A growing market decline
A far-right riot at the Capitol has sent markets into a tailspin. Fearful investors have dumped stocks and bonds this morning, fearing that chaos in the Republican Party will trigger a government shutdown next month and all but crush fleeting hopes for a soft-landing economic recovery heading into an election year.
Markets had been reeling long before the latest turmoil in the House. But Tuesday’s decision to remove Kevin McCarthy, R-Calif., as party chairman raised the prospect of a prolonged leadership vacuum. That could doom negotiations to fund the government beyond Nov. 17, when a temporary deal agreed to last week will expire, adding to investor anxieties. (More on what’s next for the House below.)
Economists at Goldman Sachs called next month’s close their base case, saying in a Tuesday note that “a $120 billion difference between the parties in the preferred spending level for fiscal 2024” is one of the major conflict points. A prolonged shutdown could hurt growth and put the country’s credit rating at risk.
Investors are scared. Stocks and bonds in Asia and Europe fell this morning. Those declines came after the S&P 500 closed at a four-month low on Tuesday. The benchmark index is teetering toward correction territory, having fallen nearly 8 percent from a peak in July.
It is “the largest sell-off so far this year, having already surpassed the magnitude of the February and March losses at the time of the SVB collapse,” Deutsche Bank strategist Jim Reid wrote in a note to investors. this morning. referring to the Silicon Valley bank.
The Treasury collapse is raising broader fears. The yield on a 30-year Treasury bond surpassed 5 percent this morning, a 16-year high, before rebounding. Yields rise when prices fall, and when Treasury bill yields rise, so do interest rates on many long-term loans, including mortgages, another blow to households and businesses that have seen rates soar. borrowing costs since the Federal Reserve began raising rates 18 months ago.
Jeffrey Gundlach, the billionaire investor and CEO of DoubleLine Capital, warned that the fall in bonds “It should put everyone on recession alert, not just recession alert.”
The consequences could affect the banks. Analysts at Deutsche Bank warned on Tuesday that the bond spill could exacerbate balance sheet losses at vulnerable midsize banks, forcing them to reduce their lending. But Janet Yellen, the Treasury secretary, sounded more optimistic, saying the scenario of higher interest rates for longer was “not at all a given.”
Whats Next? Friday’s employment data may provide signs of whether high interest rates and inflation are affecting the labor market and the broader economy. On Tuesday, the so-called JOLTS jobless claims report showed a rebound in job openings for August, further evidence for investors increasingly worried that the Federal Reserve will raise interest rates again this year.
THIS IS WHAT’S HAPPENING
Donald Trump is ordered to stop badmouthing court staff. The judge presiding over his civil fraud trial in New York issued a gag order after the former president posted a photo of the court clerk on his Truth Social platform, mocking her as “Schumer’s girlfriend,” in reference to the Senate Majority Leader. Experts say violations could result in fines for Trump, or even jail time.
Jury selection continues in the Sam Bankman-Fried fraud trial. Prosecutors and defense attorneys are likely to select a 12-person jury, as well as alternates, on Wednesday. Bankman-Fried, the founder of collapsed cryptocurrency exchange FTX, has pleaded not guilty to seven criminal charges, including fraud and money laundering.
Drug manufacturers agree to negotiate prices with Medicare. Ten pharmaceutical companies, including Janssen, Novartis and Novo Nordisk, will begin talks with the federal government as part of a discounted pricing regime introduced by the Inflation Reduction Act, even as several sue to stop it. The Congressional Budget Office projects that a breakthrough in negotiations would save taxpayers about $100 billion over a decade.
A strike threat looms over Kaiser Permanente. More than 75,000 employees of the healthcare giant have threatened to leave their jobs on Thursday, after their contract expired last weekend. It would be the largest strike in the sector in recent history and would come after labor disputes that have affected Hollywood and the auto industry.
The house is in disarray
The removal of Kevin McCarthy as Speaker of the House of Representatives brought Washington to a new level of uncertainty as half of Congress was left leaderless, effectively halting all legislation. (“Think carefully before we descend into chaos,” Rep. Tom Cole of Oklahoma, a McCarthy ally, warned before Tuesday’s vote.)
It’s unclear who can muster enough support from both moderate Republicans and hardliners like Florida’s Matt Gaetz, who led the coup. And there are only six weeks left before the federal government shutdown.
Republicans wrung their hands at the anarchy. “I’m really devastated because I don’t know how a person could lose their job for doing the right thing,” Rep. David Joyce of Ohio told Politico. Rep. Stephanie Bice of Oklahoma said the measure “will put this House in a deadlock and paralyze our ability to fight for our constituents and instead create a fight among ourselves.”
Even Donald Trump weighed in: “Why are Republicans always fighting each other, why aren’t they fighting the radical left Democrats who are destroying our country?” he wrote on his Truth Social platform. (It is unclear whether he tacitly endorsed the rebellion.)
There is no obvious successor to McCarthy, who spent his nine months as president at constant risk of being ousted by the far-right colleagues who delayed his nomination in the first place. Rep. Patrick McHenry of North Carolina is speaker pro tempore, but only has the power to oversee the selection of a permanent speaker.
Potential candidates include Steve Scalise of Louisiana, the No. 2 House Republican, who is undergoing chemotherapy; Elise Stefanik of New York, the top woman in the party’s House leadership; and Cole, who is respected on both sides of the aisle. But whether any of them can corral people like Gaetz (whom some Republicans now want to expel from their caucus) is another question.
Lawmakers are concerned about how to avoid a shutdown, since McCarthy’s last-minute deal to avoid one cost him his job. Sen. John Cornyn, R-Texas, lamented that the House coup undermined last weekend’s deal “because now they’re going to be stuck in a presidential election for who knows how long.”
Some Republicans said they now had less leverage to negotiate with Democrats over a compromise. “Today’s actions actually empower those who want to increase spending and those who want to give Ukraine a blank check,” said Rep. Jason Smith of Missouri, chairman of the House Ways and Means Committee.
“Do you want to be a goldfish?”
— Dough son, the founder of SoftBank. In a presentation at his company’s annual corporate conference on Tuesday in which he predicted huge advances in artificial intelligence, the billionaire technology investor showed a slide showing a goldfish trapped in a fish tank staring at a question mark, suggesting what he thought. from those who ignored AI: “Take advantage of artificial intelligence.” or be left behind,” he added.
“The power of the bag”
It looks like the Consumer Financial Protection Bureau could survive an extraordinary challenge from the payday lenders it regulates. Supreme Court justices on Tuesday were skeptical of industry claims that the agency’s funding model was unconstitutional, in a case that threatens its regulations and enforcement actions and raises questions for other federal agencies.
The CFPB is funded directly by the Federal Reserve. Industry groups say this is unconstitutional because the budget for the agency, which was created in the wake of the 2008 financial crisis and has become a lightning rod for conservative lawmakers, is not determined annually by Congress. A lower court agreed.
Noel Francisco, a former attorney general who represents the lenders, said the structure was “a model” for funding agencies in a way that “unconstitutionally strips Congress of its power over money.” But Elizabeth Prelogar, the current attorney general, noted that other agencies bypass the appropriations process, but its constitutionality has never been questioned.
Conservative and progressive judges rejected the lenders’ case. They suggested that the financing practice had roots in history and that the Constitution allowed Congress to exercise its authority by delegating some of it.
“We are all struggling to determine what standard would be used,” said Judge Amy Coney Barrett.
Justice Ketanji Brown-Jackson questioned the court’s role in the argument. “I think I’m a little concerned about the separation of powers problem that can occur if the judiciary gets involved in telling Congress when and under what circumstances it can exercise its own funding prerogatives,” he said.
Another hopeful sign for the agency: There was little talk of what would happen if the funding mechanism was rejected, a sign that it may well survive.
Intel plans to spin off a division that makes reprogrammable computer chips as part of a turnaround. (WSJ)
Brookfield Asset Management raised $12 billion for its latest private equity fund, the largest in its history. (Bloomberg)
Atomico, the European venture capital firm led by Skype founder Niklas Zennstrom, raised $1.1 billion for its latest fund. (FOOT)
The disappointing market debuts of companies like Instacart underscore the losses that late-stage growth investors are likely to face in an era of diminished valuations. (Bloomberg)
The best of the rest
Campbell Brown, the former journalist who oversaw Meta’s partnerships with news organizations, is leaving. (Axios)
Initially, Pixar’s “Elemental” was derided as a failure. But it has since proven to be a success, raising questions about the conventional animated film business model. (NY)
“Without a college degree, life in America is staggeringly shorter” (NYT Opinion)
Dave Portnoy, who amassed wealth and fame by founding Barstool Sports, is now the most influential person in American pizza. (NY)
Musician Grimes, mother of three of Elon Musk’s children, has sued the billionaire technology executive, seeking a “parental relationship.” (San Francisco Standard)
We would like to receive your comments! Email your ideas and suggestions to email@example.com.