This Government Shutdown is Blinding Investors

The partial government shutdown is obviously affecting federal employees that aren’t getting paid, but for the most part, life goes on.

These federal workers might be in a pinch right now, but eventually they’ll get paid back for doing nothing during the longest shutdown ever.

I agree with Fox contributor John Stossel who opined, “During shutdowns, government tells ‘nonessential workers’ not to come to work. But if they’re nonessential, then why do we pay 400,000 of them?”

There’s so much government waste that taxpayers probably wouldn’t notice a change if many of these agencies permanently shut down!

However, the closure is impacting Treasury markets…

Investors aren’t getting important updated economic data from agencies that aren’t funded.

Housing and other data from November and now December are delayed because the U.S. Census Bureau, Department of Commerce, and the Department of Housing and Urban Development are closed.

Even Statistics Canada is blaming the U.S. shutdown on its ability to publish international trade data. I’m just wondering why they can’t track their own data…

For now, we’ll look at December’s existing home sales, which came out yesterday.

Existing home sales is a much larger number, but they don’t give the economy the boost from associated sales of appliances, furniture, and the like as new home sales do. Nonetheless, it’s a good indicator of where overall home sales are headed.

December existing home sales disappointed in a big way!

Sales were down 6.4% on the month and fell below 5 million units annualized. On the year, sales fell 10.3%. The median sales price fell to $253,600, or down 1.4%.

Mortgage rates fell in December. That should have helped sales. It didn’t.

Of course, the shutdown delayed closings for those getting FHA mortgages and other government guaranteed loans.

Look for housing to get worse before it gets better.

Aside from home sales, another update missing this week was December’s retail sales figures.

Retail sales data is important.

It represents over half of all consumer spending, which comprises two-thirds of our economy. December is especially important, as that’s when holiday sales occur.

For the most part, stocks trade on their own fundamentals, but Treasury bond investors rely heavily on economic data to determine how yields should be priced. Supposedly, the Federal Reserve does as well.

Since some of the economic releases will be delayed, does the Fed just continue the path of quantitative tightening (QT) or shrinking its balance sheet?

Will the Fed hike rates again at next week’s meeting?

I doubt it. Not after having raised rates in December.

But remember, all Federal Open Market Committee meetings are “live,” meaning that there’s the chance they could take action and Powell will tell us about it during the press conference following every meeting.

The markets don’t expect a hike either. In fact, they’re not pricing in one for this year!

But, if we see continued market stability, I think we’ll see another hike in March.

Aside from delaying 800,000 federal workers pay, the partial shutdown isn’t stopping the White House preparations for negotiations with China.

Equity markets shot higher last Thursday after reports that Treasury Secretary Steven Mnuchin proposed lifting Chinese tariffs to calm markets and give the Chinese incentive to make deeper concessions.

Treasury yields barely moved but were slightly higher after the news broke.

U.S. Trade Representative Robert Lighthizer is resisting concessions ahead of negotiations that are slated to start on January 30. He thinks China could see the move as sign of weakness.

I could be wrong… but it doesn’t seem like a negotiating tactic President Trump would agree with.

In any case, the stock market reacted to the possibility that a deal might happen at some point in the future.

And so, the shutdown/trade war/rate hike watch continues…