Liberty SBF Interest Rate Commentary – The Shutdown’s Effect

We parse the latest news to give you our thoughts on the marketplace. 

Lawmakers voted Wednesday night by wide margins — 81-18 in the Democratic-led Senate and 285-144 in the Republican-controlled House — to pass legislation to end the shutdown. President Obama signed the bill just after midnight. The measure suspends the debt limit, puts government workers back on the job and permits the U.S. to pay its debts, benefits and salaries. However, the shut down will likely cause the U.S. economy to slowdown for the 4th quarter. In addition, a potential slowdown will likely cause the Fed to refuse tapering in October, November and now probably December as well.

The Fed has again missed its opportunity to taper. We expect the easy money cycle to continue leading stocks higher and a move down in interest rates. Rates were taken lower again in early European trading. One hour of heavy buying on the EU open pushed 10-yr UST to 2.56%, then follow on trades took the low to 2.54%.

So how are we looking at the employment picture? Corporate earnings (including IBM) indicate continued expense control. We do not anticipate a major reaction to September payrolls that will be released next week because the market is already pricing in a bad number. The October report will be delayed a week – to be delivered on Nov 8.

On the international front central banks bought a massive of amount of Treasuries in the latest week and the Euro hit 1.37 before backing off and may head to 1.40 before the end of the year.