Threat of US government shutdown sends DJIA lower

• The Dow Jones Industrial Average lost 1.14% on Tuesday.
• DJI had already shed 1.89% last week as part of pullback that began in August.
• US Durable Goods Orders for August came in well above consensus.
• Apple partner restarts production after fire at India factory.
• Friday’s Personal Consumption Expenditures report for August will determine market’s view of interest rate cycle.

The Dow Jones Industrial Average (DJIA) loses more ground on Wednesday. Anxiety is still top of mind with rebellious members of the US House of Representatives refusing to allow continuing spending bills to reach the floor for a vote. With a vote on any of the separate spending bills, US Federal Government workers could be furloughed as soon as next week, and some government operations could even halt by Saturday.

Early Wednesday, the US Census Bureau released its August Durable Goods Orders data. The print arrived at 0.2%, much better than the -0.5% that had been forecast by analysts. It would seem the US economy is in much better shape than thought. However, when durable goods from the defense industry were excluded, orders dropped by 0.7%.

Dow component Apple (AAPL) said that its Taiwanese partner in India, Pegatron, had restarted production of iPhones on Wednesday after an electrical fire shut down the factory on Sunday. Dow member Disney (DIS) also opened narrowly higher after the Writers Guild of America ended its five-month strike with major movie studios.

Dow Jones News: US Government shutdown might curtail spending

Though it has been in the news for weeks, the Republican-controlled House of Representatives has refused to bring any of the 12 spending bills to the floor for a vote. Prior funding bills should run out this weekend, and already lawmakers are saying they do not have enough time to vote on the bills.

The Democratic-controlled Senate released a 79-page bill late Tuesday in an attempt to help the lower house of Congress with its negotiating process by extending funding through November 17. 

Leaders of both parties in the Senate have proved bipartisan in the effort by bringing both of their caucuses together in support of the stop-gap measure. 

“It will continue to fund the government at present levels while maintaining our commitment to Ukraine’s security and humanitarian needs while also ensuring those impacted by natural disasters across the country begin to get the resources they need,” Senate Majority Leader Chuck Schumer (D-NY) said Tuesday.

However, the situation in the House is being held up by a small band of Republicans headed by Florida Representative Matt Gaetz. It isn’t completely clear what Gaetz wants, but many speculate that the present impasse is merely an attempt to force House Speaker Kevin McCarthy (R-CA) to resign.

Other disciples of Gaetz take issue with a lack of Mexican border security funding in earlier versions of the bill, as well as a minority who dislike any further funding for Ukraine’s defensive war with Russia.

Experts say that as many as 800,000 federal workers will be furloughed starting next week if no deal can be finalized. In addition, the government’s inability to pay thousands of vendors could result in a slowing US economy, depending on how long the stand-off lasts. The shutdown in December 2018 ended up lasting more than one month.

August PCE data will be most-watched event on Friday

Core Personal Consumption Expenditure (PCE) data is the Federal Reserve’s (Fed) most trusted source for pinpointing inflation in the US economy. As luck would have it, the August data for the PCE arrives at 12:30 GMT / 8:30 EST on Friday.

Analyst consensus holds that monthly inflation grew at 0.2% in August, which is the same result as July. Annualized inflation is expected then to print at 3.9%, a much healthier level than July’s 4.3%.

Oil and thus Gasoline prices have been soaring so far in the second half of 2023. Neither of these directly is included in core PCE, but both will begin seeping into PCE as higher energy prices translate into higher prices for goods and services. Both WTI and Brent Oil contracts have extended their September gains above $90 a barrel. 

Expect the Dow Jones index to collapse if core PCE comes in stronger than expectations. There is a lot of negative macro sentiment at the moment, and it does not seem like investors can bear one more negative data point. Higher inflation will lift expectations that the Fed has one more rate hike in its quiver, which the equity market is hoping won’t be used.

What they said about the market – Ian Shepherdson

Pantheon Macroeconomics’ Ian Shepherdeson, a trained economist, sees parallels between the December 2018 government shutdown and the present market reaction to a US government shutdown that may begin this weekend if the Republican-controlled House of Representatives fails to bring a funding bill to a floor vote. 

“The stock market tanked in the weeks before the record government shutdown from December 22, 2018, through January 26, 2019, and is on course for a repeat performance this time around. The S&P 500 fell by 15.5% from its December 3 high to its low on December 22, as the shutdown began. […] The market then rallied through the shutdown, recovering most of the lost ground before the federal government went back to work, and breaching the December 3 level again on February 22.”