Trump’s Government Shutdown Threat Stole Spotlight from Jackson Hole

While markets are awaiting speeches of Fed Chair Janet Yellen and ECB President Mario Draghi in the annual Jackson Hole symposium, they are unsettled by US President Donald Trump’s comments on shutting the government. DOW gave up some of the gains on revived hope on tax reform and closed down -87.8 pts or -0.40% at 21812.09. S&P 500 dropped -8.47 pts or -0.35% to close at 2444.04. Dollar index is heading back to 93 handle and is kept well below near term resistance at 94.28, and thus maintaining bearishness. More notable movement is seen in 30 year yield which recent recent fall and closed down -0.04 at 2.749. 10 year yield also lost 0.044 to close at 2.171 but it kept above last week’s low at 2.163. In the currency markets, Sterling and Kiwi are trading as the weakest one for the week and there is no sign of a rebound.

Shutdown threat complicates debt ceiling plan

Trump’s pledge in a rally in Phoenix that "if we have to close down our government, we’re building that wall" is seen by analysts as unsettling. He has requested USD 1.6b for building the US-Mexico border wall but that is widely rejected by Democrats. And, even though the House has passed a spending package with the wall funding, Trump doesn’t have enough support to pass in the Senate by September 30. And he could in the end veto the spending bill if wall funding is not included. At the same time, some Republicans are working on a bipartisan bill with Democrats on raising debt ceiling. But the Democrats are clear on their rejection of attaching any condition to the debt bill. Now, it’s believed that Trump’s veto on spending will not only risk government shut down on October 1, but debt payment defaults shortly after that.

Fitch warns of rating review with negative implications

Credit ratings agency Fitch warned that failure to raise the debt ceiling would prompt a review on US AAA sovereign rating "with potentially negative implications". Fitch warned that "brinkmanship over the debt limit could ultimately have rating consequences, as failure to raise it would jeopardize the Treasury’s ability to meet debt service and other obligations." It noted that "republican fiscal conservatives are likely to make support for lifting the debt limit conditional on measures to aggressively reduce the budget deficit. A ‘clean’ debt limit increase, unattached to other policy measures, appears possible, although it may require support from Democrats." And, "in Fitch’s view, the economic impact of stopping other spending to prioritize debt repayment, and potential damage to investor confidence in the full faith and credit of the U.S., which enables its ‘AAA’ rating to tolerate such high public debt, would be negative for U.S. sovereign creditworthiness."

Impact on Fed’s policy

Bearing a resemblance to the situation in 2013, one may worry about Fed’s move in light of possible government shutdown. Back in 2013, the FOMC, led by the then Chair Ben Bernanke. Haunted by threats of not raising debt ceilings by Republicans at the time, Bernanke refrained from making announcement on tapering at the meeting on September 17-18. As noted in the minutes, the Fed acknowledged that "a number of significant risks remained, including those related to the potential economic effects of the sizable increases in interest rates since the spring, ongoing fiscal drag, and the possible fallout from near-term fiscal debates". US dollar slumped with the DXY index sinking over -1% on the day of this dovish announcement. More in US Debts Approach Limit. How Will It Affect Fed’s Policy?

On the data front

New Zealand trade surplus narrowed to NZD 85b in July but was better than expectation of NZD -200m deficit. UK will release Q2 GDP revision, BBA mortgage approvals and CBI realized sales. US will release jobless claims and existing home sales.

GBP/USD Daily Outlook

Daily Pivots: (S1) 1.2774; (P) 1.2803; (R1) 1.2828; More…

Intraday bias in GBP/USD remains on the downside as fall from 1.3267 is still in progress for 1.2588 key near term support. As noted before, we’re favoring the case that correction from 1.1946 is completed at 1.3267. Decisive break of 1.2588 will confirm our view and target a test on 1.1946 low. On the upside, break of 1.2952 resistance is needed to indicate short term bottoming. Otherwise, outlook will stay cautiously bearish in case of recovery.

In the bigger picture, overall, price actions from 1.1946 medium term low are seen as a corrective pattern. While further rise cannot be ruled out, larger outlook remains bearish as long as 1.3444 key resistance holds. Down trend from 1.7190 (2014 high) is expected to resume later after the correction completes. And break of 1.2588 will indicate that such down trend is resuming.

Economic Indicators Update