Shutdown fears loom over Wall Street after McCarthy ouster

Infighting within the House of Representatives is dealing another blow to financial markets.

Wall Street experts say there are concerns behind the firing of former Federal Reserve Chairman Kevin McCarthy (R-Calif.) amid already growing concerns as the Fed takes a cautious approach to curbing inflation. He points out that the dysfunctional politics in Japan poses new risks.

Soaring bond yields and turmoil in the oil market are also raising fears of a recession, giving investors plenty to worry about in the coming months.

“Yields and oil are big topics. They have the biggest economic impact. And they come at a time when the economy is particularly vulnerable,” said Karrie Cox, U.S. investment analyst at eToro, on Wednesday. said in an interview.

“However, these political headlines are not helping the situation and are probably making investors more nervous, even though the economic impact is likely to be more limited.”

On Wednesday, the Dow Jones rose 127 points or 0.38%, the S&P 500 rose 0.81% and the Nasdaq rose 1.35%. The gains come after a steady decline in stocks in recent days and weeks, including a 400-point drop in the Dow Jones Industrial Average on Tuesday.

It was a rough September for markets, with lawmakers within hours of allowing a government shutdown over the weekend.

Congress ultimately succeeded in passing short-term stopgap measures, but the threat of a shutdown continues to loom large. The stopgap bill, also known as a continuing resolution (CR), has a deadline of Nov. 17, giving lawmakers weeks to reach a new agreement on government funding.

Now, the House faces the additional hurdle of selecting a new speaker before moving forward with the spending battle.

“The selection process for a new speaker will further delay work on individual spending bills, forcing Congress to either pass new legislation (again) or shut down the government,” said Brian Gardner, chief Washington policy strategist at Stifel. They will have to make a choice.” The investment bank said in a statement.

“The new speaker could face the same problem that Mr. McCarthy faced: a small group of House Republicans who have influence and are seeking to use it to force a shutdown.” he added.

Most government shutdowns are short-lived and have little direct economic impact. But Wall Street experts remain concerned that a government shutdown could undermine consumer confidence.

“We’ve seen a significant drop in consumer confidence with some of the recent shutdowns, and at a time like this when consumers have so much to think about, lower confidence has a big impact on spending. It could give,” Cox said.

The U.S. economy has shown remarkable resilience after years of high inflation and the Fed’s rapid interest rate hikes aimed at calming it. Latest forecasts show that job growth has slowed slightly, but the labor market remains strong and Fed officials expect a recession to be avoided.

Still, consumer confidence has been declining since the summer, and recent hikes in gas prices are hurting U.S. household budgets.

“There’s always the fear that the drop in confidence will be enough to buck the camel’s back and actually cut spending enough to put the economy in jeopardy,” Cox said.

Another shutdown could also deprive the Fed and markets of key economic data as central banks face a difficult crossroads in their fight against inflation.

After hitting a 40-year high of 9.1% in June last year, inflation has eased significantly, falling to 3% in June this year before rising slightly in July and August. The Fed last month warned of the possibility of further interest rate hikes as inflation remains above its 2% target.

Fed officials are weighing whether to raise rates again before the end of the year, or to moderate them, as the economy shows signs of slowing.

The Fed will be paying close attention to federal economic indicators, especially those from the Labor Department, as officials consider whether to keep up the pressure on the economy.

If government funding were lost, these reports and policymakers would no longer have access to the most up-to-date views on the economy. The Fed is independently funded and will continue to operate during a government shutdown, but without vital information.

“When you have a government shutdown… the main issue is the data blackout, and in an environment where the Fed is seen as a wild card, that’s very scary for the bond market,” said Daniel Alpert, managing partner at investment firm Westwood. ” he said. capital.

“Let’s say there was a government shutdown over the weekend. There would be no jobs report on Friday,” Alpert said, referring to the upcoming October jobs report.

“It would have been a complete disaster. No one would have known what to do and everyone would have run for cover.”

It could take weeks for House Republicans to choose a new speaker, and there is no guarantee they will do so by the Nov. 17 government funding deadline. Until then, Rep. Patrick McHenry, RN.C., chairman of the House Financial Services Committee, will serve as chairman pro tempore.

Mr. McHenry is a well-known name on Wall Street as the top Republican on the House committee that oversees the financial sector. Mr. Alpert suggested that an agreement to keep Mr. McHenry in charge of the House could alleviate some of the market turmoil.

“That would be a very stable outcome,” Alpert said.

“Frankly, if [House Minority Leader Hakeem] jeffries [D-N.Y.] He was a great leader and will still be sitting in the back room with McHenry making deals. ”