US government shutdown and ECB in focus this week – Rabobank

Tomorrow, the US Congress will return from recess and has only 12 working days to avert a government shutdown, points out the research team at Rabobank.

Key Quotes

“Fiscal year 2018 starts on October 1 and if the federal government does not have permission to spend money it will have to close down, at least partially. To prevent this Congress either has to approve a formal budget for 2018 or adopt a continuing resolution, which is essentially a stopgap measure. Meanwhile, the Treasury’s extraordinary measures are close to being exhausted and Treasury Secretary Mnuchin has asked for a raise in the debt ceiling by September 29. Estimates by the Congressional Budget Office suggest that the extraordinary measures could be exhausted by early or mid-October. If the debt ceiling is not raised by then, a government default seems unavoidable.”

“On Thursday, markets will be focusing on the ECB meeting. Whilst the Governing Council may not be immediately concerned by the current level of the euro - as we mentioned above - , they must be careful that their own (in)actions do not aggravate the situation. Speculation about the ECB’s next move may continue to keep upward pressure on the currency, and complete silence from Draghi after Thursday’s monetary policy meeting could send the markets’ thoughts running wild – risking further appreciation of the euro. We believe that the ECB will try to contain market expectations, by steering them to a final decision in December through a ‘pre-announcement’ of plans to taper the asset purchases. We do note that the ECB’s communication in the run up to December will have to be clear and very carefully worded, in order to prevent startling the markets.”