It may be non-farm payrolls week on the economic calendar, but perhaps that might get taken away. And that is the significance of the potential impact that could arise from a US government shutdown this week. For some context, the US federal fiscal year runs from 1 October to 30 September and government funding is allocated on a year by year basis according to this date. In total, Congress must pass 12 separate appropriation bills by 1 October. So only agencies with appropriation bills that are passed will be able to operate while those without will be forced to shut down.
Typically, this is the usual game of chicken that we're used to seeing but it eventually gets done. So, is this time any different?
As much as politicians like to be dramatic and make a big deal about everything, my take is that all of this will get done one way or another - as it always has. If push comes to shove, Congress could just avert a shutdown by passing a continuing resolution. That just buys them more time to get the bills passed. So, no biggie.
Polymarket currently has odds of a shutdown at 72% but that is down slightly from before the weekend at around 83%. It's still a high number but again, politicians just love a good game of chicken right up until the last second.
However, what if a US government shutdown really does happen? What will be the impact to markets?
The way I see it is that a shutdown is mostly an operational disruption rather than an economic one. Unless it leads to permanent layoffs of some sort, then there might be more impact for markets to digest. Otherwise, it's all just going to be temporary. As such, the impact to markets is arguably going to be minimal; if not hardly felt.
In fact, BofA estimates that any major shutdown would only subtract 0.1% from economic growth for every week it lasted.
So, why is the operational disruption a key risk event for markets then?
The thing is if we do get a shutdown on 1 October, that will delay the key economic releases that we will be getting this week. The BLS and Census Bureau are not part of the list of 'essential operations' during a shutdown, so they won't be working.
And that means the weekly initial jobless claims as well as the non-farm payrolls data this week could very well be delayed to a further date. In the grand scheme of things, it shouldn't be too consequential as the data will still be the data. However, it could very well stir up some nervousness in markets with the potential for the CPI data in mid-October to be delayed as well.
So, that's the key risk in scrutinising the US government shutdown that could happen this time around. And that being how these data delays might feed into the Fed decision at the end of October.
