Well, we actually had a vote yesterday in the Senate to reopen the government. Actually, we had two votes but both failed to secure the necessary 60 yeas and so on we go with the shutdown into month number two. The two votes: the Trump wall and DACA proposal, and the other the House-passed bill that would reopen the government through February 8th received partisan support but failed to achieve the necessary bi-partisan votes to pass in the Senate. The House proposal did receive more Republican cross-over votes, so perhaps there is something to work with there. McConnell and Schumer say they continue to talk so perhaps we are creeping closer to a solution? One can hope. In any event, next week’s FOMC meeting will take some of the attention away from the shutdown machinations. The only drama expected in the Fed meeting is whether the statement and post-meeting press conference strike a more dovish take than the Fed speak after the December meeting. We discuss the upcoming meeting in more detail below.
|Economic News||Shutdown Starting to Bite into First Quarter GDP||Market Rates|
As we increasingly fly blind with the economy due to shutdown-affected releases that never appear, we’re reminded the FOMC has its first meeting of 2019 next Wednesday and it will include a post-meeting press conference that should shed some light on the darkness we’re experiencing in reading the economy right now.
Most Fed speak since the December 19th meeting has been dovish with a clear impression that the Fed’s default position in the first half of 2019 is very likely to be pause mode. We don’t expect that the Chairman will say it so bluntly in his press conference but we do expect words like “patience” and “cautious optimism” to sprinkle his commentary. He may also make note of the nine hikes to date, not to mention the balance sheet tapering. With 12 to18 month lags in monetary policy effectiveness taking a little time to step back and see how the prior action takes hold is probably prudent. We also expect the statement to express a bit more restraint and less optimism in characterizing the economic outlook given the increasing clouds that have developed leading up to and through the December meeting.
Some signs are already gathering as to the impact from the prior hikes. One need look no further than the interest-rate sensitive sectors of housing and auto sales to see a marked slowdown in activity over the past several months particularly. Business sentiment began turning lower as the fourth quarter began and now consumer confidence readings are also weakening as December market volatility and the ongoing government shutdown have dented earlier exuberance.
Speaking of the government shutdown, if it persists much longer the amount of lost economic data will become material. For an economy beholden to consumer consumption, missing data on retail sales, personal income and spending, and fourth quarter GDP (originally scheduled for next Wednesday), will further undermine both business and consumer confidence. As businesses look at the increasing dysfunction and uncertainty in D.C., they are likely to shelve some expansion and/or hiring plans, and that pullback will impact consumers as well. And heaven forbid an accident or widespread illness occur with understaffed and overworked air traffic controllers and/or other critical food and medical positions. If you thought confidence was deteriorating before watch it crater in a worse-case scenario.
If you’re looking for some solace from the domestic situation, don’t look overseas for it. Yesterday, the ECB held its monthly policy meeting and ECB President Draghi pointedly said that downside risks to the E.U. were increasing. When 2018 came to a close, the ECB was expected to begin a tightening path sometime by the summer. In yesterday’s meeting Draghi pushed that timeframe back to December, at the earliest. And with Germany, the largest economy in the E.U., posting the weakest manufacturing numbers since 2013, and in clear contractionary territory, Draghi’s caution and concern certainly seems warranted.
Don’t go looking to Asia either for soothing words. Japan’s latest GDP print was –2.5% with two of the last three quarters posting negative growth. Last week China posted its weakest GDP growth in ten years. We won’t dig into the US/China trade war issues much other than to say the serious and important topics of IP-theft and technology transfers are a long way from being settled and that will continue to be an overhang for both economies. Don’t forget there is also the UK and its Brexit problem. The March 29th deadline is fast approaching and the only bit of good news on that front is that an amendment has been offered up that extends the deadline to July. It needs a vote in Parliament but that’s what passes for good news these days on the international front.
Navigating all of these hurdles is a huge task even with a somewhat functioning federal government but with the level of dysfunction currently on display it only adds to the sense that Treasuries will continue to be the beneficiaries of the slowdown and angst. 2.50% on the 10-year is a feasible target in this environment and the technical indicators are beginning to lean that way.
Shutdown Starting to Bite into First Quarter GDP
Initial estimates of the government shutdown’s impact to the overall economy overlooked two factors: (1) the length of time for the shutdown, and (2) the increasing ancillary economic activities that are impacted, especially the longer the shutdown continues. The latest estimate is that for every two weeks close to a 0.5% of GDP could be cut. With the shutdown now beyond a month, the 800,000 affected employees and the spending they are foregoing is expected to cut at least 1.0% off first quarter GDP estimates and that number will only increase as the D.C. stalemate continues.