Shutdown
With Congress failing to reach agreement on a funding deal ahead of Tuesday’s deadline, the US federal government is now in shutdown. This is not an unusual situation. So then, what is it and why does it matter to markets? Departments of the federal government deemed non-essential have been shut down. Functions of the government deemed essential will continue to operate skeleton staff and functions until funding is secured. The lack of agreement in Congress lies between the Democrat’s desire to defend key spending projects, notably healthcare and the Republican’s new agenda.
The immediate risk of a shutdown until an agreement is obtained on funding is limited. The Dollar, however, would be vulnerable if this government shutdown were to prove to be long lived. Ahead of the October 1st deadline, the assumption had been a shutdown was likely but given the Republican’s dominance throughout government, it ought to be short lived. Yesterday, the mood soured with expectations growing that Democratic representatives could use the opportunity for a rare show of strength. Accordingly, the Dollar drifted lower yesterday with the Euro and Yen in particularly taking up the slack.
One department deemed non-essential is the Bureau of Labour Statistics. This upsets the agenda for this week when all eyes were due to turn towards Friday’s non-farm payrolls report. This will add a layer of uncertainty within the US Dollar market and likely undermine the greenback. The longer a shutdown endures, the greater this risk premium may become. Subject to the agreement reached, especially in the context of the activities of DOGE throughout this year, any impact upon federal government jobs may ultimately force a more rapid deterioration in the outlook for the labour market than pre-shutdown.
Discussion and Analysis by Charles Porter
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