Deal lifts markets but does little for US economy
By CHRISTOPHER S. RUGABER of AP
WASHINGTON (AP) – The budget agreement Congress reached Wednesday cheered investors and removed the threat of a catastrophic debt default that could have triggered another recession.
Yet the temporary nature of the deal means a cloud will remain over a sluggish U.S. economy that was further slowed by the government’s partial shutdown.
Political fights over taxing and spending will persist over the next few months. The risk of another government shutdown and doubts about the government’s borrowing authority remain. Businesses and consumers may still spend and invest at the same cautious pace they have since the Great Recession officially ended more than four years ago.
The agreement, expected to be approved by the House and Senate late Wednesday, will reopen the government but only until Jan. 15. The deal would enable the United States to keep borrowing to pay its bills, but not past Feb. 7.
The deal followed a two-week shutdown and came a day before a Treasury Department deadline to raise the nation’s $16.7 trillion debt limit.
“The good news is that we avoid hitting the debt ceiling and all the risks that entails,” said Joel Prakken, co-founder of Macroeconomic Advisers, a forecasting firm. “The bad news is … this hasn’t produced any clarity. We’re going to be right back at this again after the turn of the year.”
The stock market soared on the news. The Dow Jones industrial average jumped 206 points. Bond investors celebrated, too. They sharply drove down the yield on the one-month Treasury bill, which would have come due around the time a default could have occurred. And the yield on the 10-year Treasury, a benchmark for rates on mortgages and other loans, fell.
Investors may now turn to what typically moves stock prices: corporate earnings and economic data. Wall Street is in the midst of earnings season.
“We can go back to focusing on the true reason why stocks are higher: the rebound in housing, rising corporate profits, the resurgence in manufacturing,” said Doug Cote, chief investment strategist for ING U.S. Investment Management.
By itself, the partial government shutdown will have only a limited effect on economic growth, analysts said. Most forecast that the shutdown will dent growth by about 0.15 percentage point per week. But federal employees will receive back pay, suggesting that much of the lost spending could be made up.
Standard & Poor’s estimated that the shutdown has shaved at least 0.6 percentage point from the economy’s annual growth rate in the October-December quarter. It calculated that that means the shutdown took $24 billion out of the economy.
S&P now expects the economy to grow at a tepid annual rate of roughly 2 percent this quarter. In September, it had predicted a 3 percent growth rate.
“The U.S. economy dodged a bullet today,” said Paul Edelstein, an economist at IHS Global Insight. “But the reprieve will be short. … The stage is set for another showdown in January.”
IHS lowered its forecast for growth in the October-December quarter to a 1.6 percent annual rate from a 2.2 percent rate.
The new deadlines to fund the government and raise the borrowing limit that are now a few months away could also weigh on growth in the first quarter of 2014.
A study by Prakken’s firm found that uncertainty over future government policies tends to raise borrowing costs for businesses and consumers, depress stock markets and lower business and consumer confidence. Uncertainty surrounding government tax and budget policies has remained far above historical norms since 2009, Prakken said.
Higher borrowing costs typically make companies less likely to invest and hire. Lower stock markets reduce household wealth and can cut into consumer spending. Macroeconomic Advisers estimates that these factors have slowed growth by 0.3 percentage point each year since 2010.
A report from the Federal Reserve on Wednesday offered fresh evidence of the economic impact of the shutdown and debt limit fight. The Fed’s report on economic conditions in its 12 banking districts found that employers in several districts were reluctant to hire because of uncertainty surrounding budget policies and the new health care law.
Manufacturing growth slowed in the New York region in October, builders were less confident in the housing recovery and growth slowed in four Fed districts. All the reports cited the federal shutdown and impasse over the debt limit as reasons for the declines.
Several companies have also cited the shutdown as a likely drag on sales and earnings. Stanley Black & Decker, the tool maker, on Wednesday lowered its profit forecast for this year. It blamed, in part, “uncertainty created by the U.S. government’s (budget cuts) and shutdown and its impact on business, consumer confidence and spending levels.”
Linear Technology, a semiconductor company, on Tuesday lowered its revenue outlook for the final three months of the year because of the shutdown.
Some analysts think the Fed is now unlikely to slow its monthly bond purchases until well into next year. The Fed has been buying $85 billion a month in Treasury and mortgage bonds to try to keep long-term interest rates low.
The full economic effect of the budget standoff could take a month or more to assess because the release of so much economic data has been delayed. And Drew Matus, an economist at UBS, says that much of the economic data will be distorted by the effect of the shutdown, making it harder to discern underlying trends.
Weekly applications for unemployment benefits, for example, spiked last week, partly because of workers who were temporarily laid off by government contractors and other affected companies. Those figures are collected by the states.
“We’re in the dark,” says Robert DiClemente, chief U.S. economist at Citigroup. “It’s going to be a while until we have good answers to all these questions.”
___
AP Business Writer Ken Sweet contributed to this report from New York.
Debt-Ceiling Alarm Freezes Market With Least Supply: Muni Credit
By Brian Chappatta & Priya Anand Oct 9, 2013
Municipalities are borrowing at the slowest pace in more than two years, showing how the partial federal shutdown and prospect of a U.S. default are dissuading localities from taking on financing for new projects.
Cities and states are offering $4.3 billion of bonds this week after $3.7 billion last week, when the U.S. government shutdown began, data compiled by Bloomberg show. Excluding holidays, it’s the skimpiest stretch of financing since May 2011, even as benchmark muni-bond yields have fallen from a two-year high.
As the political stalemate persists, supply may dwindle further. San Francisco and a school district in Utah are among issuers that may shift sales scheduled for Oct. 17, the day U.S. borrowing authority lapses. The ebbing tide of new bonds is echoed in diminished trading: Volatility on benchmark 10-year muni yields has dropped close to a 10-month low
“Without new issues to give a little bit of price discovery, offers are drying up, bids are getting quiet, and when you add in the politics, the shutdown and the debt ceiling, it seems like people are sitting on their hands,” said Dan Toboja, vice president of muni trading at Ziegler Capital Markets in Chicago. “I would almost call it complete malaise.”
Already Down
The federal gridlock is exacerbating a drop in local financings as interest rates have risen from generational lows seen in December. Cities and states have issued $233 billion of fixed-rate long-term debt through Oct. 4, down 15 percent from the same period last year, data compiled by Bloomberg show.
Municipalities planning their financing amid the standoff in Washington have to consider the potential impact on market interest rates and the economy. The Treasury Department has said any U.S. default from failing to raise the $16.7 trillion federal debt limit could have catastrophic consequences that might last decades.
The Sevier County School District in Utah, with about 4,500 students, has a $36 million bond sale set for Oct. 17. Proceeds from the competitive deal will go toward building a high school. Patrick Wilson, the district’s business administrator, said he has talked with his financial adviser about possibly changing the date.
“I have a little bit of concern” about selling the day of the debt-ceiling deadline, he said in an interview. “The market could be pretty wild.”
Volatility Vanquished
The federal government’s first partial shutdown in 17 years began Oct. 1, halting a rebound in the municipal market fueled by the Federal Reserve’s surprise decision in September to maintain the pace of its monthly bond buying.
Ten-year benchmark muni yields have barely budged over the past two weeks, fluctuating just 0.02 percentage point, Bloomberg data show. Volatility has tumbled, deadening the market swings that generate trading opportunities. For 10-year yields, 60-day volatility is close to the lowest since December, data compiled by Bloomberg show.
A stable muni market is uncommon in October. Benchmark 10-year muni yields have jumped about 0.24 percentage point on average in the month since 2009, Bloomberg data show.
“The market is quiet right now, and that’s pretty rare, especially in October,” Toboja said.
Investing Antipathy
The federal government shutdown has slowed other fixed-income markets too. Corporate bond sales in the U.S. have dropped to $15.2 billion this month from $48.1 billion in the year-earlier period, according to Bloomberg data.
“Underwriters are very hesitant to advise issuers to come to market during somewhat unsettled times,” said Bart Mosley, co-president of Trident Municipal Research in New York. The shutdown and debt-ceiling debate are “keeping investors from feeling like they have to take action, which has led to subdued activity.”
San Francisco plans to sell about $37 million of tax-exempt bonds in a competitive deal Oct. 17 to pay for work at ports, including a cruise-ship terminal, and refinance commercial paper issued to move the project along.
The city has until 1 p.m. local time the day before the sale to postpone, said Nadia Sesay, director of the city controller’s office of public finance.
As Advertised
“We have advertised for a sale on the 17th and we’re hoping we can keep it, but we’re going to continue to monitor the market and see what’s happening with the debt ceiling,” Sesay said in an interview.
Cicero, an Indiana town of about 4,800 residents, has a $2.4 million sewer-revenue bond deal set for Oct. 17. Deen Rogers at H.J. Umbaugh & Associates, the town’s financial adviser, said officials have flexibility to shift the sale if necessary because of the debt-ceiling debate.
Stephen DeGroat, finance commissioner of Rockland County north of New York, said he’s concerned that its $34 million general-obligation issue is scheduled for Oct. 17. He said he plans to call the county’s financial advisers and is open to moving the date.
In 2011, Republicans and Democrats reached a deal to raise the borrowing limit ahead of an Aug. 2 deadline and avoid default. Similar to this month’s reduced volatility, 10-year benchmark muni yields were unchanged that year from the end of June to the end of July, Bloomberg data show.
Offsetting Interests
“Sellers are saying maybe the market will tighten up if we pass the debt ceiling,” Toboja said. “Buyers are saying if we get any kind of supply, the market is going to cheapen up. The end result is you’ve got nobody doing anything.”
Deals in the municipal market this week include a $563 million general-obligation sale from Wisconsin.
The state is issuing with top-rated 10-year munis yielding 2.72 percent, close to the lowest since June. The interest rate compares with 2.66 percent for similar-maturity Treasuries.
The ratio of the yields, a gauge of relative value, is about 102 percent, compared with an average of 93 percent since 2001. The higher the figure, the cheaper munis are compared with federal securities.
Fed now unlikely to slow bond buying before 2014
By MARTIN CRUTSINGER of AP
WASHINGTON (AP) – The Federal Reserve’s decision last month to maintain the size of its economic stimulus was a shocker. Just about everyone expected a pullback in its bond purchases, which have helped keep loan rates low.
And now?
Thanks to the government’s partial shutdown, many analysts don’t think the Fed will reduce its stimulus before next year. And with the White House’s choice of the like-minded Janet Yellen to succeed Ben Bernanke as chairman next year, the Fed will likely be cautious about any pullback in early 2014.
Bernanke and the Fed may also now look a bit wiser to those who questioned their stance last month. After all, a key reason Bernanke gave for maintaining the pace of the Fed’s stimulus was Washington’s budget impasse. It posed a risk to the economy and financial markets, he suggested.
Bernanke said the budget standoff would likely make it harder to know whether the economy was strong enough for the Fed to slow its stimulus.
If anything, the economic outlook is getting darker: Even if the partial shutdown ended now, a graver threat awaits: A deadline to raise the federal borrowing limit. If Congress doesn’t raise the limit by Oct. 17, the government would soon run out of cash to pay interest on its debt. Any missed payment would cause a default. Another recession would likely follow.
In hindsight, many economists think the Fed would have erred if it reduced its stimulus last month.
It almost did.
Some Fed officials have said the policy committee’s decision at the Sept. 17-18 meeting against paring the $85 billion in monthly bond purchases was a close call.
Still, one voting member of the committee, James Bullard, head of the St. Louis Federal Reserve Bank, noted that Fed officials have stressed that any pullback in bond purchases would hinge on the strength of the economy. Some data released before the Fed’s September meeting had showed a weakening economy, Bullard noted.
On Wednesday, details about last month’s decision could emerge when the Fed issues the minutes of the September meeting. The minutes will likely show concern that the economy wasn’t growing as fast as the Fed had forecast and that some indicators, such as job growth and consumer spending, had weakened.
Even after the Fed chose last month not to slow its stimulus, some analysts said it might reduce the bond purchases at its next meeting Oct. 29-30 or at the final meeting of the year, Dec. 17-18.
Few are saying so anymore. What’s changed was the partial shutdown, which many analysts hoped would be averted, and the growing risk that Congress won’t raise the debt limit and will cause the government to default.
Now, many economists say they think the Fed will leave its support at the current high level into 2014.
“With everything that is happening with the federal budget, the Fed is going to be even more cautious about doing anything,” predicted Sung Won Sohn, an economics professor at the Martin Smith School of Business at California State University. “The best approach they can take right now is stand pat and watch.”
For one thing, the outlook for the economy will remain murky as long as the partial shutdown goes on. The shutdown has delayed the government’s release of critical economic data. The jobs report for September, for example, was due out Oct. 4 but has yet to be released.
In the meantime, the Fed will need to monitor the economic effects of both the shutdown and the possibility of a government default.
Treasury Secretary Jacob Lew has told Congress that he likely will have exhausted all the book-keeping maneuvers he can use by Thursday of next week. By then, the government will have only about $30 billion cash on hand.
Lew has urged Congress to raise the current $16.7 trillion borrowing limit before then. President Barack Obama has repeatedly said he won’t negotiate with Republicans over raising the debt limit as he did during a previous such fight in August 2011.
The 2011 standoff was resolved at the last minute. The borrowing limit was raised before the government defaulted on its debt obligations. But the prolonged political impasse led Standard & Poor’s to downgrade long-term U.S. debt for the first time in history.
Most analysts also expect the current debt-limit standoff to be resolved before the deadline given the economic crisis that would ensue if it isn’t.
But Mark Zandi, chief economist at Moody’s Analytics, said it could take the threat of further turbulence in financial markets to break the logjam.
“I think the most likely scenario is that policymakers only act when financial markets begin to sell off,” Zandi said. “It will require lower stock prices, a lower dollar and turmoil in the bond market to get Washington to move.”
Zandi is among those who think market turmoil will delay any pullback in the Fed’s bond purchases. He foresees no slowdown in the purchases until 2014.
“With each day that the lawmakers can’t get it together, the economic damage mounts, and the day the Fed starts tapering is pushed off,” he said.
It’s always possible that Congress could act faster than some expect to resolve the shutdown and the government’s borrowing limit. If so, some say the Fed might still act before year’s end to scale back its stimulus.
But Vincent Reinhart, chief economist at Morgan Stanley and a former top economist at the Fed, said he saw the likelihood of a cut in bond purchases as around 5 percent at the Fed’s October meeting and 10 percent at the December meeting.
Sohn said the Fed’s meeting in March could be the first one when it might feel the economy was strong enough to withstand a pullback in bond purchases.
If the slowdown in bond buying began in March, it would be a full six months after the September date where many had initially expected the Fed’s pullback to begin.
That’s why Sohn thinks the mid-2014 point that Bernanke had mentioned as a likely time for the bond purchases to end will likely slip until the end of 2014.
Sohn said he expects the Fed to eventually take small steps in cutting its $85 billion in monthly purchases, possibly in reductions of $10 billion to $20 billion that would end in December 2014.
“The Fed wants to take measured steps, and I don’t think they will move until Yellen feels she is in firm command,” Sohn said. “Washington’s budget craziness has made the Fed more cautious.”
