US government shuts down, markets react - BBH

The US government has officially shutdown. USD and US equity futures are down. If the shutdown is brief, the Fed will ignore it. However, a prolong shutdown (more than two weeks), increases the downside risk to growth and raises the likelihood of a more accommodative Fed. That can further weigh on USD, BBH FX analysts report.

Fed risks tilt dovish on prolonged shutdown

"The last shutdown lasted 34 days between December 2018 and January 2019. During this period, USD was marginally weaker, S&P500 rallied, and 10-year Treasuries were firm. The Congressional Budget Office estimate the 2018-2019 shutdown to have decreased the level of real GDP in Q1 2019 by 0.2%, which was mostly made up in subsequent quarters. The current shutdown means the release of key economic reports like Friday's September non-farm payrolls print are on hold. The postponement of labor market data muddies the water for the Fed, depriving it of an important indicator for tracking downside risk to the economy at present."

"Yesterday's August JOLTS data was mixed. Job openings unexpectedly increased to 7227k (consensus: 7200k) vs. 7208k in July (revised up from 7181k). However, the ratio of job openings to unemployed workers slipped 0.02 to 0.98, the lowest since April 2021, consistent with softer wages growth ahead and posing a headwind to consumer spending activity."

"There's no layoff spiral underway, but labor demand is cooling. The layoffs rate was unchanged at 1.1% for a third consecutive month in August while the hiring rate dipped 0.1pts to 3.2%, matching the June 2024 low."