Congress and the White House

“The US 10 year rate just crossed above 4 percent. Mortgage rates comfortably exceed 7 percent. We are now in new financial territory.”  

(Lawrence Summers, former Treasury Secretary for President Clinton and director of NEC for President Obama)

The Senate cleared the first procedural step towards passing a continuing resolution (CR) last night after Sen. Joe Manchin dropped his controversial permitting reform language.  The CR could pass the Senate as early as today, or more likely tomorrow, leaving the House with plenty of time to pass the bill before Friday’s midnight deadline.  The CR extends government funding at current levels through December 16.  The legislation includes $12 billion for Ukraine, some disaster relief money, a 5-year extension of FDA user fees and an extension of the flood insurance program until December 16.  But as far as CRs go, this one is pretty “clean.”  The January 6th Committee postponed its final hearing, scheduled for tonight due to Hurricane Ian.  So, Congress is set to leave town for the midterm elections after a relatively drama free week.  There remains a small chance the Senate will return in October to pass its version of the NDAA – but in all likelihood, Congress is out until the midterm elections.

The past few weeks, however, may turn out to be consequential for the midterm elections.  European Central Bank President Christine Lagarde said this week the “outlook is darkening.”  Former Treasury Secretary Lawrence Summers tweeted this morning “we are now in new financial territory.”  And the Wall Street Journal described the situation today:

“Rising yields have ratcheted up borrowing costs for households, businesses and the government and have slammed the stock market, slashing corporate valuations and sending the Dow Jones industrials into a bear market this week. New stock offerings have ground to a standstill, highly indebted companies are facing a tough fundraising landscape, and mortgage costs have jumped, causing a slowdown in the housing market.” 

(10-Year Treasury Yield Hits 4%)

It has been said the only thing worse than inflation is fighting inflation.  The tools to fight inflation are blunt – raising interest rates and tightening the money supply.  They generally cause the economy to slow and often cause recessions.  Those impacts have seemingly hit hard in the U.S. and elsewhere the past few weeks.  The labor market remains strong, but consumer spending is slowing, housing is lagging, the markets are dropping, and the rest of the world looks in even worse shape (especially Europe).  None of this is likely to change voter perceptions – Americans have had a negative view of the economy for over year.  But they could solidify voter sentiment on the majority party’s major weakness heading into the midterms – Americans dissatisfaction with the economy. 

Senate Advances Stopgap Funding Bill After Removing Joe Manchin’s Permitting Overhaul. 

West Virginian lawmaker’s proposal had faced opposition from Republicans and Democrats.  Sen. Joe Manchin (D., W.Va.) on Tuesday threw in the towel on including his contentious proposal to speed up permitting of energy projects in a must-pass funding bill, clearing the way for the Senate to advance the legislation needed to keep the government open.  With the permitting language out, the Senate voted 72 to 23 to advance the stopgap bill, which would extend current government funding levels until Dec. 16 and prevent a partial shutdown this weekend, when the fiscal year ends. The bill now moves to final passage in the Senate and will also need approval in the House, which returns Wednesday, before heading to President Biden’s desk.  The resolution also contains more than $12 billion in aid to Ukraine to help fortify the country’s military with new weapons and support the government in Kyiv as it fights off Russia’s invasion.

Why Manchin backed off on his top priority

Facing the apparent limits of his leverage after 20 months exerting it over a 50-50 Senate, the West Virginia centrist strategically retreated on energy permitting.  Minutes before he would have crashed and burned, Joe Manchin found an escape hatch.  After 20 months as the focal point of the 50-50 Senate, the West Virginia Democrat found himself with only one good option as Republicans were set to defeat his signature energy permitting legislation: yank it from government funding legislation. The move kept alive Manchin’s top priority of speeding approval for energy projects, yet he has no guarantee that it will find a more welcome reception later this year.

Biden's campaign mission: Take on Republicans — from a distance

The president is raising money and highlighting Democratic themes, but often sticking close to home when doing so.  The storm bearing down on Florida forced President Joe Biden to scrap plans to deliver a politically-charged speech in the state. But he campaigned anyway, from behind a podium in the Rose Garden.  Biden criticized Sen. Rick Scott (R-Fla.) for wanting to endanger Medicare and Social Security; and he laid into House Minority Leader Kevin McCarthy for offering an election year blueprint with “little or no detail.”  The moment may have been refashioned by Hurricane Ian. But it reflected the approach the White House hopes to adopt less than six weeks before the midterms. The president has eased into a familiar cadence: He’s raising cash for Democrats and echoing the big-picture themes the party wants emphasized; he’s doing just enough to stay visible, but not so much that he becomes a heavier anchor.  Biden is aware — and increasingly comfortable — with the reality that he isn’t wanted everywhere. White House officials are supplementing his campaign travel with events closer to home they believe still allow him to respond to Republicans and capitalize on the bully pulpit.

Democrats brace for a national security brain drain

A combination of retirements and vulnerable seats could mean big changes on defense committees in the House.  A host of House Democrats versed in national security and foreign affairs are at risk of losing their seats in November — just as some of their most experienced members in that realm are retiring from Congress.  Democrats on committees with oversight of defense and foreign policy issues are among some of the most vulnerable incumbents in a cycle where Republicans are narrowly favored to take the House.


The Economy

Bank of England to Buy Bonds to Stop Spread of Crisis

U.K. central bank is launching an effort to restore order to the market for gilts.  The Bank of England on Wednesday said it would buy U.K. government bonds with long maturities “on whatever scale is necessary” in an effort to restore order to the market after a large set of government tax cuts sent borrowing costs soaring.   The move caused an immediate reaction, with bond prices both in the U.K. and other markets rallying, sending yields lower. The U.K.’s benchmark 10-year government bond yields fell to 4.004% after the announcement, from 4.552% before, an outsize move for what is normally a stayed corner of the market. The pound rallied at first against the dollar but then slid further to trade down around 0.6% to $1.066.  In a statement, the BOE also said it would postpone the sale of government bonds under a program of quantitative tightening that was intended to help bring surging inflation under control. The program was agreed by policy makers earlier this month and was due to begin next week, but has been delayed until Oct. 31.

10-Year Treasury Yield Hits 4%

U.S. borrowing benchmark has climbed at its fastest pace in four decades, driven by inflation fears.  The yield on 10-year U.S. government bonds hit 4% for the first time in more than a decade Wednesday, the latest leg of a historically steep rise that has jolted financial markets this year.  Yields, which rise when bond prices fall, have been climbing at their fastest pace in four decades because of escalating expectations for how high the Federal Reserve will raise short-term interest rates to tamp down the worst inflation since the 1980s.

Orders for Long-Lasting Goods Fall for Second Straight Month

New orders for durable goods declined 0.2% in August after increases earlier in the year.  Companies pulled back on orders for long-lasting goods for the second month straight in August, a sign of weakening demand as the U.S. economy loses momentum amid high inflation and rising interest rates.  New orders for durable goods—products meant to last at least three years—declined by 0.2% to a seasonally adjusted $272.7 billion in August compared with the prior month, the Commerce Department said Tuesday. Excluding defense, new orders were down 0.9%. Orders fell a revised 0.1% in July.  September surveys of purchasing managers by S&P Global and the Institute for Supply Management indicated that economic activity in the manufacturing sector has stalled in recent months. S&P Global’s U.S. manufacturing index for September was the second lowest reading since July 2020.  “New demand is stumbling,” Shannon Seery, an economist at Wells Fargo, said. “But there are some factors offsetting this hit to new demand that we are seeing,” she added, pointing to easing supply-chain bottlenecks and a backlog in inventories.

U.K. Market Turmoil Ripples Into Home Loans

Some lenders put mortgage business on pause due to uncertainty about future interest rates.  Some British banks paused new mortgage lending Tuesday, the latest fallout from market turbulence fueled by the new government’s plans for sweeping tax cuts and energy subsidies.  At least six mortgage lenders stopped offering some loans, or briefly halted lending to home buyers altogether, according to UK Finance, an industry trade group.  The banks and industry analysts pointed to a sharp selloff of U.K. government bonds, which began Friday, amid uncertainty about how far and how fast the Bank of England will have to raise interest rates. The tumult makes it harder for lenders to be confident about pricing mortgages.  Ten-year U.K. government bond yields jumped above 4.5% on Tuesday afternoon trading in London, up more than 1 percentage point from a week earlier. British bonds are inflicting record losses on investors, ICE BofA index data shows.