The U.S. government shutdown is about to become the longest on record and the media comment is increasingly focusing on the personal and the economic costs of the shutdown.
Financial markets have paused in their more optimistic assessment of life as a result, although it is probably still too soon to say “bye-bye” to equities. The abrupt end to the White House Congressional discussions yesterday has seemingly reduced investor expectations for a more rapid conclusion to the current problem. The longer the government shutdown lasts, the greater personal and economic costs and with that, the greater the impact on financial markets.
To some extent, this is not about the current shutdown but about investors anticipating how things will play out with a gridlocked Washington over the next couple of years.
At some point, in the second quarter, there is the debt ceiling debate and then in September of this year there is another budget debate.
The signal of problems with the current situation has implications beyond the immediate future.
If there is a move to resolution, then the economic damage now will be limited and there may possibly be more optimism about future collaboration, and financial markets can then return to being more positive.
Otherwise, the world of policy was marginally more favorable to financial markets.
The China-U.S. trade talks concluded in a reasonably positive way.
There is unlikely to be a major, major trade deal any time soon, but the sense is that the worst of the risks are being managed.
And then, the Federal Reserve Minutes of the FOMC meeting of December 18-19 seem to be more “dovish” than the December language of the Fed had suggested. It is noted that the Fed is now at the “bottom end of the range” for neutral interest rates and the suggestion of a pause to reflect that came through more clearly.
If the Fed sees the core PCE inflation measure that follows 2 percent or so, with 2 percent economic growth and if the market expects a rate hike, which is more likely than not, then the Fed, on the basis of these Minutes, will probably raise rates again.
Those conditions “should” be met this year, but in the absence of economic data as a result of the government shutdown at the moment, it may take a while for the conditions to be met.
European Central Bank Minutes
The European Central Bank (ECB) offered also today the minutes of their monetary policy meeting of October 24-25, and here there is less room for excitement.
The ECB is barely starting its process of policy adjustment, even as the Federal Reserve is moving into the later stages of policy adjustment.
Of course, as the Euro area lagged behind the United States in terms of the economic recovery, this is not perhaps so surprising.
Policy perceptions are somewhat “frozen” until ECB President Draghi is escorted off the premises later in September this year and a new leadership is installed, bringing in a new assessment to the Eurozone’s economic outlook.
Chinese inflation data came in overnight with consumer prices moderating somewhat. Chinese consumer prices are mainly about food, which China doesn’t export, so it’s of limited importance to the rest of the world. The things that the American and European exporters sell to China, are not generally given much weight in Chinese inflation numbers either.
Producer prices are slightly more relevant to the rest of the world, but like producer prices everywhere else, they have been affected by low oil prices at the end of last year.
China did announce some further tax cuts for small and medium sized businesses yesterday, following the recent pattern, the process is of a bit of stimulus here and a bit of stimulus there, emphasizing the political significance of meeting growth expectations overall, the South China Morning Post reported.
Etienne "Hans" Parisis is a bank economist who has advised investors on financial markets and international investments.