evergrande.
However, many strategists have suggested that market participants shouldn’t have to worry too much about the impact of a possible government shutdown.
“In the past, we’ve seen government closures tend to be short-lived,” JPMorgan Asset Management’s global market strategist Jordan Jackson told Yahoo Finance Live on Friday. “We also know that these non-essential federal employees also get vacation pay.”
“If it takes more than 30 days, it will surely have a bigger impact on the economy. But in general these closings are usually short-lived and the markets – although they can correct themselves in the short term – somehow “keep grinding,” he added. “I think it is certainly a risk in terms of a short-term Mini correction there. But even here, with all the liquidity out there, I think any kind of slip in the markets will be short-lived. “
Historical stock performance during and immediately after a government shutdown also suggests subdued market effects.
“In the 14 government closures since 1980, the S&P 500 has achieved average returns of -0.1% on the day the budgetary authority expires, 0.1% during the closure periods and 0.3% on the day of the dissolution,” said David Kostin, chief executive of Goldman Sachs equity strategist, wrote in a note posted Sept. 21.
“One notable exception was the last federal shutdown in December 2018, when the S&P 500 fell 2% by the spending agency’s expiration date,” he added. “However, this decline was likely mainly driven by investor concerns about the Fed tightening policy.”
Kostin also noted that the typical government shutdown since 1980 has only lasted three days before it was finally resolved. However, recent shutdowns would have taken many times longer, with the last four state shutdowns averaging 18 days, Kostin said.
As for economic data, consumer confidence will be one of the most closely watched new data.
The Conference Board will release its consumer confidence index for September on Tuesday morning. Economists expect the index to rise only slightly compared to August, with consumer sentiment on the coronavirus and rising prices stabilizing near the lowest level since February.
Consensus economists expect the index to climb to 115.0 in September after falling to 113.8 in August. In the last monthly report, consumer assessments of the current business and labor market situation have eased and expectations for the next six months have also deteriorated.
“Consumer confidence fell to a six-month low in August on delta concerns and inflation,” Bank of America economist Michelle Meyer wrote in a statement Friday. “We think these concerns largely persisted into September.”
At the time, Lynn Franco, Senior Director of Economic Indicators at the Conference Board, said it was “too early to decide” whether the decline in consumer confidence “would lead to a significant cut in consumer spending in the months ahead.”
The latest spending data has also been ambiguous. The latest report from the Department of Commerce showed that retail sales rose 0.7% in August after falling in July. However, the categories that saw the biggest drops were areas like ecommerce stores and grocery stores, suggesting that consumer behavior was shifting back towards staying trends and away from in-person events like dining out during the latest wave of coronavirus.
Monday: Durable goods orders, preliminary in August (0.6% expected, -0.1% in July); Durable goods without transport, preliminary August (0.5% expected, 0.8% in July); Non-defense capital goods orders excluding aircraft, tentative in August (0.3% expected, 0.1% in July); Orders for capital goods, excluding defense equipment, excluding aircraft, preliminary in August (0.9% in July); Dallas Fed Manufacturing Activity Index, September (11.0 expected, 9.0 in July)
Tuesday: Advance Goods Trade Balance, August ($ 87.0 billion expected, $ 86.4 billion in July); Wholesale Inventories, Previous Month, Provisional August (0.6% in July); Retail inventory levels August (0.4% in July); FHFA Monthly Home Price Index, July (1.5% expected, 1.6% in July); S&P CoreLogic Case-Shiller 20-City Composite Index, Month on Month, July (1.62% expected, 1.77% June); S&P CoreLogic Case-Shiller 20-City Composite Index, Monthly Comparison, July (20.1% expected, 19.08% June); Conference Board Consumer Confidence Index, September (114.2 expected, 113.8 in August); Richmond Fed Manufacturing Index, September (August 9)
Wednesday: MBA Mortgage Applications, Week Ending September 24 (4.9% the previous month); Monthly Pending Home Sales, August (1.0% expected, -1.8% in July)
Thursday: Initial jobless claims, week ending September 25 (320,000 expected, 351,000 the previous week); Ongoing Claims, week ended September 18 (2.845 million the previous week); GDP annualized, quarterly, second quarter third estimate (6.7% expected, 6.6% in previous estimate); Personal Consumption, Second Quarter, Third Estimate (11.9% in previous estimate); Core private consumption expenditure, second quarter, third estimate (6.1% in previous estimate); MNI Chicago PMI, September (65.0 expected, 66.8 in August)
Friday: Personal Income, August (0.2% expected, 1.1% in July); Personal Expenses, August (0.7% expected, 0.3% in July); Core deflator in private consumption expenditure, monthly comparison, August (0.2% expected, 0.3% in July); Core deflator in consumer spending, YoY, August (3.6% expected, 3.6% in July); Markit Manufacturing PMI, September finals (60.5 by prior estimate); Construction spending in August month-on-month (0.3% expected, 0.3% in July); University of Michigan Mood, September Finals (71.0 expected, 71.0 in previous press); ISM Manufacturing, September (59.5 expected, 59.9 in August)
Monday: Aurora Cannabis (ACB) after the market closes
Tuesday: Micron Technology (MU) after the market closes.
Wednesday: No noteworthy reports planned for publication
Thursday: CarMax (KMX), Bed Bath & Beyond (BBBY) before market opening; Jefferies (JEF) after the market closes
Friday: No noteworthy reports planned for publication
Emily McCormick is a reporter for Yahoo Finance. Follow her on Twitter: @emily_mcck
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