US politicians were this week’s contestants on Let’s Make a Deal (a popular game show in the 1960s, revived and reproduced). Though the financial markets considered the risk of a government shutdown in the US as rather ho-hum, the chaotic Republican party pulled their act together to not only elect a new Speaker of the House of Representatives but agree to a budget which extends the debt ceiling out to 2017. The deal was quickly approved by the Senate and is expected to be signed by President Obama shortly. This agreement avoids the issue of a government shutdown through the election cycle and even allows the new President a little time to get his or her feet under them. It also increase the contribution of the US government towards GDP growth beyond the five consecutive quarter trend it has currently. That said, the contribution to GDP over the next 12 months is estimated at about 0.1% to 0.2%, a little buffer but not much.
The Fed also met this week and, though they took no action as expected, changed the language in its written communication to take a more hawkish tone. Specifically, it referenced the decision of whether to take action at the “next meeting” as opposed to a more generic future and then downplayed global growth concerns. Did the world change so much in a month, or did the market rally in October combined with the realization that their last message was confusing lead them to change. The scary thought (this close to Halloween), are they watching CNBC? The market repriced the odds of a Fed Funds increase in December from around a third to almost 50/50, clearly reading the tone as tightening. Interestingly, the equity market rallied on the news. Perhaps traders just want a little clarity.