Morning Report – The shutdown and the debt ceiling become joined at the hip 10/07/13

Vital Statistics:

Last Change Percent
S&P Futures 1671.7 -13.1 -0.78%
Eurostoxx Index 2904.9 -23.4 -0.80%
Oil (WTI) 102.9 -0.9 -0.89%
LIBOR 0.243 0.001 0.21%
US Dollar Index (DXY) 79.99 -0.128 -0.16%
10 Year Govt Bond Yield 2.61% -0.04%
Current Coupon Ginnie Mae TBA 105.6 0.1
Current Coupon Fannie Mae TBA 105.2 0.2
RPX Composite Real Estate Index 200.7 -0.2
BankRate 30 Year Fixed Rate Mortgage 4.26
Markets are lower as the government shutdown stretches into Week 2. Bonds and MBS are rallying. Earnings season kicks off with Alcoa tomorrow. We will hear from JP Morgan and Wells on Friday.
On Wednesday, we will get the minutes from the September FOMC meeting. Should make very interesting reading, although the shutdown pretty much means tapering is off the table for a while.
Back of the envelope calculations:  The drop in government spending is about 13% from the shutdown because most government functions, specifically entitlements, are still being done. So, on a 3.8 trillion budget, 13% amounts to just a hair under 500 billion for the year, or about 9.5 billion a week. On a 16 trillion GDP, that amounts to 6 basis points of GDP. Tack on a government spending multiplier of 1.3 and you get about 8 basis points of fiscal drag for each week the government is shut down.
Ginnie Mae has denied rumors that the Ginnie Mae I MBS is about to be sunsetted. Ginnie Mae I securities have usually traded at a premium to Ginnie II MBS but have been trading at a discount since May when rates started backing up. The other security which is rumored to be going away is the Freddie Mac (or Gold) MBS. This would simplify the MBS market into conforming and Ginnie.
The debt ceiling debate is going to get ugly. The Administration has said it will not negotiate on the debt ceiling. John Boehner has said he doesn’t have the votes to pass a clean debt ceiling increase. While it seems easy to just decide which checks to write and which ones not to, it is actually a knotty piece of re-programming at Treasury to do that. And with the government shut down, it is even more difficult. Still nobody thinks the US will fail to make interest and principal payments. The Bipartisan Policy Center has a really good breakdown on the shutdown and debt ceiling issue
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