As politicians of both US parties cannot agree on the annual budget proposal, there is a real risk of a 'government shutdown' under which some government agencies stop functioning until the budget is passed by parliament. This procedure could contribute to a drop in GDP or delays in published macroeconomic data. According to the Washington Post, 'the U.S. government already notified federal employees yesterday that a suspension of operations appears imminent, as the Biden administration begins the formal process of preparing much of Washington to halt operations on Sunday.' Lael Brainard, an economic advisor to the White House, indicated that a government shutdown could pose an unnecessary macro challenge to the US economy although data releases would not necessarily be significantly delayed.
- To date, the longest U.S. government shutdown has lasted 35 days. Moody's chief economist Zandi suggested that a full quarter-long government shutdown would result in an approximate 1.2% decline in GDP
- The situation raises the risk of a downgrade to AA+ by Moody's which is the only agency that still maintains a AAA rating for the US.
- Potentially, a shutdown would certainly help the Federal Reserve 'fight inflation' but it is uncertain whether the market would find this sufficient consolation given the broader uncertainty surrounding the economic ramifications
- Neal Kashkari suggested that a government shutdown would take the burden of policy tightening off the Fed's shoulders by making it likely that investors would indeed expect dovish monetary policy changes much sooner
The US500 has reduced its gains almost completely and is trading under heavy selling pressure, with the price settling below the SMA50 and SMA100 on the H1 interval. Index futures are losing 0.54%.
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