By Derry Pickford
Following the last minute deal, a budget conference committee led by Senator Patty Murray and Representative Paul Ryan will now take place and is due to report back by a deadline of Friday 13th December. The chances of this being a fantastic success and the two sides agreeing on a budget are, frankly, slim at best. But should we be scared of Friday 13th? Probably not.
The actual consequences of a failure are relatively low. Only when we reach 15 January 2014 will the government lose its funding. Suddenly the world could look very much look like 1 October 2013 again with the chance of both a shutdown, and a far more scary deadline of 7 February 2014 looming.
However, extraordinary measures (accounting methods that the Treasury can utilise) will mean that even this date won’t be binding. A lot will depend on the February and March tax refund season. Assuming that the Treasury is able to get through this period then cash-flows will turn positive in April. It could be Friday 13th in June or even later that could be the new crunch point. All this leads to a “Groundhog Day” uneasiness. The market thinks “we have seen this all before” and becomes complacent but the more times that we keep on repeating this process the greater the cumulative chance it could end in a miscalculation by either side that causes a default. Continued uncertainty also does nothing to help companies plan and encourage them to invest, which is necessary for a balanced sustainable recovery.
With debt ceiling crisis averted, attention has now switched back to Fed tapering (the slowing down in the rate that the Federal Reserve purchases assets such as Treasuries and Mortgage Backed Securities). The government shutdown which ended last week is going to impact the quality of economic data in general for some time, and in particular the household survey which is used to estimate the unemployment rate. The market now increasingly views January as the earliest the Fed can now move, and given that there could still be a lot of fiscal related uncertainties many pundits are now talking about March as the start to tapering.
We should have most of the delayed September price data out by month end. Although the Fed is likely to treat the data with a high degree of caution a December move is still possible, if (and it is a big if given the economic costs created by the shut-down), the data between now and then were strong enough. The minutes from the last meeting showed that they were very close to moving in September, so a move in December shouldn’t be seen as impossible. Attempting to assign subjective probabilities to various outcomes is always tricky but when weighing up all the evidence I gathered in Washington, the chances that tapering is delayed into 2014 have risen.
Announcements about the date of tapering have taken an excessive level of significance, far more than the implications for the eventual size of the total of stock of asset purchases, because the market was directly inferring about the timing of the first Fed hikes from the start of tapering. The Fed needed to break down the market’s perception of a correlation between the two, but may explain why Governor Yellen has become so quiet on the matter.
‘Could we have QE forever if conditions don’t improve?’ asked a participant at the IIF Institute of International Finance) annual meeting. Sadly the question led Governor Powell to joke that it was a great question that he would love to answer but they had run out of time, before finishing with an upbeat message that continued policy accommodation would eventually lead to a return to full employment.
Derry Pickford is a macro analyst at Ashburton Investments
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