T-Minus 15 Hours: The Complete Government Shutdown Summary

Today sees the Senate reconvene after yesterday saw the Republican-led House voted in favour of a modified continuing resolution (CR) which includes a one-year delay to Obamacare (the Affordable Care Act). The Senate is not scheduled to meet until 1400ET today meaning that if the new bill is rejected there is not enough time to create a new CR and pass it back to the Senate before the midnight deadline, leading to a government shutdown in which all non-essential government workers will stay at home. 

Expectations are now that it is likely there will be a temporary shutdown given that the White House signalled the new CR would be vetoed by President Barack Obama and Democrats in the Senate immediately said the legislation approved by the House yesterday is unacceptable.

Even if there is a government shutdown, it is expected to only last a day or two and a CR is expected to pass in Congress this week, however this shutdown could lead to a delay of Friday's release of this month's Non-Farm Payroll report. This will fund the government to at least November 15th, giving more time for Congress to create a CR which extends through the entire 2014 fiscal year. Goldmans estimate a 2-day US govt shutdown will hit Q4 GDP (annualised) by 0.1 percentage points and one week by 0.3 percentage points, however the more important issue for Congress to address will be the debt ceiling as the US is expected to exhaust borrowing capacity on October 17th.

One main concern of a delay to both a 2014 budget and raising the debt ceiling is the possibility of a credit rating downgrade of the US sovereign, although overnight Moody's said that a government shutdown wouldn't affect debt service and that a debt cap failure would lead to perceived default risk and that failure to raise the debt limit is worse than a shutdown.

It is worth bearing in mind that several members of Congress are likely to speak to the press throughout today as they arrive for discussions and the Senate vote, and as is often the case, any deal between the Senate and House is likely to be either overnight or within the next two days. 

Although a US government shutdown is a risk event for financial markets, many analysts have noted this week's voting is overshadowed by debt ceiling negotiations which will begin shortly after. These talks will have a much greater impact on market sentiment as a delay to increasing borrowing capacity risks a US default as the worst case scenario.

EVENTS OVER THE WEEKEND:

• Shutdown seen as unavoidable without talks
• U.S. 4Q GDP seen reduced by as much as 1.4 percentage pts. depending on shutdown’s duration
• Latest House plan authorizes 10 wks of spending starting Oct.1 only if most provisions of Obama health law delayed a year
• Senate Democrats, President Obama say they will reject any measure that includes provisions tied to Obamacare
• Yday, Senate Majority leader Harry Reid D-Nev. says chamber has acted on Continuing Resolution, adjourns until today 2pm
• Govt shutdown odds now at 90%, Democrat Collender says

ECONOMY:

• In case of govt shutdown, Labor Dept says it will issue jobless claims data (scheduled Thursday 8:30am)
• SEC says EDGAR system, crucial enforcement will continue
• Treasury says it will operate debt programs and manage cash, USPTO says it will stay open “a few weeks”
• Commerce Dept says it won’t issue economic data
• Bearish impact on U.S. economy “significant” if shutdown lasts,  Morgan Stanley says in note
• Shutdown means Fed will have to prolong QE: BNP Paribas

CONTRACTORS:

• "Notable" cos. tied to potential continuing resolution moves; H.J. Res. 59 would fund govt at “close to current levels”  according to Sept. 27 note from Bloomberg Industries analyst Brian Friel: BLL, BAVA@DC, BA, CACI, ERICB@SS, XLS, GD, GSK@LN, HRS, LMT, NOC, NOVN@VX, RTN, SAN@FP, TTEK, URS
• Top 20 tied to defense, healthcare, infrastructure, IT:LMT, BA, GD, RTN, NOC, UTX SAIC, BA/@LN, LLL, HII, MCK, Bechtel (2213Z@US), BAH, URS, CSC, DYN, HUM, HNT, Triwest Healthcare (1893Q@US), TXT/BA joint venture
• Health Exchanges begin enrollment tomorrow there’s a partial shutdown of govt.
• Fannie, Freddie don’t face direct shutdown effect: Moody’s
• Senate bill ends protection Sept. 30 for Monsanto, Dupont on bioengineered seeds: BI’s Friel
• USD begins week buffeted by increasing possibility of U.S. government shutdown

TRADING RECOMMENDATIONS BASED ON DEBT SHUTDOWN CATALYST:

Barclays

• Go long USD/CAD 2w2w FVA; relatively low USD/CAD volatility and its exposure to U.S. economic outlook make this an attractive hedge against U.S. political risk from debt-ceiling negotiations and a potential spike in market volatility

Credit Agricole CIB

• Risk aversion is rising, U.S. equities and USD are falling
• Near-term prospects for USD are bleak, with limited potential for any upside unless budget deal is reached; safe-haven currencies, in particular JPY, will be buoyed in this environment
• In terms of high-beta currencies including Asian currencies, any positive impact from the fact that U.S. yields are capped will be outweighed by rising risk aversion leaving most Asian currencies vulnerable

Bank of Tokyo-Mitsubishi UFJ

• If no resolution is reached, partial govt shutdown will kick in on Oct. 1, which could prompt USD selling against majors although stronger against Asia
• Beyond govt shutdown, bigger issue is how they move toward debt limit when govt runs out of cash on Oct. 17; under such circumstances, BOT-Mitsubishi UFJ’s one-week USD/JPY forecast is a wider 96.50-100.00 on safe-haven JPY bids

Westpac

• Expects USD to continue to trade on the “backfoot” vs its peer core currencies during a govt shutdown; event risk early in the week is negative for USD
• Failure to raise debt ceiling would mean the U.S. govt must pay all its bills out of current revenue, risking default and downgrade and probable chaos in markets

Credit to Zero Hedge