Weekly update by Larry Baer: With the very light economic calendar this week, investors will begin to focus more intently on the political jockeying surrounding Congressional efforts to avoid automatic government spending cuts scheduled to take effect in less than three weeks.
You remember sequestration -- it’s a huge part of the fiscal mess Congress and the President temporarily swept under the carpet as they scrambled to pass a short-term extension of the federal debt ceiling to prevent Uncle Sam from issuing hot checks.
Sequestration refers to the deep, automatic cuts in domestic and military spending that will begin to take effect March 1st if Congress and the President can not reach agreement on significant deficit reductions in another manner.
The Bipartisan Policy Center released a report last summer stating, “the full defense and non-defense sequester cuts for the coming year could -- due to their arbitrary and abrupt nature -- reduce U.S. gross domestic product by roughly half a percentage point in 2013 and cause more than one million jobs to be lost over the course of two years.
The closer we get to March 1st without meaningful Congressional action to avert sequestration – the stronger the profit taking motivation will become for stock investors. Like a snowball rolling downhill this process can easily morph from profit-taking to all out “flight-to-quality” buying of Treasury debt obligations and agency eligible mortgage-backed securities. Either way it is an exercise, should it develop, that will almost surely prove supportive of the prospects for steady to perhaps fractionally lower mortgage rates. Heads up.
