What U.S. Congress Is Fighting Over as Shutdown Approaches

Political

Summary:

With the U.S. government due to run out of funding at midnight on Saturday, the Republican-controlled House of Representatives and the Democratic-controlled Senate are at odds over priorities they would like to include in legislation that would keep the government running in the new fiscal year that starts Oct. 1.

Here are some of the issues they are fighting over:

Spending

House of Representatives Speaker Kevin McCarthy, a Republican, and Democratic President Joe Biden agreed in May to set overall agency spending at $1.59 trillion for the new fiscal year, as part of a deal that suspended the government's $31.4 trillion borrowing limit and removed the risk of a debt default.

That agreement would keep spending roughly at the same level it is now, which amounts to an effective cut due to inflation.

But House Republicans are pushing for deeper cuts, saying Congress needs to do more to shrink the federal government and rein in annual budget deficits that have grown sharply since the COVID-19 pandemic. They are advancing a set of spending bills that would reduce agency spending by $120 billion, or 7.6% from the current level, though those cuts would fall most heavily on domestic social programs.

That is a relatively small slice of the total $6.4 trillion U.S. budget. Republicans are not proposing cuts to popular benefit programs like Social Security and Medicare, which are projected to grow dramatically as the U.S. population ages.

Biden says McCarthy should stick with the original deal, and the White House has said the president would veto at least two of those spending bills.

Immigration And Border Security

House Republicans say any spending bill that would avoid a shutdown should include new restrictions on immigration to deal with a surge of migrants at the country's southern border. Their proposal includes:

- Resumed construction of the U.S.-Mexico border wall, a signature policy of former Republican President Donald Trump

- Tight limits on asylum seekers that would require them to apply for U.S. protection outside the country, or remain in detention while their case is considered

- An increase in border agents and a boost in pay

Biden is seeking additional money for border enforcement, but his Democrats oppose the Republicans' proposals as draconian.

UKRAINE AID

Biden is seeking $24 billion for Ukraine to help fight Russia, on top of the $113 billion the U.S. has already provided.

A stopgap spending bill that has won bipartisan support in the Senate would include $6 billion for Ukraine. That leaves open the possibility for more aid later on.

But some House Republicans oppose additional aid to the country and say they will vote against any bill that includes it.

Disaster Aid

The Federal Emergency Management Agency (FEMA) has warned Congress that it could soon run out of money to help people recover from hurricanes, wildfires and other natural disasters. The Senate has included $6 billion in disaster aid in its bipartisan stopgap bill, but that could face opposition in the House if it is paired with Ukraine aid.

Abortion, Race and Other Social Issues

House Republicans have sought to advance conservative social policies in several spending bills. Among them:

- prohibiting pharmacies from dispensing mifepristone, an abortion drug

- prohibiting the Defense Department from paying for employees to travel to states where it is legal to get an abortion

- prohibiting Defense Department racial diversity programs

- restrictions on teaching about racial topics

Trump Criminal Cases

Former President Donald Trump has called on Republicans in Congress to slash funding for the Justice Department and the FBI. He is facing two federal criminal prosecutions for seeking to overturn his 2020 election loss and mishandling classified documents.

Some of Trump's allies in the House have backed that idea, but the chamber has not yet addressed Justice Department funding and it has not yet come up as a sticking point in the shutdown fight.

Source: USNews

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Devin

Economic

Refined copper volumes hit a year-to-date monthly high in August and primary aluminium imports were the highest since November 2021.

The country has also fully reverted to being a net importer of unwrought zinc after flipping to net exporter in 2022.

Rising imports are flowing through an open arbitrage window resulting from Shanghai Futures Exchange (ShFE) prices outperforming the London Metal Exchange (LME).

While LME forward curves are in contango, cash is commanding a premium in Shanghai due to low visible exchange inventory.

Higher imports would seem to fit the bullish narrative that the Chinese government's piecemeal stimulus programme is gaining traction and the world's largest buyer is recovering its metallic mojo.

However, robust copper and aluminium imports come with important caveats and the broader metals trade picture is far more mixed. China's Strong Metal Imports Not as Bullish as They Seem_1

China's Strong Metal Imports Not as Bullish as They Seem_1

From Russia With Love

China's imports of primary aluminium surged to a near two-year high of 153,000 metric tons in August, bringing the year-to-date count to 755,000 metric tons. Last year's equivalent tally was just 298,000 metric tons.

However, just about all the metal being imported is Russian-brand. Imports of Russian aluminium accounted for 87% of the total in the first eight months of 2023.

Is the headline acceleration in imports down to demand pull or supply push?

Russian aluminium is not officially sanctioned but the U.S. market has been effectively closed by penal 200% import duties and many Western consumers are self-sanctioning by opting for different origin metal.

China is clearly soaking up a large part of this displaced metal and it appears to be doing so at a discount.

The average value of Russian imports was $2,162 per metric ton in August, compared with $2,279 for Malaysian-brand metal and $2,355 for both Australian and New Zealand imports.

Without the Russian push, would China's aluminium imports look so impressively robust? China's Strong Metal Imports Not as Bullish as They Seem_2

Slow Copper Boat To Shanghai

Refined copper imports were 340,000 metric tons in August, the highest monthly tally this year.

However, cumulative imports of 2.29 million metric tons are still down by 8% on last year and net imports are down by 10% due to slightly higher exports in 2023 relative to 2022.

The mini-surge also has much to do with Democratic Republic of Congo (DRC). Imports of copper from DRC have accelerated sharply from 57,000 metric tons in June to 74,000 in July and an all-time record 97,000 in August.

These are catch-up shipments from China's CMOC Group, which was blocked from exporting between June last year and April this year during a prolonged stand-off with the government over taxes.

CMOC, which produced 254,000 metric tons of refined copper last year, began shipping from its stockpile in June with the metal evidently starting to arrive in China in July and August.

Imports of copper from DRC have accounted for more than 25% of total inbound shipments in the last two reported months and have kicked the headline figure higher. China's Strong Metal Imports Not as Bullish as They Seem_3

China's Strong Metal Imports Not as Bullish as They Seem_3

Zinc Business As Usual

China was a net exporter of refined zinc last year for the first time since 2007. Western smelter outages sent physical premiums sky-high, sucking metal out of China as the supplier of last resort.

The country's refined zinc trade has reverted to net imports this year but volumes remain modest by historical standards.

Net imports of 199,000 metric tons over the first eight months of the year were, barring last year, the lowest since 2010.

Moreover, imports of 29,000 metric tons in August itself were sharply off the pace of the 77,000 recorded in July. The next few months will tell whether zinc imports will return to the levels seen over the last decade.

Shifting The Nickel Mix

There has been no pick-up in China's imports of refined nickel. Indeed, they've been declining steadily since the start of last year.

They've fallen another 50% to 48,000 metric tons over the first eight months of 2023.

China's electric vehicle battery manufacturers don't need so much nickel in this form as they pivot to increased flows of intermediate products coming from Indonesia.

Indonesian shipments of ferronickel grew by 51% in the first eight months of this year. Those of intermediate products and nickel matte were up by 92% and 138% respectively.

Imports of Indonesian nickel sulphate only began in May but have already grown to 25,000 metric tons, accounting for 38% of total year-to-date arrivals.

The share of refined metal in China's import mix is continually shrinking and with many Indonesian producers still ramping up new capacity that trend seems likely to run.

All change in lead?

China has been a significant exporter of refined lead since the middle of 2021, when, similar to sister metal zinc, smelter problems in the West caused physical premiums to soar.

However, unlike their zinc peers, China's lead producers are still exporting to the tune of a net 101,000 metric tons in the first eight months of 2023.

That was up by 10% on the same period last year and begs the question as to whether this is the new norm in terms of global flows of unwrought lead.

Source: Metals Mine

To stay updated on all economic events of today, please check out our Economic calendar

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Thomas

Forex

China's yuan has weakened more than 5% against the dollar this year and has lately been squeezed to the lower extremity of its trading band as the U.S. currency climbed.

It is unusual and partially caused by Chinese authorities leaning against market forces in setting the trading band's level.

Here's a breakdown of how that works:

What Is The Trading Band And Midpoint Fixing?

China's yuan is not a fully-convertible currency and its onshore exchange rate is a managed floating rate mechanism.

The central bank sets a daily midpoint rate against the dollar at 9:15 a.m. (0115 GMT) every day. The onshore spot price can trade in a band either side of the rate, which has been widened over the years from 0.3% in 1994 to 2% since March 2014.

How Is It Calculated?

Fourteen midpoint contributing banks set prices with reference to the yuan's previous-day official domestic close at 0830 GMT and moves in global markets overnight. Their quotes are sent to a unit of the central bank which then sets the midpoint rate.

China introduced a so-called "counter-cyclical factor" into the midpoint formula in 2017 in what regulators said was an effort to better reflect market supply and demand. The factor was adjusted multiple times since then.

Analysts, who calculate their own estimates for the fix by reverse-engineering the formula, said the goal was to dial down the input from the closing price and increase the influence of fundamental factors.

What's Been Happening To The Fix?

China's central bank has been setting far firmer-than-expected midpoint guidance for months, in what traders and analysts interpret as a sign that the authorities are getting increasingly uncomfortable with the currency's weakness.

The gap between the midpoint and Reuters' estimates hit a record on Sept. 26, when the fix was 1,447 pips stronger.

Setting the midpoint so far from the market level means that the currency, without necessarily moving much, trades close to the edge of the band - such as on Wednesday when it was within 14 pips of the downside limit.

What happens if the limit is reached?

Currency traders said they are not sure what will happen when the yuan hits the limit, and whether trading will be suspended.

In the past, it has only ever brushed it; touching the down limit in 2011 when the trading band was only 0.5% and coming within 1 pip of the limit last October.

State-owned banks have been selling dollars for yuan to steady the currency, and such trading could also protect the downside.

Does It Work?

It avoids spending reserves to stabilise the currency and, so far, the market has been heeding the authorities' signals.

Ahead of the Golden Week break, beginning on Friday, the yuan has held steady in spite of a rising dollar. This means that the Chinese currency has strengthened against the currencies of its other trading partners.

The CFETS basket index, a gauge that measures the yuan's value against its peers, is up 0.9% this year while the yuan has lost more than 5% against the dollar during the same period.

Source: Yahoo

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Kevin Du

Cryptocurrency

Crypto companies are descending on Capitol Hill on Wednesday, but their push to advance industry-friendly laws is likely to be overshadowed by a fight over the federal budget and a Senate crackdown on the use of crypto for money laundering.

Dozens of executives from digital asset companies are meeting with lawmakers and their staff on Wednesday as part of a grassroots advocacy campaign organized by Coinbase, the biggest U.S. crypto exchange, and Stand With Crypto, a non-profit it founded.

The House Financial Services Committee in July passed two major bills that would help provide clarity over which existing financial rules apply to the industry, and crypto lobbyists hope they can convince lawmakers to advance those through Congress.

But with lawmakers focused on averting a government shutdown and other competing bills that must pass this year, including the Farm Bill and National Defense Authorization Act (NDAA), the industry may struggle to be heard.

"There's a mind-boggling number of competing areas but ... we need to keep pounding the table," said Katherine Dowling, general counsel and chief compliance officer at Bitwise, a crypto investment manager. The company is one of several pushing for the U.S. Securities and Exchange Commission to approve a spot bitcoin exchange-traded fund.

Crypto companies have been expanding in Washington to combat growing regulatory scrutiny, especially from the SEC which says the industry has been flouting its rules. Lobbying escalated after the SEC sued Coinbase and its rival Binance in June for allegedly failing to register tokens, claims they deny.

The industry spent nearly $13 million on federal lobbying in the first half of 2023, putting it on track for another record year after spending $21.6 million in 2022, new data provided by OpenSecrets to Reuters showed. Coinbase led the pack at $1.4 million.

The crypto delegation on Wednesday includes Coinbase CEO Brian Armstrong, who is meeting with Democrats and Republicans from both chambers of Congress, a spokesperson said. It also includes an executive from OpenSea, the top non-fungible token marketplace.

"Everybody wants to make sure that what they're doing isn't going to be erased by the government," said Kara Calvert, head of U.S. policy at Coinbase, referring to the crypto industry.

An OpenSea spokesperson said the company was excited that policymakers have taken an interest in NFTs, and "hope(s) that a collaborative approach" to regulation will foster innovation and protect users.

Coinbase also this month launched a media campaign which will include advertisements in Washington and calls-to-action on its own platform for crypto users to urge their members of Congress to pass crypto legislation.

The outcome is uncertain, said Mark Hays, senior policy analyst at Americans for Financial Reform and Demand Progress.

"It's not clear to me whether the industry's efforts to bootstrap a crypto grassroots campaign out of nowhere is going to translate into something that's politically impactful."

'Last thing we need'

The July bills would define when a cryptocurrency is a security or a commodity, curtailing the SEC's authority. Another bill would create federal rules for stablecoins, tokens pegged to a traditional asset.

The next step is consideration by the full House, or for the bills to be introduced in the Senate. A House vote before year-end is possible, but the outlook is dimmer in the Senate, where industry-friendly crypto bills have failed to gain traction.

Instead, both sides of the aisle are focused on curbing the use of crypto in money laundering and terrorist financing. The Senate in July passed its version of the NDAA, which included an amendment increasing scrutiny of anonymous crypto transactions.

And Senate Banking Committee Chair Sherrod Brown of Ohio has shown little interest in making it a priority to advance the House bills.

"The last thing we need is for the crypto industry to write their own rulebook — too many Ohioans have been burned by fraud and scams," said Brown in a statement to Reuters.

"We need a framework of rules for crypto that protects our economy and protects Ohioans' hard-earned money."

Still, Coinbase is stepping up its efforts in Ohio, where Brown is facing re-election next year, with grassroots events raising awareness of the industry's role in the local economy.

Without Brown's support, industry-backed crypto legislation in the near-term remains unlikely, said Ian Katz, managing director of policy research firm Capital Alpha Partners. "If it doesn't seem urgent, and the chairman of the relevant committee isn't that into it, it's hard to see it happening."

Source: Yahoo

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FxPro Group

Cryptocurrency

Crypto market capitalisation rose 0.7% in 24 hours to 1.053 trillion. This is a return to the levels seen at the end of last week. Cryptocurrencies saw increased buying when equity markets were under the most pressure and the dollar was gaining momentum. However, this momentum didn't last long. Crypto Needs Financial Chaos for Growth_1

Crypto Needs Financial Chaos for Growth_1

Bitcoin briefly rose to $26.7K but again found resistance at the 50-day moving average, which had already fallen to the abovementioned level. These growth impulses promise to remain a bull trap, offering the best opportunity to sell on the upside. Crypto Needs Financial Chaos for Growth_2

Crypto Needs Financial Chaos for Growth_2

Cryptocurrencies need banking problems or uncertainty about the solvency of governments to generate sustainable growth momentum. Recent moves in bond markets show that something like this is brewing. But it's too early to call cryptocurrencies a safe haven from the chaos of the traditional financial system.

News background

The SEC has delayed until the 10th of January 2024 a decision on spot bitcoin ETF applications from ARK Invest and 21Shares and until the 21st of November 2023 for Global X Bitcoin Trust ETF. The regulator cited the need for “sufficient time to review the documents”.

Stablecoins are vulnerable in times of large-scale turmoil in the cryptocurrency market and could cause instability in the broader financial system, the New York Fed said in a study.

Forbes noted that the crypto market had responded positively to global financial uncertainty and remains resilient amid rising bond market volatility. Therefore, investing in Bitcoin or Ethereum could be a safer choice on the cusp of a possible recession.

According to the Wall Street Journal, U.S. authorities have been investigating Binance for a year and could face criminal charges and billions of dollars in fines.

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Samantha Luan

Forex

USD: The low-polnt in the next Fed easing cycle is priced at 4.3%

The dollar remains very well bid and has rallied around 7% from its low point in mid-July. Corrections have been few and far between - largely because of a confluence of factors. At the heart of it is strong US growth and a Federal Reserve that is showing no signs of letting up its hawkish rhetoric. And increasingly, the market is building the view that the next Fed easing cycle - whenever it comes - will not be the kind of 300-400bp affair we have been used to over prior decades. This has lifted the market pricing of the low point for the next Fed easing cycle - priced in around three years - to 4.29%. This was just at 3.99% last Friday and around 3% in the spring. This has been a key factor driving long-end US rates higher. 5.00% on the US 10-year Treasury yield is the bias from our rates strategy team.

At the same time, higher crude oil prices, as Saudi supply cuts keep the market in deficit, are driving a renewed wedge between the 'haves' - the US - and the 'have nots' - Europe and Asia. Our commodities team sees the risk that Brent crude briefly spikes above $100/bbl.

Add in developments in Europe and China, and one can see why the high-yielding dollar remains in demand. For Europe, we would highlight two new euro negatives this week - Italy pushing the budget boundaries and some European Central Bank officials discussing large rises in Minimum Required Reserves. And in China, the news out of the property sector remains bleak.

We have been saying for a while that a softening in US activity data is required to turn the dollar around. But because of the poor investment outlook overseas, that bar for poor US activity data is now higher. On that subject, today sees the weekly jobless claims. These have been really robust. We also see the 3Q23 PCE deflator.

In theory, a US government shutdown should be slightly dollar-negative in that it provides a hit to activity and not to US creditworthiness. But it is going to take a lot to turn the dollar and it could well stay bid into mid-October when US corporates in California need to pay their taxes. DXY looks like it can grind to 107.00/107.20 and perhaps the biggest threat to the dollar is the Bank of Japan selling $20-30bn near 150 in USD/JPY as Japanese officials watch FX 'with a strong sense of urgency'.

EUR: Some new negatives

EUR/USD near 1.05 would suggest that a lot of confidence has been lost in the euro. Yet the European Central Bank's trade-weighted euro is just 2.5% off its July highs. We can probably all agree that the dominant trend is a strong dollar. However, two developments this week warn that the euro may be due some independent weakness. The first is the suggestion from some ECB officials that Minimum Required Reserves for European banks need to be raised - perhaps substantially. Our banking specialists in research feel that such a move would hit banking liquidity at a crucial juncture and no doubt weigh further on already soft bank lending. We think an MRR hike would be a clear euro negative.

Additionally, another emerging story this week is the Italian BTP- German Bund 10-year spread widening out to 200bp as the Italian government announces looser fiscal policy. This will put the issue of the return of Maastricht fiscal criteria back in the spotlight for early next year and will be a factor worth assessing for whether it puts a renewed risk premium back into the euro.

Based on the above, there seems no reason to fight this bearish EUR/USD trend just yet. But for today, keep a look out for German and Spanish inflation - in case it builds momentum for one last ECB hike. If not, expect EUR/USD to continue drifting to the 1.0400/0410 area.

Elsewhere, the Czech National Bank (CNB) has laid out its strategy for its forthcoming easing cycle - a cycle we expect to start in November.

GBP: Caught in the crossfire

Like the euro, sterling has probably been caught in the crossfire of position adjustment. Speculators had been trying to hold onto long euro and sterling positions through the spring, despite the strengthening dollar. Presumably, these positions have now been cut. Like EUR/USD, GBP/USD remains vulnerable to the 1.20/21 area.

MXN: September correction continues

High US interest rates are proving a headwind to emerging currencies worldwide - even to the mighty Mexican peso. In addition, the peso this month is facing the unwind of Banxico's FX intervention book - a front-loaded exercise that we felt could weigh on the peso this month and perhaps into October, too. With the dollar set to stay strong for the next few weeks, USD/MXN could head up to the 200-day moving average at 17.85 or even briefly trade above 18. However, we like the peso multi-quarter and expect good peso buying interest should USD/MXN trade over 18.

Today also sees Banxico announce its latest monetary policy decision. No one expects a change in the 11.25% policy rate. And with US rates so high, it seems too early for Banxico to start entertaining speculation of an easing cycle. This month, the market has priced out 125bp of Banxico easing over the next two years. However, the market still has 200bp of easing priced in. A little more could be taken out of market pricing for the easing cycle today - but not much.

Source: ING

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Alex

Economic

Amid signs the bond market has bought into the Federal Reserve keeping interest rates higher for longer, a cohort of investors is placing bets on the economy hitting a wall — and a sharp policy reversal in short order.

Treasury yields have settled into tight ranges this month near the highest levels in more than a decade as data show a resilient economy and inflation still well above the Fed's 2% target. But with yields anticipating a peak in the policy rate, the outlook for growth takes on greater importance.

The past week has seen a pickup in demand for options that will turn a profit should interest rates tumble before the middle of next year. That's a more dire scenario than what's seen in the swaps market, where traders are no longer pricing in a rate cut during the first half of 2024.

Bond traders have been placing these sorts of bets since the hiking cycle began and so far they haven't panned out. But this time may be different as the Fed's tightening cycle has had more time to work through the economy.

The Fed is widely expected to leave its policy rate unchanged next week after lifting it in July for the 10th time in an aggressive hiking cycle that began in March last year. It's also seen significantly raising its forecast for growth and indicating another rate increase this year in its so-called dot plot. The rate outlook for 2024 remains up for debate. In June, the median projection showed a full percentage point cut by the end of next year.

The longer rates stay elevated so does the risk of a downturn, and at the margin there are more signs of consumer stress as higher borrowing costs and weaker hiring start to erode household spending. With the Fed seen being close to its policy rate peak, the focus is now on growth softening.

"There is a question mark around whether the economy is transitioning to a soft landing or does the labor market weaken towards a more recessionary outlook," said Roger Hallam, global head of rates at Vanguard Asset Management.

The week saw notable demand for options linked to the Secured Overnight Financing Rate — which closely aligns to the projected path of Fed's policy rate — hedging multiple rate cuts before June. These trades likely accompany existing positions that reflect the Fed's current message, allowing some traders to benefit from a surprise policy pivot.

One trade positioned for a 3% rate by the middle of next year versus a current market level around 5%. The premium paid on that bet was in excess of $10 million. Other similar trades surrounding March were also made over the course of the week.

Ramping up wagers that the Fed could pivot to rate cuts by mid-2024, or even before, stands in sharp contrast to policy makers stressing a higher-for-longer narrative. Meanwhile, the current Fed rate at 5.25%-5.5%, well above the US annual inflation rate and three-month annualized figure, is seen as threatening the growth outlook.

As a result, investors are more worried about recession than they were nine months ago, according to Robert Waldner at Invesco.

"There is an increasing risk of recession as rates stay high and nominal growth comes down," the chief strategist said. "As inflation is coming down, central bank policy is getting tighter, and if they don't consider this, it will increase the risk of an accident."

Positioning through options for next year's Fed meetings in March and June may make sense, given the bond market faces the likelihood of being stuck in a holding pattern as investors wait for clarity on the economy.

It's very reasonable to see lower yields in an economic environment heading into a downturn, according to Vanguard's Hallam. But the picture for bond buyers gets complicated should higher energy prices stall the recent disinflationary trends.

"Sticky inflation would make it very difficult for the Fed to ease next year," he said.

Given the uncertainty over the outlook for the economy and rates, parking funds in cash-like equivalents has been gaining favor. Shorter-dated Treasuries returning 5%-plus have seen a significant slice of investment flows locking in relatively high yields, according to EPFR fund data for this year.

For Monica Defend, head of the Amundi Institute, the middle of the Treasury curve looks attractive for a multi-strategy portfolio.

With rates staying higher for longer, yields should turn lower as the economy weakens, and the five- to 10-year sectors "are a good alternative to equities," she said.