Fulcrum Macro Advisors Washington Week Ahead: Will We See A Government Shutdown? And Are We Reaching New Inflection Points in Russia and Iran?

Monday and Tuesday morning will be quiet here in Washington as Congress is out of session for Rosh Hashanah. That leaves them little time to get a stop-gap federal funding bill done before the government runs out of money on Friday.  

Typically, getting a short-term funding bill through Congress is relatively easy – although the markets have experienced their fair share of government shutdowns (10 to be precise since 1980. The longest was in 2018-2019 and lasted 35 days).    

To avoid another shutdown, the Senate returns to work Tuesday afternoon and hopes to pass such a bill, but it is particularly complicated this time around. Why? What to do with Senator Joe Manchin’s (D-WV) oil/gas permitting bill. Recall that House Speaker Nancy Pelosi (D-CA) and Senate Majority Leader Chuck Schumer (D-NY) promised Manchin they would support his legislation that would significantly expand the permitting of oil and gas drilling in return for his support of the Inflation Reduction Act. 

 The complication? More than 70 House Progressive Democrats have gone on record opposing the bill, and most Congressional Republicans also are going to fight it (not that they oppose expanding permitting but because they do not want to give Manchin or the White House a victory this close to the November mid-terms).

You can find a summary HERE for details of what is in the Manchin bill.  The big question: Will Pelosi and Schumer successfully attach Manchin’s bill to the short-term funding bill? Or is there too much risk  it will cause a government shutdown this close to the election?

The temporary funding bill – which will keep the money flowing until December 16th, when Congress is back from the mid-terms and can move to either vote on a final budget or temporarily extend the funding again – will have other add-ons, including $12 billion more in military and economic aid to Ukraine, funding for the water crisis in Jackson, Mississippi, and financing for resettling Afghan refugees as well as heating assistance for low-income families.

 Beyond this bill, Congress is working on getting out of town as fast as possible to campaign for the final four weeks before the November mid-terms. 

Looking abroad, we will be watching closely what is happening in Russia and Ukraine this week. Russia has rushed through a “vote” to annex the Donetsk, Luhansk, Kherson, and Zaporizhzhya regions, making them formally a part of Russia. Hence, any attacks by Ukrainian forces will be categorized by Moscow as an attack on Russia itself. The elections are clearly a sham (there are credible reports that 13 and 14-year-old Ukrainians have been forced to vote at gunpoint for the annexation) and show how desperate the situation has become for Russian President Putin.

Concurrent with the annexation vote, Putin is moving forward to mobilize at least 300,000 new troops. Reports suggest that the State Duma (Parliament) has given Putin the authority to draft as many as 1 million men. Resistance is significant – reports of men fleeing abroad are extraordinary. On Friday, we talked with a friend in Almaty, Kazakhstan, who told us of large groups of young Russian men who had fled the mobilization last week, milling around in public parks, cafes, and hotels, talking about how to find work and not be sent back to Russia.  It is now evident knowledge of the failures of the Russian Army and casualty rates are much better known by the general Russian public than previously thought (we would note the New York Times recently published estimates of between 80,000 and 110,000 Russian troops killed or wounded in the past seven months).  

Add to this news reports in official Russian press of both borders being closed and possible imposition of martial law, and we are hitting a massive inflection point in the war.  

Elsewhere, the situation in Iran also bears close watch. Protests across the country have continued to grow as average Iranian citizens show their anger at police brutality after the morality police arrested a 22-year-old woman for allegedly violating the hijab dress code.  She died in captivity from torture.   This event, along with intense overall frustration with social restrictions and ever-growing economic malaise.  Of note from a US perspective is the US Treasury’s expansion of sanctions on Iran’s morality police as the negotiations with Iran over restoring the Joint Comprehensive Plan of Action (JCPOA) – otherwise known as the nuclear deal – continue and the Biden Administration issuing a license to relax sanctions in internet services in Iran to help “support the free flow of information for Iranians.  We do not see, at this point in time, much likelihood of the protests resulting in a change of government.  But it does show the growing unhappiness among the general Iranian public with little change for improvement. 

Finally, we would note the potential market impact of Italy’s elections yesterday. The right-wing coalition led by Giorgia Meloni won a sweeping victory.  It was a massive political comeback story for Meloni and her party, Brother of Italy, which only won 4 percent of the vote in 2018.  

The question for markets in the short-term is can Meloni get the 2023 budget approved by the EU by the end of the year (as required). And will her coalition government be able to meet the 54 targets/conditions worked out with the European Commission to unlock the 3rd tranche payment (€19 billion)  from the Next Generation EU (NGEU) program? Also, will they honor the terms and repayment schedule of the National Recovery and Resilience Plan (NRRP) or, as Meloni promised in the campaign, seek to renegotiate it? 

Italy drew down the full €191.5 billion allocated to them in the NRRP to help battle the economic impact of COVID.  But Meloni wants to renegotiate the repayment, saying the Ukraine War is presenting Italy with a new set of challenges that need to be addressed, too.   

Why it Matters: Italy’s latest political crisis could result in EU turbulence

We have been watching closely the political crisis in Italy these past few weeks which resulted in Prime Minister Mario Draghi resigning. Italian politics are always complex and at times bewildering. There have been 66 changes of government in Italy since the end of World War II. But this change could be a shock to not only Italy but to the rest of the European Union.

A snap election is to be held on September 25th but polls today show the Brothers of Italy Party with a clear majority. The right-wing party, whose name comes from the Italian national anthem, is led Giorgia Meloni. They have formed a coalition with other right-of-center parties including Forza Italia (led by former Prime Minister Silvio Berlusconi) and the Italian League (led by Matteo Salvini) and the populist Five Star Movement. Together, they would form what would be seen as the most conservative - both fiscally and socially — political party in the EU.

If elected, markets should expect a much more disruptive Italy within the EU governance structure, challenging the EU rules over budget and other issues including migration and social issues (including gay rights and abortion). Most investors have become worried Italy carries too much debt now. A Brothers of Italy coalition would not make debt reduction a priority.

If elected, Meloni would become Italy’s first female premier. She has made clear, however, that Italy will continue to support Ukraine in the war effort against Russia.

We will be tracking this election closely and sharing our analysis going forward. Here are the latest polls: