As the US shutdown shows no sign of ending, oil and gold did nothing. The US and Australian dollars were stable. Long bonds were unchanged too. There is still no sign of panic in broader markets.
But there are some signs of concern. The VIX surged to 20% stocks were off 1%. The action in short duration bonds was spectacular, from Zero Hedge:
So markets are getting jumpy about a default in the short term. The three year Treasury auction went off without a hitch so it’s really only around those bonds exposed directly to repayment risk in the next month that are suffering.
Cracks re also appearing in the real economy. Gallup has released an awful consumer confidence number:
Americans’ confidence in the economy has deteriorated more in the past week during the partial government shutdown than in any week since Lehman Brothers collapsed on Sept. 15, 2008, which triggered a global economic crisis. Gallup’s Economic Confidence Index tumbled 12 points to -34 last week, the second-largest weekly decline since Gallup began tracking economic confidence daily in January 2008.Fiscal brinksmanship in Washington is related to many of the largest weekly drops in Americans’ confidence in the economy since 2008. … Americans’ confidence in the economy fell eight points during two separate weeks in July 2011, as leaders in Washington debated over whether to raise the debt limit or default on the nation’s debts. … Similarly, economic confidence could continue to fall in the coming days and weeks as Congress and the president work to reach an agreement to raise the debt ceiling by the upcoming Oct. 17 deadline.Still, economic confidence bounced back within several months of the 2011 debt crisis and the downgrading of the U.S. credit rating. … This suggests that these fiscal debates may not affect consumer confidence in the same long-term negative way that hits to the economy — like the 2008-2009 economic recession — do.
And the NFIB Small Business Optimism Index showed weakening internals. From Capital Economics:
- September’s NFIB survey suggests that small businesses became more downbeat on the prospects for the economy ahead of the Federal government shutdown. The longer the shutdown continues, the more likely it is that actual sales will fall and credit conditions will tighten.
- We already knew from last week’s release of the NFIB’s jobs report that the hiring expectations balance fell to +9 from +10 in August (which was revised down from +16). And most of the other components either rose or fell by one point. (See Table.)
- The exception is the decline in the balance expecting the economy to improve, to a five-month low of -10 from -2 in August.
This is still not overly concerning but the longer it goes, and there seems no end in sight, the wider the ripples. Provided the stupidity ends soon the economic affects will pass by Christmas. In 2011 the same impasse triggered an inventory cycle that boosted growth for six months. I still see this as a short term buying opportunity for the risk-tolerant equities trader.
He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.
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