Volume 27, Issue 40
October 2, 2023.


Sep 29

Sep 22


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Source: Globe & Mail


Shutting Down the Expansion?

Sal Guatieri

BMO Senior Economist


Large parts of the federal government could begin closing down on Sunday due to a lack of funding. As of noon Friday, Congress was still debating passage of a stopgap funding bill that would keep departments open for several more weeks, though this may only delay the inevitable if all 12 appropriation bills are not eventually signed to fund the government for the entire fiscal year.

During a federal shutdown, Social Security recipients would still get paid, taxes would still be collected, and many essential services, such as mail delivery, would continue. Importantly, the Treasury Department would still make debt payments, unlike in the event of a debt-ceiling crisis. Still, up to 800,000 non-essential federal workers could be furloughed, receiving backpay only when returning to work. The White House says that even military personnel and some law-enforcement officers, though still working, could see a delay in paychecks. Contractors for the federal government would not be paid and many could be forced to lay off workers. Travelers could face longer lines at airports and may need to change plans for visiting national parks and museums.

A short-lived shutdown lasting, say, five weeks would have a modest economic impact, but the damage would mount the longer the closure lasted. Federal nondefense spending accounts for 3% of GDP, a not insignificant amount. After the last shutdown lasting five weeks in December 2018 and January 2019, the Congressional Budget Office estimated the closure cut real GDP by $11 billion, or less than 0.1% of output, with most of the loss quickly recouped. The economic hit was largely due to the temporary loss of income for roughly 300,000 furloughed government workers, a delay in federal spending, and a decline in some private-sector activity. The CBO estimates the shutdown—the longest of 20 closures since the 1970s at 35 days—lowered real GDP growth by an annualized 0.2 ppts in 2018Q4 and 0.4 ppts in 2019Q1. However, output was boosted by a hefty 1.0% in Q2, led by retroactive pay for furloughed workers. As a result, for all of 2019, GDP was trimmed by just 0.02%, or effectively zero. Meantime, the economy still grew a decent 2.2% annualized in 2019Q1. Of course, a broader and longer shutdown today could make a bigger mark on the economy. Based on the CBO’s earlier estimates, a closure lasting 10 weeks (double that of the last shutdown) could slash annualized GDP growth by more than one percentage point in Q4.

Alas, we might have little sense of the scope of the impact if the three main reporting agencies—the Labor Department, Commerce Department and Census Bureau —are shuttered. Key releases on employment, retail sales and the CPI might be delayed, all of which the Fed would need to scrutinize ahead of its next policy decision on November 1. The first estimate for Q3 GDP growth, due in late October, may also get postponed. Of course, no news could be good news, as the Fed may simply refrain from taking action while flying blind. Or, partially blind. Being a self-funding agency, it would continue to publish its own reports, such as the regional Beige Book, elevating its importance as a market-moving release. Then again, if the data drought causes the Fed to misread the economy and inflation, it might be forced to catch up in a hurry.

Longer-lasting effects of a shutdown could include a credit-rating downgrade, resulting in higher government borrowing costs. Moody’s, which still rates U.S.  sovereign debt as triple A, has warned that a shutdown would only reinforce its concern that political brinkmanship is interfering with important fiscal matters.

Bottom Line: A shutdown of short duration would be more of a nuisance than a menace, leaving little lasting mark on the U.S. economy. But a longer and broader closure than in 2018/19 could take a sizeable bite out of Q4 growth. While activity would rebound after the closure ended, the initial hit would compound damage stemming from other looming headwinds, including higher oil prices, a possible escalation of the autoworkers’ strike, and resumed student loan repayments. These thrusts are all conspiring at the same time that past rate hikes are bearing down on demand, threatening to seriously test the economy’s armor.


Frank and Mark.


Source: Globe & Mail, BMO Capital Markets, Bank of Canada, Bloomberg.



The TSX fell 1.2% last week as rate-sensitives and higher-yielding sectors struggled alongside new highs for GoC yields—as one example, the closely-watched 5-year yield pushed to 16-year highs.

The struggle is starting to look real in the Canadian economy, and the headwinds might only be getting stiffer. Canadian real GDP was flat in July, and a modest +0.1% initial read on August leaves growth for Q3 barely in positive territory. Over the past six months, real GDP is effectively unchanged, which starts to look pretty rough when considering that the population is exploding at a 3% per-year run rate. While we’d love to insert some rays of optimism here, the challenge is that the recent action in the bond market is not cooperating, pushing borrowing rates even higher, and the typical 12-to-18 months lags in monetary policy suggest that the most aggressive phase of the tightening cycle (last summer) is about to fully bite. As such, we continue to forecast very little real growth between now and next spring.

For the Bank of Canada, it’s complicated. This remains a tough spot where any signs of slowing are being countered by the inflationary impulse of torrid population growth, still-stubborn core metrics, and lags between turning points in the job market and wage growth. It all suggests that the Bank will keep leaning on the economy and inflation with the tightening that has already been put in place, while downside pressures continue to build.

YTD, the TSX is up 0.81%, and the benchmark 10-year yield ended the week to yield 4.02%.


U.S. & Global

Equity markets struggled last week as bond yields continued to push higher and test valuations. The S&P 500 fell 0.7%, with utilities down sharply, while consumer stocks and financials also struggled. Ten-year Treasury yields continued to rise on the week, as did most of the yield curve, before backing off somewhat on Friday. That despite some sluggish data and a well-behaved 'supercore' inflation print, which rose just 1.7% annualized in August, or 3.4% over the latest three months.

YTD, the DJIA is up 1.09%, the NASDAQ is up 26.30%, and the S&P 500 is up 11.68%.  The 10-year Treasury yield ended the week to yield 4.58%.


Source: BMO Capital Markets


The Good: Manufacturing Sales +1.0% (Aug. A);  Wholesale Trade (Ex. Petroleum); +2.6% (Aug. A); Job Vacancies -5.8% (July).


The Bad: Monthly Real GDP unch (July)—and StatCan estimates August came in at +0.1%; Ottawa posts a $1.2 bln deficit (Apr.-to-July).


The Good: Real Personal Spending +0.1% (Aug.); Core PCE Prices slowed to +0.1% (Aug.)—and supercore +0.1% Personal Income +0.4% (Aug.); Core Durable Goods Orders +0.9% (Aug.);  S&P Case-Shiller Home Prices +0.1% y/y; FHFA Home Prices +4.6% y/y (July); Goods Trade Deficit narrowed to $84.3 bln (Aug. A); U of Michigan Consumer Sentiment revised up 0.4 pts to 68.1 (Sep. F)—but inflation expectations also up.


The Bad: New Home Sales -8.7% to 675,000 a.r. (Aug.); Pending Home Sales -7.1% (Aug.); Conference Board Consumer Confidence Index -5.7 pts to 103.0 (Sep.); Initial Claims +2k to 204k (Sep. 23 week); Chicago Fed National Activity Index -0.16 (Aug.).


Mexican mom shields son as bear leaps on picnic table, devours tacos, enchiladas

MEXICO CITY — A Mexican mother bravely shielded her son after a bear leapt on a picnic table and devoured the tacos and enchiladas meant for the boy’s birthday dinner, inches from his face.

Silvia Macias of Mexico City had traveled to the Chipinque Park in the northern city of Monterrey to celebrate the 15th birthday of her son, Santiago, who has Down syndrome.

Soon after they sat down to eat the food they had brought, the bear showed up and gulped down french fries, enchiladas, tacos and salsa. A video shot by her friend, Angela Chapa, shows Macias sitting stoically, inches from the bear’s mouth, holding Santiago and shielding his eyes with her hand. She kept her eyes downcast, to avoid anything the bear might consider a challenge.

“The worst thing was that Santiago might get scared,” Macias recalled Tuesday in an interview with The Associated Press. “Santiago is very afraid of animals, a cat or a dog, any animal scares him a lot.”

“That’s why I covered his eyes, because I didn’t want him to see it and scream or run. I was afraid that if he got scared or screamed or scared the bear, that the bear would react,” she said of the incident Monday.

Macias said that she and Chapa had previously thought about the possibility of a bear encounter — they are not unknown in the park, though usually the bears come out more toward dawn or dusk, not midday — and they had come up with a plan.

“We are going to play a game where we cover Santiago’s eyes and we are going to act like statues,” she recalled rehearsing the plan.

And that is exactly what they did: Santiago remained motionless, even though “the bear was very close to us, we heard him as he growled, as he ate, you could smell the bear. It was really very very close.”

Asked if he had been scared, Santiago, who attends middle school in Mexico City, said “yes, a lot.”

Their resourceful friend Angela, who filmed the scene, lives in Monterrey and knew the proper behavior for a black bear encounter: never run.

She noticed a plate of enchiladas the bear had not eaten — the bear appeared to prefer french fries, and as a true Mexican, had eaten the salsa — and she tossed the enchilada far away, after showing it to the animal. As expected, the animal followed the food and Angela stood in front of the bear, shielding Macias and her son and allowing them to retreat quietly and slowly.

Eventually, the bear went away.

Santiago got his birthday tacos replaced, and all ended well.

Macias says she doesn’t consider herself a hero.

“I just think I’m a mother who protected her cub,” she said.