How a Shutdown Miss Could Spark a “Short Squeeze”

House Speaker Kevin McCarthy

Stocks struggled to rally this morning as Wall Street regrouped following last week’s brutal selloff. The Fed’s “higher for longer” interest rate strategy is still weighing on investors’ minds, and the looming U.S. government shutdown isn’t helping. The Dow traded flat through noon while the Nasdaq Composite and S&P both climbed roughly 0.4%. Adding fuel to the fire, 10-year Treasury yields surged to their highest levels since 2007.

Oil prices are back on the rise, too, stoking fears of persistent inflation. This puts the Fed in a tight spot, limiting its ability to cut rates in the near term. Investors are now eyeing the upcoming PCE inflation data for further clues.

The clock is ticking on Capitol Hill, with less than a week to prevent a government shutdown. Washington remains as divided as ever, but there’s a growing consensus among lawmakers that these recurring shutdowns need to stop. Over the last decade, the federal government has shut down three times, causing tangible (albeit small) economic damage without significant policy changes.

Sen. Ron Johnson (R-Wis.) recently asked, “What could be more reasonable than passing a bill that would prevent shutdowns?” He’s pushing for a vote on the issue and believes it would pass the Senate unanimously. Several plans aim to make shutdowns more difficult or eliminate them altogether. One such plan, led by Sens. James Lankford (R-Okla.) and Maggie Hassan (D-N.H), proposes to keep the government open in rolling 14-day increments if annual spending bills aren’t enacted on time. The catch? Lawmakers must stay in Washington and work until the bills are done.

Lankford said, “The one pressure point in Congress that is the great equalizer is time.” The bill has gained traction, with Majority Leader Chuck Schumer (D-N.Y.) considering it as a potential solution to the current deadlock.

However, not everyone is on board. Sen. Jeff Merkley (D-Ore.) criticized the bill, saying it could give too much leverage to those opposing increased government spending. Merkley proposes a change in Senate rules to guarantee timely votes on spending bills approved at the committee level.

Other plans are also in the mix. Sen. Tim Kaine (D-Va.) and Rep. Don Beyer (D-Va.) have proposed the End Shutdowns Act, which would initiate automatic temporary funding at the start of a new fiscal year if a lapse is imminent. Another proposal aims to hit lawmakers where it hurts—their pocketbooks. The “No Pay for Congress During Default or Shutdown Act” would withhold lawmakers’ paychecks during any debt ceiling default or federal government shutdown.

Few lawmakers (outside of the Freedom Caucus) seem concerned with reigning in deficit spending, which has been one of the largest contributors to the rise in inflation.

In other market news, media stocks got a boost from the tentative deal to end the Hollywood writers’ strike. However, optimism is waning around the autoworkers’ strike, with Ford stating that “significant gaps” remain before reaching a new labor agreement with the UAW.

Global concerns are also affecting market sentiment. Debt woes at Chinese property developers, particularly Evergrande, are causing jitters about the impact on the world’s second-largest economy.

In the tech sector, Amazon has inked a deal to invest up to $4 billion in startup Anthropic, bolstering its push into AI. Meanwhile, Booking Holdings faces a setback as its proposed $1.7 billion acquisition of ETraveli was blocked by the EU antitrust regulator.

As the market navigates these choppy waters, all eyes remain on the more imminently dangerous situation in Washington. With sentiment still extremely bearish, avoiding a shutdown could easily spark a “short squeeze” in stocks.

That’s only if lawmakers can actually sidestep a shutdown, though, and as of this morning, a shutdown seems more likely than not.


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