September’s story hasn’t changed: High yields and oil prices are dragging down stocks. But a twist in the story — a potential and increasingly unavoidable U.S. government shutdown — is making it truly difficult for stocks to have any confidence to climb.
Let’s look at each factor in turn.
Yields on the U.S. 10-year Treasury breached 4.6%, while that of the 2-year Treasury inched up to 5.137% yesterday. If yields continue on their upward trend, it’s likely they’d trigger fresh fears of recession as the cost of borrowing increases.
Rising Treasury yields aren’t the only costs weighing on the economy — oil prices are surging again. As oil is an input cost for so many components of the economy — from the obvious like gasoline for vehicles, to the more unexpected like food and grocery prices — there’s a possibility companies and consumers will cut back on spending.
Last, a government shutdown means economic data will be delayed, hobbling a Federal Reserve that’s repeatedly said it’s “data-dependent.” With interest rates the highest they’ve been in more than 20 years, even the most careful calibration will have an outsized impact on the economy. Going at it blind — through no fault of the Fed’s — won’t inspire confidence in markets.
And a shutdown risks another downgrade by ratings agencies. Indeed, the U.S. is weaker now, fiscally speaking, than it was in 2011 when S&P Global Ratings downgraded the country’s long-term credit rating from AAA to AA+, said John Chambers, former chairman of S&P’s ratings committee.
Even though September’s already ending, things, as BTIG’s Jonathan Krinsky puts it, “are likely to remain messy.”
