Tags: debt | ceiling | budget | fights | investors

Fights on Debt Ceiling, Budget to Haunt Investors

us capitol building roof flipped open and dollar flowing out

Friday, 25 January 2019 09:05 AM Current | Bio | Archive

The U.S. government remains partially shut down for the 35th day.

After dueling bills to reopen the federal government failed yesterday in the Senate, some senators of both parties briefly discussed a bill to fund the government for three weeks while they try to find a larger immigration agreement. This gives some hope, but not much, that a solution could be reached. President Donald Trump was noncommittal, telling reporters at the White House that he would only sign a bill if it included a "down payment" on a border barrier, the BBC reported.

Meanwhile, 800,000 federal workers will miss their second payday today since the partial shutdown started on December 22.

The problem for investors is that a conclusion to this situation does not necessarily signal easier times ahead with the debt ceiling and the September budget debates still on the calendar later this year.

For investors, it’s important to keep in mind that both of these issues will be relevant in economic and in market terms.

Durable Goods Orders Data Won’t Be Released Today

Durable goods orders data were supposed to be released today but apparently that won’t be the case.

On the U.S. Department of Commerce’s website we read: “Due to the lapse in Congressional Appropriations for Fiscal Year 2019, the U.S. Department of Commerce is closed. Commerce Department websites will not be updated until further notice.”

European Central Bank Leaves Policy Unchanged

The European Central Bank (ECB) left rates and policy unchanged yesterday. During the press conference, Reuters reported that ECB President Draghi made various statements of the obvious saying: “There was unanimity in saying that the key aspect to assess is the persistence of the general uncertainty as being produced by these factors ... If all this were to persist, we should expect a longer weak momentum beyond the near term.”

The European Central Bank (ECB) governing council member Benoit Coeure said that it is too early to discuss whether ECB will hike rates this year as the recent economic slowdown has surprised the central bank. Coeure sees quite a lot of political uncertainty and further added that the ECB may have to adjust rate guidance at some point as the jury is still out on how persistent the slowdown will be.

In simple words, it will be “low for longer.”

That situation will, in my view, further increase the divergence between the ECB and the Fed, from which I still expect a couple of rate increases this year if the U.S. economy remains on its current path.

German Economy Declines Further

The monthly German ifo Business Climate Index, which is a highly-regarded early indicator of economic developments in Germany, fell 1.9 points to 99.1 in January 2019, the lowest reading since February 2016 and well below market expectations of 100.6, amid global trade tensions and Brexit uncertainty. The gauge of current conditions declined to 104.3 from 104.9 in December and the business expectations sub-index dropped to 94.2 from 97.3. Sentiment deteriorated among manufacturers, service providers, wholesalers & retailers and constructors.

Together with the flash Purchasing Managers' Index (PMI) survey for Germany, both reports suggest that German business activity got off to a very soft start to 2019.

For investors it could be helpful to recall that Germany is the world’s fourth biggest economy when measured by GDP.

The ECB decision to downgrade its economic risk assessment for the Euro area from balanced to negative looks all the more appropriate, which stands in sharp contrast with the still relatively positive outlook for the U.S. economy.

The euro weakened somewhat against the dollar to the $1.13 zone per euro on the news and is set to face further headwinds as things don’t look all that well in the Eurozone, which in turn should be supportive for the dollar.

Investors could do well keeping in mind that there are Elections to the European Parliament on May 23–26 and that in case the ‘populists’ should advance substantially, which cannot be excluded, that should be another negative for the euro.

Dollar cash-equivalent instruments don’t seem to me to be a bad choice to park funds temporarily for the time being. There could be some unpleasant surprises lurking beneath the surface.

Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.

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The problem for investors is that a conclusion to ‘this’ situation does not necessarily signal easier times ahead with the ‘debt ceiling’ and the September ‘budget’ debates still on the calendar later this year.
debt, ceiling, budget, fights, investors
Friday, 25 January 2019 09:05 AM
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