5 Takeaways from the Mini-Budget Deal 

Kristina Hooper 

The Upshot 

12/16/2013 

The bi-partisan budget agreement inked last week has real implications for investors, including its impact on consumers, the stock market and the Fed, writes Kristina Hooper.
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Kristina Hooper, US investment strategist and head of US Capital Markets Research & Strategy for Allianz Global Investors. She has a B.A. from Wellesley College, a J.D. from Pace Law and an M.B.A. in finance from NYU, where she was a teaching fellow in macroeconomics.

In today’s financial markets, good surprises don’t always bring everyone cheer.

Congressional leaders last week announced a two-year budget deal designed to stave off another government shutdown and cut expenses more thoughtfully—and less severely—than what was mandated through sequestration. The deal, while criticized by the extreme wings of each party, was well-received by the American public—but not by investors. That’s because there’s an assumption that the deal substantially increases the likelihood of a “jingle bell taper.”

However, there are some key takeaways for investors to consider on the D.C. debt deal:

1
A December taper is not necessarily in the offing. Yes, there will be less “fiscal drag” on the economy—something the FOMC has worried about and clearly factored into its past decisions on whether or not to taper. However, that doesn’t mean December is the most likely start for tapering. That’s because the Fed has other considerations. Keep in mind that last week we saw the November Producer Price Index, which provided another anemic reading on wholesale prices. This may prompt the Fed to pay more attention to deflation than the impact of continued quantitative easing, especially if the weaker inflation trend is confirmed by Tuesday’s CPI.
Deflating a December Taper
2
Consumer sentiment will likely be the biggest beneficiary. Consumer confidence took the biggest hit from the government shutdown, so it makes sense that a resolution to prevent another shutdown in the next two years would give it the biggest boost. The Bloomberg Consumer Comfort Index released last Thursday provided an early indication of a budget-driven improvement to sentiment, hitting its highest level since early October. The latest rise in confidence is a continuation of the substantial strides made since early November, as consumers began to exhale after the shutdown.
3
Don’t expect business sentiment to benefit as much. While business leaders and owners are excited about the deal because it shows that our government can finally work together and reach an agreement, it doesn’t alleviate all of their concerns right now –namely the Affordable Care Act. For example, last week’s NFIB Small Business Optimism Index suggests that small-business owners are growing concerned about what the Affordable Care Act might mean for labor costs, specifically the cost and availability of insurance, which rose three percentage points after an extended period of remaining virtually flat.
No matter when the Fed tapers, central banks will remain extremely accommodative… looser for longer.”


4
This deal does not preclude another battle over the debt ceiling in the coming months. The deal struck in October allows the United States to keep borrowing beyond the debt limit through Feb. 7, 2014. After that deadline, the US Treasury can use “extraordinary measures” to keep funding the government—but that’s expected to run out some time in the spring. Clearly, a debate over the debt ceiling has the potential to hurt confidence and roil markets.
5
No matter when the Fed tapers, central banks will remain extremely accommodative. Investors must recognize that tapering is not an “if” but a “when.” At the same time, it’s not a sign that the Fed is taking the punch bowl away. We believe monetary policy is going to remain very accommodative for an extended period. (Read our 2014 outlook: “Central Banks to Stay Looser for Longer”) No matter when tapering occurs, expect the Fed to remain behind the curve in terms of supporting US economic growth.


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Past performance of the markets is no guarantee of future results. This is not an offer or solicitation for the purchase or sale of any financial instrument. It is presented only to provide information on investment strategies and opportunities.


A Word About Risk
: Equities have tended to be volatile, involve risk to principal and, unlike bonds, do not offer a fixed rate of return. Foreign markets may be more volatile, less liquid, less transparent and subject to less oversight, and values may fluctuate with currency exchange rates; these risks may be greater in emerging markets.
 
The material contains the current opinions of the author, which are subject to change without notice. Statements concerning financial market trends are based on current market conditions, which will fluctuate. References to specific securities and issuers are for illustrative purposes only and are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities. Forecasts and estimates have certain inherent limitations, and are not intended to be relied upon as advice or interpreted as a recommendation.

 

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