The debate in US congress is still raging if to pass the law that funds several government programs. The existing law expires tonight and the political tug-of-war continues with the life of government employees at stake. This debate is not the end. Next political showdown will be over debt ceiling issue.
This will eventually get resolved one way or other, but what is the effect of all these on Canadian economy?
- In uncertain times – bond will rise. Canadian bonds prices are soaring not because Canadian economy looks very healthy but US economy is having some hiccups. Raising bonds spells drop on yields. If yield drops then mortgage rate will also drop.
- If US jobless go up: Canada supplies more than one quarter of its GDP to US (natural resources mainly). Due to loss of jobs demand will fall and Canadian suppliers will have problem with stockpiles. This will lead to job loss in Canada too. Mortgage demand will fall, mortgage default rate will grow.
- Canadian Banks have stakes in US: Any problem in US will also touch Canadian banks.
- Canadian dollar will rise: High Canadian dollars mean more buying power for your bucks. That will lead to lower inflation. Low inflation is a handicap on Bank of Canada in the rate rise race.
- Credit will shrink: A short supply of cash will alter the flow of credit. BoC intervention will not be enough to manage rising cost of short term borrowing.
There are more effects than those apparent ones listed above. So far only bond market got hit due to market fear. The real effect will be far more than just bond yield.
As of today – October 10th 2013 – after the political talks failed – it is possible that first time in 17 years about three-quarter of a million government workers will have problem getting paid.