US government shuts down: What it means for markets

The US federal government ceased activities for a record 35 days back in 2018, amid the now infamous disagreement between President Trump and the Democrats over funding for his fabled border wall with Mexico.
As Mark Twain once said, history doesn’t repeat itself, but it often rhymes. Here we are once again, this time with Trump 2.0 at an impasse with Congress over the extension of health insurance subsidies.

Matthew Ryan, CFA, Head of Market Strategy at Ebury, said: “The dollar has come under a bit of selling pressure, although investors won’t be losing too much sleep just yet, that is, of course, providing they view the closure as a brief disruption, rather than a more elongated cessation in federal activities. A prolonged impasse that drags on for more than a few days could trigger a flight to safety, with the yen and the franc looking best placed to perform well.”

Matthew Ryan added: “Similar to 2018, an extended standoff may weaken the dollar should markets bet that the shutdown could harm the US economy and prompt a faster pace of Federal Reserve interest rate cuts. This remains a distant scenario for now, but markets will be wary of a repeat from Trump’s first term.”

USD

The dollar is trading mildly lower against most currencies so far this week, which we can really only put down to jitters surrounding the government shutdown. While a short disruption would likely be brushed aside by markets and have limited impact on FX, a prolonged impasse that drags on for more than a few days (even weeks) would no doubt trigger an increase in market unease and volatility. The dollar lost 1.5% of its value during the last shutdown in 2018/19 (which lasted for a record 35 days), and it's entirely plausible that we could see a repeat performance should the current saga drag out similarly.

Yesterday’s dump of data painted a relatively mixed picture on the state of the US economy. Job openings unexpectedly ticked higher to 7.23 million in August, but quits (which tend to increase during boom periods in a sign that workers feel more secure in finding alternative employment) actually slumped again to 3.1 million - the lowest level since November. Consumer confidence also dropped and, at 94.2, is now at its weakest point since April. All eyes would ordinarily turn to Friday’s payroll release, but this (along with other official government data) will be delayed until an agreement is reached in Washington.

EUR

We’ve seen a modest tick higher in EUR/USD so far this week, with the common currency now trading around our end-of-third-quarter target, just above the $1.17 level. Focus today will be on this morning’s September inflation report. The consensus of economists suggests a modestly stronger headline number of 2.2% (up from 2%), but with yesterday’s German HICP print surprising markedly to the upside (2.4% vs. the 2.2% estimate), this could be a touch on the conservative side.

ECB President Lagarde said on Tuesday that inflation risks appeared quite contained in both directions, and markets appear pretty confident that the Governing Council is done with its easing cycle. A strong inflation reading today would merely cement these expectations. A handful of other ECB officials will be speaking in the coming days, including members de Guindos, Montagner, and Schnabel. We will also be keeping tabs on the final September PMI figures on Friday, particularly after the flash readings showed a surprise dichotomy in performance between the bloc’s two largest economies, Germany and France.