Financial Markets Shrug Off Shutdown Concerns

The Midnight Countdown

Political drama in Washington is building as the Senate has yet to reach an agreement on a short-term funding measure for the government, with less than eight hours remaining before a partial shutdown effectively begins.  Yesterday evening the House passed a one-month extension with little trouble via a 230-197 vote, however Senate Republicans will need the backing of at least 12 Democrats to gain the votes required to pass a stopgap measure.  Immigration policy has remained the largest hurdle to gain bipartisan support for the budget passage, specifically with regard to the “Dreamers”.  President Trump met with Senate Democratic leader Chuck Schumer this afternoon to try to break the deadlock, with Schumer confirming that “some progress” was made albeit without a final deal set yet. 

 

 

What Shutdown?

US financial markets seemingly shrugged off any concerns over the government shutdown as risk assets gained during today’s trading session.  All three major stock indices rose to new record highs, up 0.20%-0.55% on the day, driven by increases in consumer shares.  Treasurys sold off across the curve, with yields/swap rates climbing 2-9 bps in a bear steepening pattern.  The 10-year note yield is poised to finish the session near 2.66% — its highest level since March 2014.  The US dollar eked out a 0.1% gain against major currencies, although it still posted its sixth consecutive weekly decline and is currently hovering near a three-year low.

 

 

Williams Supports Three Hikes

Contributing to the case for higher rates, earlier today at the Bay Area Council Economic Institute, San Francisco Federal Reserve Bank President John Williams confirmed his stance that three rate hikes during 2018 would be a “good starting point”, while adding “that’s not something that’s locked in” as “there are clearly signs… the economy does better than I expect.”  He specifically cited the recent tax cuts as one of the main factors that could drive a spike in inflation, despite current market indicators providing little evidence for such an occurrence.  Williams has been in the news a lot lately, as yesterday it was reported that he had been interviewed for the position of vice chairman at the Federal Reserve, a potential selection that would generally be viewed positively by markets, comforted by his like-mindedness with soon-to-be new Fed Chair Jerome Powell.