U.S. government shutdown negotiations at a glance
Market players today
- We expect the US Congress to pass a short-term funding bill before the deadline of midnight U.S. Time, which would avoid a government shutdown on Friday.
- On economic data, we will have both German inflation and unemployment figures for September. Weekly jobless claims are released for the United States and the KOF leading indicator is up from Switzerland.
- From the central banks, we will get the minutes of the Riksbank meeting last week. We also have a range of Fed speakers coming today, including Williams, Bostic, Evans, and Bullard.
The 60-second preview
Imminent Government Shutdown: Last night, the House passed a bill to suspend the debt ceiling until December 2022. However, the bill is largely expected not to pass by the Senate given the Republican opposition, because 60 votes out of 100 are needed to pass most laws. Therefore, the stalemate is still not resolved and time is running out and the government shutdown is approaching (in the United States at midnight today). See also Research US: Government shutdowns are generally short-lived and none are interested in defaulting by the end of the day we published yesterday. In this report, we also discuss what happens if the so-called X-Day passes when the US Treasury is expected to prioritize, delay, and ultimately default. The US Treasury said X-Day is October 18 – others have argued it could be early November.
Evergrande Crisis: As markets quickly turned to other issues, we caution against being too complacent about the real estate crisis in China. In a new article, we describe the perfect storm facing Chinese developers and what the government needs to contain the crisis, see Research China – ‘No’ Lehman moment ‘but the financial stress is not over.
Central Banks: In a virtual debate with Fed’s Powell, ECB’s Lagarde, BoJ’s Kuroda, and BoE’s Bailey all essentially reiterated that the current supply disruptions and high inflation will be temporary. But it still cannot hide that the world’s central banks have started the process – albeit very cautiously – towards a post-corona normalization of monetary policy with the BoE and the Fed in the lead. Recent market movements show that the market believes the ECB will eventually follow suit.
Gas, electricity and oil prices: European spot natural gas prices hit a new record yesterday, with Netherlands 1m forward TFF rising EUR 9 to EUR 86.5 / Mwh. In the UK, three smaller energy companies targeting the retail market collapsed yesterday amid the recent surge in natural gas prices. 10 electricity providers have so far collapsed in the UK. Oil prices edged down yesterday as the market waits for the OPEC + meeting next week.
Stocks: It looks like stocks made a comeback yesterday. In Europe, stocks were higher, but global stocks were stable, as measured by the MSCI World Indices. Interestingly, the defensive / value / large cap sector continues to outperform and the tech sector continues to underperform despite improving risk appetite and stagnating returns. In the United States, Dow + 0.3%, S&P 500 + 0.2%, Nasdaq -0.2% and Russell 2000 -0.2%. This morning, Asian markets are overwhelmed with an underperformance of Hong Kong and most other green markets. European and American futures contracts are higher.
FI: For the first time since the FOMC meeting last week, yields ended lower that day. The periphery led the risk on the mood, with BTP-bund spreads tightening 2.3bp to just below the 100bp mark. Bund yields fell 1bp. A similar performance was observed in the United States. European inflation continues to recover with a 5 to 5 year hitting 1.82% yesterday amid market speculation on the behavior of central banks in response to higher inflation. In particular, we expect the ECB to adopt a patient approach before acting.
FX: Yesterday’s Forex session was all about the USD appreciating and EUR / USD falling close to full digits. At the other end of the spectrum, the NZD, MXN and NOK all registered losses of more than 1% against the greenback while the JPY and CAD were more resilient.
Credit: Thanks to a better general feeling of risk, credit also improved yesterday. Xover and Main both tightened around 0.5bp. HY bonds tightened by 4bp while IG bonds just tightened slightly.
The Swedish National Institute for Economic Research (NIER) released new forecasts yesterday. The NIER forecasts a further relatively sharp rise in CPIF inflation in the coming months – to a peak of 3.5% in November – largely driven by energy prices. However, energy (electricity) prices are expected to decline in 2022 due to two factors. First, according to the Swedish Energy Agency, the output of wind turbines will increase by 30% in 2022, second, a Finnish nuclear power plant is expected to start up in 2022 with production amounting to 14% of electricity consumption. As the Nordic electricity markets are integrated, this will also put pressure on prices in Sweden.
The Riksbank minutes of the September political meeting are released today. After the policy was announced, there was a discussion as to whether there has been a change of mind regarding the size of the balance sheet or more specifically whether the Riksbank, after all, might not reinvest all the securities coming in. maturing in 2022, makes it a QT (quantitative tightening). We doubt it.