US: Government shutdown risks building - MUFG

Sandeep Kanihama FXStreet Contributor

With Congress back from the Thanksgiving break, latest developments will certainly intensify the risks of a government shutdown taking place when the 8th December deadline on passing a government spending bill is reached, according to Derek Halpenny, European Head of GMR at MUFG.

Key Quotes

“Tuesday was important in shaping how this proceeds with President Trump meeting the two Democrat leaders – Nancy Pelosi and Chuck Schumer. However, following a tweet by President Trump that he didn’t think a deal was possible given what the Democrats wanted, Pelosi and Schumer cancelled the meeting. In September, President Trump sided with Democrats to extend funding to the new deadline date of 8th December but it doesn’t look like anything similar will happen this time. The Democrats are insistent on the provision of legal protection for immigrant children under the Deferred Action for Childhood Arrivals (DACA) being renewed.”

“What might that mean for the markets? The last example of a government shutdown was during the Obama presidency when there was a government shutdown between 1st October and 17th October. The dollar weakened by around 1.0% (DXY basis) in the run in to the beginning of the shutdown but then reversed while the S&P 500 dropped briefly before recovering and hitting new highs by the end of the shutdown. So the financial market impact wasn’t particularly huge in 2013. Estimates on the economic impact of the shutdown varied but was certainly not insignificant. S&P estimated that the 17-day shutdown reduced annualised Q4 2013 real GDP growth by around 0.6%.”

“While we would not expect another similar sized shutdown in December to threaten the fully priced rate hike in December, we do believe it would reinforce the prospect of the Fed raising rates at a slower pace in 2018 than current guidance implies. A modest hit to Q4 real GDP growth along with the now nearly standard weakness that tends to come in calendar year first quarters, the FOMC will have ample scope to pause for six months following next month’s rate hike. That’s our assumption and it is consistent with EUR/USD breaking above the 1.2000 level over the coming months.”

Author

Sandeep Kanihama

FXStreet Contributor

Sandeep Kanihama is an FX Editor and Analyst with FXstreet having principally focus area on Asia and European markets with commodity, currency and equities coverage. He is stationed in the Indian capital city of Delhi.

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