The U.S. political wrangling over the past week has the feel of a Choose Your Own Adventure novel. We could be turning pages back and forth and end up in the same place over the next few weeks. The potential government shutdown this week is only phase 1 of a likely drawn out process, with the debt ceiling showdown of much more significance for financial markets.
But before getting ahead of ourselves, what are the potential scenarios in the budget fight today?
The U.S. Senate is likely to send a spending bill back to the House that does not include the delay of Obamacare. In that case, there are 3 main scenarios:
- The government shutdown proceeds at midnight.
- The House negotiates a temporary spending measure with the Senate that buys a few days to a week for further negotiations between Democrats and Republicans
- The House passes the Senate’s spending bill with Democratic votes, which would avert a shutdown and move the debate on to the debt ceiling
The VIX rose 10% on Friday as the market started to increase the odds of scenario number 1. With SPX futures down almost 1% overnight, those odds have increased even more. But perhaps the more important odds are tied to what happens with the debt ceiling.
The path that the political game takes for the shutdown this week is going to shape the nature of the debt ceiling debate in the coming weeks. Treasury Secretary Jack Lew has already singled out Oct. 17th as the date when the Treasury must stop further borrowing under the current debt ceiling. Analysts estimate that the Treasury can likely fund current spending with its existing cash until late October / early November. So the debt ceiling debate has another month, max, to get resolved.
Many political analysts, including Goldman Sachs’ research team, have opined that if the government does indeed shutdown, resolution on the debt ceiling debate might actually be easier because the public backlash after a shutdown might make hasten the will of the politicians to come to avoid a debt ceiling struggle. Whether that’s true or not is up for debate.
Regardless, the path that Congress chooses in the next week will shift the pieces on the board ahead of October’s real battle. Unlike a Choose Your Own Adventure book though, no one’s laid out how the market will react as the debate churns and shifts.