A looming US government shutdown pushed down US markets late on Friday, after a week in which investors mostly shrugged off politics, skyrocketing oil prices, a eurozone rate hike and another earthquake in Japan to bid prices upward.
Party leaders clinched an agreement, including about US$38.5 billion in extra spending cuts barely an hour before the federal government effectively ran out of money at midnight on Friday.
Before the agreement, Friday afternoon’s sharp drop lopped off enough earlier gains in the week so that the Dow Jones Industrial Average closed virtually even, adding a bare four points at 12,380.05.
The broader S&P 500 index lost 0.3 percent from a week ago to 1,328.17, and the tech-heavy NASDAQ Composite gave up 0.3 percent to close at 2,780.41.
All eyes on Friday were on the midnight deadline for settling the US budget fight. Without a deal about 800,000 government employees were expected to be furloughed, though those in areas deemed essential would remain at work.
However, without any concrete indications of the economy’s direction this week, and with the looming shutdown threatening to curtail a whole range of government services — including some of the Securities and Exchange Commission’s (SEC) operations — caution reigned on Friday.
The biggest question was how long federal workers would be forced to stay at home.
“A brief shutdown of a few days would have a trivial impact, but costs would mount the longer the shutdown lasted,” economists Nigel Gault and Gregory Daco at IHS Global Insight said. “With 800,000 employees furloughed, and assuming average compensation of US$110,000 per year, the total GDP-basis spending impact represents US$1.7 billion per week.”
At that level, second-quarter economic growth would be cut about 0.18 percentage point per week of shutdown.
At first the impact on markets would be minimal on daily trading — though the lack of a full SEC staff would put a stop to activities like initial public offerings of shares.
“As far as the markets are concerned, we continue to think that a shutdown would be a non-event, at least in the first few weeks,” Rudy Narvas at Societe Generale said. “Looking back at the 1995 to 1996 shutdowns, the markets did not seem to care and instead focused on the changing Fed [US Federal Reserve] policy causing Treasuries to rally.”
Traders have been expecting a fairly buoyant first-quarter earnings season, which unofficially kicks off tomorrow with Alcoa’s results release.
Data releases scheduled for the upcoming week include the trade balance and import prices on Tuesday; retail sales on Wednesday; producer prices on Thursday and consumer prices and industrial production on Friday.
The Federal Reserve said it would release its periodic Beige Book assessment of the regional economies. Any data will be combed for evidence that the economic recovery is picking up steam or that inflation is taking root — both of which could hasten the Fed to tighten monetary policy.
Minutes from the central bank’s March 15 Federal Open Market Committee meeting released on Tuesday showed that worries about inflation are rising among the policymakers, though are not yet a dominant sentiment.
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