Growing risk of US government shutdown sends DJIA lower


  • The Dow Jones Industrial Average lost 1.14% on Tuesday.
  • DJI had already shed 1.89% last week as part of pullback that began in August.
  • US Durable Goods Orders for August came in well above consensus.
  • Apple partner restarts production after fire at India factory.
  • Friday’s Personal Consumption Expenditures report for August will determine market’s view of interest rate cycle.

The Dow Jones Industrial Average (DJIA) loses more ground on Wednesday. Anxiety is still top of mind with rebellious members of the US House of Representatives refusing to allow continuing spending bills to reach the floor for a vote. With a vote on any of the separate spending bills, US Federal Government workers could be furloughed as soon as next week, and some government operations could even halt by Saturday.

Early Wednesday, the US Census Bureau released its August Durable Goods Orders data. The print arrived at 0.2%, much better than the -0.5% that had been forecast by analysts. It would seem the US economy is in much better shape than thought. However, when durable goods from the defense industry were excluded, orders dropped by 0.7%.

Dow component Apple (AAPL) said that its Taiwanese partner in India, Pegatron, had restarted production of iPhones on Wednesday after an electrical fire shut down the factory on Sunday. Dow member Disney (DIS) also opened narrowly higher after the Writers Guild of America ended its five-month strike with major movie studios.

Dow Jones News: US Government shutdown might curtail spending

Though it has been in the news for weeks, the Republican-controlled House of Representatives has refused to bring any of the 12 spending bills to the floor for a vote. Prior funding bills should run out this weekend, and already lawmakers are saying they do not have enough time to vote on the bills.

The Democratic-controlled Senate released a 79-page bill late Tuesday in an attempt to help the lower house of Congress with its negotiating process by extending funding through November 17. 

Leaders of both parties in the Senate have proved bipartisan in the effort by bringing both of their caucuses together in support of the stop-gap measure. 

“It will continue to fund the government at present levels while maintaining our commitment to Ukraine’s security and humanitarian needs while also ensuring those impacted by natural disasters across the country begin to get the resources they need,” Senate Majority Leader Chuck Schumer (D-NY) said Tuesday.

However, the situation in the House is being held up by a small band of Republicans headed by Florida Representative Matt Gaetz. It isn’t completely clear what Gaetz wants, but many speculate that the present impasse is merely an attempt to force House Speaker Kevin McCarthy (R-CA) to resign.

Other disciples of Gaetz take issue with a lack of Mexican border security funding in earlier versions of the bill, as well as a minority who dislike any further funding for Ukraine’s defensive war with Russia.

Experts say that as many as 800,000 federal workers will be furloughed starting next week if no deal can be finalized. In addition, the government’s inability to pay thousands of vendors could result in a slowing US economy, depending on how long the stand-off lasts. The shutdown in December 2018 ended up lasting more than one month.

August PCE data will be most-watched event on Friday

Core Personal Consumption Expenditure (PCE) data is the Federal Reserve’s (Fed) most trusted source for pinpointing inflation in the US economy. As luck would have it, the August data for the PCE arrives at 12:30 GMT / 8:30 EST on Friday.

Analyst consensus holds that monthly inflation grew at 0.2% in August, which is the same result as July. Annualized inflation is expected then to print at 3.9%, a much healthier level than July’s 4.3%.

Oil and thus Gasoline prices have been soaring so far in the second half of 2023. Neither of these directly is included in core PCE, but both will begin seeping into PCE as higher energy prices translate into higher prices for goods and services. Both WTI and Brent Oil contracts have extended their September gains above $90 a barrel. 

Expect the Dow Jones index to collapse if core PCE comes in stronger than expectations. There is a lot of negative macro sentiment at the moment, and it does not seem like investors can bear one more negative data point. Higher inflation will lift expectations that the Fed has one more rate hike in its quiver, which the equity market is hoping won’t be used.

What they said about the market – Ian Shepherdson

Pantheon Macroeconomics’ Ian Shepherdeson, a trained economist, sees parallels between the December 2018 government shutdown and the present market reaction to a US government shutdown that may begin this weekend if the Republican-controlled House of Representatives fails to bring a funding bill to a floor vote. 

“The stock market tanked in the weeks before the record government shutdown from December 22, 2018, through January 26, 2019, and is on course for a repeat performance this time around. The S&P 500 fell by 15.5% from its December 3 high to its low on December 22, as the shutdown began. […] The market then rallied through the shutdown, recovering most of the lost ground before the federal government went back to work, and breaching the December 3 level again on February 22.”

Inflation FAQs

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it.
Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.

Dow Jones Industrial Average forecast

The Dow Jones fell on Tuesday below the 33,700 support level, which stems from its reinforcing nature during late June and early July. From here, the best bet is that the DJIA falls further over subsequent sessions to the June 6 bottom at 33,400.

A worse bet for bulls is that the DJIA drops all the way to the 32,500 to 32,800 demand range. That range was last tested in May of this year and looks like it may become useful once more. The daily chart shows the DJIA reaching 30 on the Relative Strength Index (RSI). Any reading below 30 means the index is at oversold levels, which may bring some bottom-feeding value investors into the fray for a change.

Dow Jones Industrial Average daily chart


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