The S&P 500 ended down 8.8%, having fallen about 4% before the bill's failure was announced. Three-month Treasury yields closed at 0.30%, down from 0.84% on Friday; 2y yields dropped 41bp to 1.67% and 10y yields fell 25bp to 3.58%, as sign that overnight rate will be lower before year end. We expect the strain in financial markets following the failure of the bill will pressure members of Congress to resolve their differences. The bill will likely be brought up again for a vote, with some changes, likely by Wednesday evening or Thursday.
The continued stress in markets increases the likelihood that the Fed will have to cut the funds rate again. We expect they will wait til the next scheduled meeting, on Oct 28-29, but of course an intensification of market turmoil could force earlier action. For an inter-meeting cut to be very effective, it likely would have to be conjunction with other central banks. We are in unique market times, so commonplace indicators need to be interpreted to the current environment, thus disolving the rate spread/FX relationship for the time being.

Chris
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