The highlight of this truncated week was the re-opening of the federal government after 43 days. On Wednesday night, President Trump signed a stopgap bill that keeps the government funded through January 30. The government resumed full operations and employees began returning to work on Thursday. It will still take weeks to fully reopen and address backlogs after being closed for six weeks. The Congressional Budget Office estimates the shutdown potentially lowered Q4 GDP by as much as 1.5%. It is expected that some of that will be recovered over time.

Re-opening the government knocked equity markets off their recent rally as traders came to grips with the notion that the FOMC may not cut in December due to a lack of economic data, leaving the committee flying blind. Interest rate futures had a 90+% probability of a December rate cut leading into the October Fed meeting. Those odds had fallen to 72% at the beginning of this week and fell again to below 50% as of this morning. The bad news is that, according to the White House, we may never get October data because surveyors never went into the field to collect it.

FedSpeak took on a hawkish tone as well this week with San Francisco Fed President Mary Daly commenting it’s too soon to decide whether policymakers should cut in December. Boston Fed President Susan Collins commented, “It will likely be appropriate to keep policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment.” Minneapolis Fed President Neil Kashkari told Bloomberg News, “The anecdotal evidence and data that we got just implied to me underlying resilience in economic activity, more than I had expected,” which he argued supported a pause in December. A dissenter at the most recent meeting, Kansas City Fed President Jeff Schmid commented, “I do not think further cuts in interest rates will do much to patch over any crack in the labor market-stresses that more likely than not arise from structural changes in technology and immigration policy. However, cuts could have longer-lasting effects on inflation as our commitment to our 2% objective increasingly comes into question.”

KEY INDICATORS THIS WEEK

No relevant economic releases this week due to the shutdown.
Next Week – FOMC meeting minutes, and hopefully the resumption of government data reports.