Introduction: US government shutdown bad for country’s credit, warns Moody’sGood morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The possibility of a US government shutdown is looming over global markets today, and threatening America’s triple-A credit rating.
Overnight, credit rating agency Moody’s warned that dysfunction in Washington DC would reflect negatively on the country’s rating.
Moody’s is the last of the Big Three credit who still gives the US a AAA rating with a stable outlook (the gold standard for credit worthiness).
It warned:
A shutdown would be credit negative for the US sovereign,”
“In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability.”
There are just a few days left for Capitol Hill to avert a shutdown, by passing a spending bill by 1 October. If that doesn’t happen, the federal government will be left without funding.
That is expected to force hundreds of thousands of federal workers to go without pay and bring a halt to some crucial government services.
Moody’s analyst William Foster told Reuters:
“If there is not an effective fiscal policy response to try to offset those pressures … then the likelihood of that having an increasingly negative impact on the credit profile will be there.
And that could lead to a negative outlook, potentially a downgrade at some point, if those pressures aren’t addressed.”
But there is deadlock in Washington DC, where a group of rightwing Republican members of the House of Representatives are refusing to reach a compromise with their own party’s leadership over a spending bill.
Moody’s predicts that a shutdown would probably be shortlived, and likely not to affect government debt service payments.
But the row is focusing investors’ attention on US creditworthiness, at a time when the interest rates on sovereign bonds are rising on fears that interest rates will stay higher for longer than hoped.
Treasury Yield Curve (10Y-2Y) is the steepest since May. Bear Steepening occurs when long-term yields rise faster than short-term yields and is commonly seen before recessions materialize. pic.twitter.com/fFW3jJ5MQv
— Barchart (@Barchart) September 26, 2023Kyle Rodda, senior financial market analyst at Capital.com, says:
While what these agencies rate most government debt means diddly-squat, it does say something about the dysfunction in the US government….
Moody’s warning is a reminder of the costs of an unstable Government.
Just last month, Fitch downgraded the US government’s top credit rating, blaming the “steady deterioration in standards of governance”, following the row over lifting the US debt ceiling.
Also coming up todayGatwick, the UK’s second largest airport, is expected to announce details of flights which are being cancelled this week due to a shortage of staff in air traffic control.
Thousands of passengers flying to and from Gatwick this week are expected to suffer disruption, after it imposed an immediate cap on Monday of 800 flights taking off or landing a day.
The airport said it would share the total of 164 cancellations proportionately between airlines until Sunday, with easyJet passengers most likely to be affected given the carrier operates just under half of all Gatwick flights.
People travelling on Friday are most likely to be hit, with 865 flights scheduled to depart.
The agenda 8am BST: European Central Bank chief economist Philip Lane speaks at a conference “Monetary Policy Challenges for European Macroeconomies”.
2pm BST: US house price index for July
3pm BST: US consumer confidence for September
Key events
Ofwat orders water companeis to return £114m to customers
Julia Kollewe
Water companies in England and Wales have been ordered to return £114m to customers through lower bills next year because progress on leakage and sewage spills has been “too slow”.
In its annual water company performance report, the regulator Ofwat said the majority of water and wastewater companies were underperforming ontargets set for 2020 until 2025 to deliver better outcomes, for customers and the environment.
Companies are judged against metrics including pollution incidents, customer service and leakage. This year, no company has been ranked in the “leading” category, and 10 companies are in the “average” category, while seven are “lagging” – Anglian Water, Dŵr Cymru, Southern Water, Thames Water, Yorkshire Water, Bristol Water and South East Water.
More here.
Pound at six-month low vs dollarThe pound has weakened to a new six-month low against the US dollar this morning.
Sterling has extended its recent selloff, losing almost half a cent this morning to $1.2175, the lowest since mid-March.
The pound versus the US dollar over the last year Photograph: RefinitivThe US dollar is at a 10-month high against a basket of currencies, despite – or even because – of the deadlock in Washington DC.
Ipek Ozkardeskaya, senior analyst at Swissquote Bank, explains:
Even if it sounds funny, the dollar could profit from safe-haven inflows if the government shutdown drama doesn’t last long. During the last US government shutdown, in 2018 – which was, by the way the longest shutdown since 1970s – the US dollar gained against most major currencies.
Of course, the longer a shutdown lasts, the bigger the impact would be on the economy, and potentially on the US’ credit rating. And the bigger the impact on the US growth and its credit worthiness, the more likely we see the US dollar get – at least a small – hit from another political gong show.
For now, though, don’t pull all your eggs out of the US basket, because, the dollar could well strengthen despite the political shenanigans in the US, and the US stocks could see increased inflows, as well. The last time the US government was shut in 2018, the S&P500 rallied 13%.
US governnment bond prices are coming under more pressure this morning, pushing up the yield (or interest rate) on Treasury bills to the highest since 2007.
Yesterday was “another stormy day” in parts of the financial markets, reports Deutsche Bank strategist Jim Reid, with fresh milestones reached across several different asset classes.
Reid told clients this morning;
Just to give you a sense of what happened: the 10yr Treasury yields rose +10.0bps and closed comfortably above 4.5% for the first time since 2007; 10yr real yields were near 15yr highs; the 10yr bund yield traded above 2.8% for the first time since 2011; the VIX index of volatility flirted with its highest level since May intra-day; the US dollar index hit a YTD high; and European natural gas prices reached their highest level in almost 6 months.
And if that weren’t enough, we remain days away from a potential US government shutdown, unless Congress can agree to pass funding beyond September 30. So a pretty tough backdrop for just about everything.
The risk of a US government shutdown this weekend is one of several potential tail risks nagging away at investors, says Stephen Innes, managing partner at SPI Asset Management.
Innes explains:
Congress faces a critical deadline at the end of September, just days away. They must come to an agreement on government funding by this deadline. Failure to do so could result in the federal government’s partial or complete shutdown. But this has looked somewhat likely since the debt limit deal, given the thin House majority and a lack of consensus on spending levels. Other issues, like aid for Ukraine, funding for Justice Dept. investigations, or border security, could hinder progress, and the US sovereign downgrade could put an extra spotlight on the fiscal situation, adding to the risks.
In contrast to the debt limit, where Congress reached a deal due to the severe potential economic repercussions of an impasse, a government shutdown is viewed as relatively more manageable from a macroeconomic standpoint. However, this very fact, the less severe economic impact of a shutdown, paradoxically increases the likelihood that Congress may fail to take timely action.
Other tail risks include rising oil prices, and the ongoing US Hollywood actors’ strike, Innes adds.
Introduction: US government shutdown bad for country’s credit, warns Moody’sGood morning, and welcome to our rolling coverage of business, the financial markets and the world economy.
The possibility of a US government shutdown is looming over global markets today, and threatening America’s triple-A credit rating.
Overnight, credit rating agency Moody’s warned that dysfunction in Washington DC would reflect negatively on the country’s rating.
Moody’s is the last of the Big Three credit who still gives the US a AAA rating with a stable outlook (the gold standard for credit worthiness).
It warned:
A shutdown would be credit negative for the US sovereign,”
“In particular, it would demonstrate the significant constraints that intensifying political polarization put on fiscal policymaking at a time of declining fiscal strength, driven by widening fiscal deficits and deteriorating debt affordability.”
There are just a few days left for Capitol Hill to avert a shutdown, by passing a spending bill by 1 October. If that doesn’t happen, the federal government will be left without funding.
That is expected to force hundreds of thousands of federal workers to go without pay and bring a halt to some crucial government services.
Moody’s analyst William Foster told Reuters:
“If there is not an effective fiscal policy response to try to offset those pressures … then the likelihood of that having an increasingly negative impact on the credit profile will be there.
And that could lead to a negative outlook, potentially a downgrade at some point, if those pressures aren’t addressed.”
But there is deadlock in Washington DC, where a group of rightwing Republican members of the House of Representatives are refusing to reach a compromise with their own party’s leadership over a spending bill.
Moody’s predicts that a shutdown would probably be shortlived, and likely not to affect government debt service payments.
But the row is focusing investors’ attention on US creditworthiness, at a time when the interest rates on sovereign bonds are rising on fears that interest rates will stay higher for longer than hoped.
Treasury Yield Curve (10Y-2Y) is the steepest since May. Bear Steepening occurs when long-term yields rise faster than short-term yields and is commonly seen before recessions materialize. pic.twitter.com/fFW3jJ5MQv
— Barchart (@Barchart) September 26, 2023Kyle Rodda, senior financial market analyst at Capital.com, says:
While what these agencies rate most government debt means diddly-squat, it does say something about the dysfunction in the US government….
Moody’s warning is a reminder of the costs of an unstable Government.
Just last month, Fitch downgraded the US government’s top credit rating, blaming the “steady deterioration in standards of governance”, following the row over lifting the US debt ceiling.
Also coming up todayGatwick, the UK’s second largest airport, is expected to announce details of flights which are being cancelled this week due to a shortage of staff in air traffic control.
Thousands of passengers flying to and from Gatwick this week are expected to suffer disruption, after it imposed an immediate cap on Monday of 800 flights taking off or landing a day.
The airport said it would share the total of 164 cancellations proportionately between airlines until Sunday, with easyJet passengers most likely to be affected given the carrier operates just under half of all Gatwick flights.
People travelling on Friday are most likely to be hit, with 865 flights scheduled to depart.
The agenda 8am BST: European Central Bank chief economist Philip Lane speaks at a conference “Monetary Policy Challenges for European Macroeconomies”.
2pm BST: US house price index for July
3pm BST: US consumer confidence for September