The Day Ahead: Assessing Shutdown Fallout

Yesterday

- European data, Shutdown headlines, Month-End trading conspired to deliver a volatile session

- Bond markets began the day strong, sold-off into the afternoon and bounced back into the close

- No shutdown resolution likely at the end of the day

- Midnight deadline passed with no new news on Shutdown.  Markets didn't seem to care.

Today

- Senate in recess until 9:30am ET

- This Friday's previously scheduled Jobs report is now theoretically delayed.  Waiting on confirmation

- ISM Manufacturing data should be out today at 10am

- European data/drama still a moderate consideration

Strategy

The day is young, but at midnight eastern, we have no Shutdown resolution and the Senate is ostensibly out until 930am ET.  Overnight markets greeted the midnight deadline without a peep.  Treasuries didn't move more than a bp in either direction from Midnight to 1pm, nor did equities move more than 2 points in S&P futures.  Indeed the implied question is "what now?" 

Government shutdowns have happened in the past and markets have reacted in divergent ways, but usually without much fuss.  The bigger questions concern how long it takes to come back on line, what the effects jobs report scheduling will be, and ultimately, how things shape up for the main-event: the debt-ceiling debate culminating in the next "fun" deadline on October 17th.  Bottom line is that we're in major "wait and see" mode.

Charts

In thinking about the "what now" question posed above, NYT posted a slick chart yesterday showing the previous government shutdowns and resulting effect on equities markets.  The green-ish earthtone bars show the number of days each shutdown lasted and the righthand column shows the positive or negative move in equities.  As the chart shows, it's been 50/50 positive vs negative since 1976.

Treasury Chart - 10yr yields, MACD +Histogram

The following chart contains a MACD chart and MACD histogram.  The recently decreasing height of the blue bars indicates a waning trend lower in yield, though one that remains positive.  The green line, however, is one that has returned to the baseline in similar ways during past examples of major sell-off corrections.  It's had a nasty habit of bouncing upon this first return, so vigilance against another day of weakness seems to make sense.  Ideally, we'd have NFP coming up on Friday to either fully justify or obviate the vigilance, but c'est la vie in the world of government shutdowns.  Hence the 'waiting and seeing."