Rate update: Rates couldn’t care less about the shutdown

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By G. Steven Bray

The end of the government shutdown removed one element of uncertainty for markets, but clearly it wasn’t a critical one as interest rates barely moved in response. I half expected a little volatility today, the first trading day after the government reopened. Instead, the day passed quietly. I suspect that’s because more important events await us this week.

First up is the Federal Reserve meeting, which ends on Wed. No one expects the Fed to change interest rates at this meeting, but pretty much everyone expects the Fed to soften its attitude towards future rate hikes. It also will be interesting to see what the Fed says about the effects of the shutdown. I suspect markets already have priced in a more dovish Fed. Thus, if the attitude, as reflected in the post-meeting announcement, hasn’t changed, watch out for higher rates.

Friday brings the Jan jobs report. No one knows exactly how the shutdown effected employment. While furloughed government workers were counted among the employed, employees of contractors that were sidelined by the funding lapse may have been counted as unemployed.

Analysts are predicting employers created about half as many jobs in Jan as in Dec; however, count me among the skeptics about whether analysts have captured the extent of the shutdown effect. One thing is likely: if the actual number of jobs differs significantly from the predictions, talking heads will do what they do best – talk – and markets will be choppy.

Finally, keep an eye on the China trade talks. Markets have been reacting to pretty much every headline the past couple weeks. That partly may have been because the shutdown bottled up economic data investors use to make trading decisions. However, I suspect markets would have been reacting anyway. Chinese economic data seems to show the trade war has significantly affected its economy. Positive headlines allow investors to think maybe the world’s economy isn’t really slowing, and equity markets rally in response. That’s been a negative for interest rates, and I suspect more positive headlines will bring more of the same.