TORONTO - Markets are likely in for more volatility following last week's partial U.S. government shutdown — one symptom of a political impasse that has the potential to slow growth in the world's biggest economy.
An even bigger worry than the shutdown of non-essential U.S. government services, which started Oct. 1, is the need for American political leaders to raise the U.S. government's debt ceiling, which will be reached Oct. 17.
"The second one is scary," said Doug Porter, chief economist at BMO Capital Markets.
"If it looks like we are headed for a collision on the debt ceiling, which increasingly it does look like, that’s the much more dangerous prospect for the markets," Porter said.
North American markets lost ground last week with the TSX shedding 0.66 per cent and the Dow industrials falling 1.22 per cent.
Anxiety and volatility increased as the week wore on.
Traders first thought Republicans in Congress would come to a deal with the Democrat-controlled Senate and White House that would avert the shutdown of non-essential government services on Oct. 1.
However, with President Barack Obama and Senate majority leader Harry Reid refusing to accept a delay in health-care reform, commonly known as Obamacare, it appeared that the impasse could drag on to Oct. 17, when the debt ceiling is hit.
Porter said he doesn’t think there will be an agreement until the last minute.
"And I suspect the two will get tied in together, the spending and the debt ceiling, I suspect there will be one big deal at that point."
As with other crises, there is some sort of a silver lining. The damage to the U.S. economy from the political impasse means that it's highly unlikely that the Federal Reserve will move to begin winding up a signature stimulus program — the monthly purchase of US$85 billion of bonds.
That move, known as quantitative easing, has kept long-term borrowing rates low and sparked solid advances on many equity markets this year. Even with last week's fall, the Dow industrials is still up 15 per cent for the year.
The resource-heavy TSX hasn't fared nearly as well, up only 2.61 per cent year to date.
Another casualty of the U.S. government shutdown has been a significant lack of U.S. economic data. For example, the U.S. government's employment report for September, which had been scheduled for release on Friday, was postponed.
However, traders will get a look at the latest Canadian employment data this Friday.
Economists believe the Canadian economy created perhaps 16,000 jobs in September following 59,000 added in August.
"I wouldn’t be surprised if we get a little bit of payback in September," said Porter.
"I think the underlying story for the economy is that it is just grinding ahead and that likely means the underlying story for job growth is also a slow grind."