The first government shutdown in 17 years was the focus for investors this week. There have been few signs of progress in reaching an agreement. The resulting uncertainty has favored safer assets, which helped mortgage rates end the week lower.
Congress faces two major fiscal issues. Bills are needed to continue funding the government in the new fiscal year which began October 1 and to raise the debt ceiling. The government shutdown is expected to modestly slow economic growth each week that it continues. The consequences from a failure to raise the debt limit could be far more severe. The Treasury projects that the debt ceiling will be reached on October 17. If the limit is not increased, the US technically could default on its obligations, which could cause major disruptions to US financial markets. Until these issues are resolved, high levels of market volatility can be expected.
One result of the government shutdown is that some economic reports compiled by the government will be delayed. The most important monthly economic data, the Employment report, will not be released on schedule if the shutdown continues. This lack of information increases the uncertainty facing investors, which likely adds to volatility. It also causes exaggerated reactions to the data which does come out during the shutdown. The major data released this week – ISM Manufacturing, ADP Employment, and Jobless Claims – was mixed, so there was little net impact on mortgage rates.
Investors will react to signs of progress in the negotiations in Congress. A significant deal could reduce the level of uncertainty, causing investors to reverse the shift to safer assets. A deal which simply postpones the decisions for a short period of time would have a more limited impact on mortgage rates. During the government shutdown, fewer economic reports will be released. If the debt ceiling is not raised, analysts are very concerned about the potential consequences.