US Government Shutdown, French Election

Here we go again…yet another chance for a government shutdown looms this week. The government is currently being funded by a continuing resolution (CR), passed in December 2016, through April 28, 2017, but there are still five months remaining for this fiscal year that need funding. Both chambers of Congress must pass a bill, which the President would sign, before midnight on Friday in order to avoid a shutdown.

Before you set your alarms, know that there is a chance of an extension, which could push the drop-dead date back a few weeks. Congressional leaders have banged out an agreement on all but a handful of issues, any of which could throw the negotiations into disarray. Congressional leadership (Senators McConnell and Schumer, Speaker of the House Ryan and Minority Leader Pelosi) is set to meet to resolve the following outstanding issues:

  1. Border wall funding: The Trump administration wants to make good on this campaign promise, but Schumer and Pelosi are taking an equally tough stance opposing it. One compromise could include shifting the cost to the Pentagon’s defense priorities.
  2. Defense spending: The administration had called for $30 billion of additional defense spending, coupled with $18 billion in domestic cuts. While Democrats are not opposed to increasing military spending, they are looking for a smaller increase, without the domestic funding cuts.
  3. Sanctuary Cities: This is a controversial rider attached to the bill, which would help win over some of the hardened House Freedom Caucus members. It would effectively block federal grants for any city that does not enforce federal immigration law, affecting more than 300 cities nationwide. Democrats are unlikely to swallow this one and most expect that a majority of Republicans would not allow a shut down over this provision.
  4. Affordable Care Act Subsidies: Without government subsidies, insurance companies that participate in the ACA health care exchanges would likely leave the program or significantly increase premiums. White House Budget Director Mulvaney has said that the White House would be open to keeping subsidies, in exchange for its defense and border wall funding goals. Democrats are unlikely to budge on their opposition, especially given the failure of the AHCA.

Bottom Line: Fear of a shutdown is more common than an actual one. Since the Ford administration, there have been 18 federal shutdowns, with the last one occurring in October 2013. In the wake of the failure to repeal and replace the ACA and a reluctance to “own” it, there is general belief that Republicans do not want to see a shutdown. One out that both sides have is to punt on any new spending measures and to instead pass another continuing resolution that funds the government at the existing levels through September.

French Elections: Liberté, égalité, fraternité…not so much

Across the pond, another election could have a seismic effect on the globe and financial markets. French voters begin the process of electing a President on Sunday. In round one, four candidates have a shot at victory. The top two must jump through hoops all over again in a runoff unless he or she receives more than 50 percent of the vote.

While most expect that globalist and EU fan Emmanuel Macron will face nationalist euro-critic Marine Le Pen in the two-person run off on May 7th, Harry Entin of 538 notes “the first-round polls have increasingly shown a jumbled pileup.” An average of surveys has Macron at 24 percent, Le Pen at 22 percent, center-right, scandal-ridden François Fillon at 20 percent and far-left candidate Jean-Luc Mélenchon at 19 percent. But Entin warns, “Polls in multi-way races are the most error-prone.”

Some fear that a Le Pen victory would rattle investors, because it could put France on a more likely path to exit the euro and the European Union (aka "Frexit"). But if we have learned anything over the past year from the UK’s Brexit vote to the US Presidential race, “consensus” is a word to be avoided for both election outcomes and market reactions.