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This week, the United States (US) entered a federal government shutdown, leading to a temporary scale-back of agency operations and the furlough (temporary layoff) of government workers. While such events have historical precedents, their occurrence invites a pragmatic assessment of the potential impact on economic activity, data analysis, and institutional stability.
Assessing the economic and data impact
Every US government shutdown has impacted economic output, with the magnitude depending on its length. The 2018–2019 shutdown, which lasted 35 days, reduced gross domestic product (GDP) by an estimated $11 billion, though much of that was later recovered. In the current economic climate, characterised by moderating growth, the US economy’s ability to absorb such disruptions is a key consideration for forecasters. The direct impacts, such as delayed payments to contractors and stalled federal projects, are well-understood mechanics.
For financial markets and policymakers, a primary challenge is the interruption of key economic data streams. Government bodies like the Bureau of Labor Statistics and the Bureau of Economic Analysis are set to pause the release of key inflation, employment, and GDP reports. In the absence of official data, the US Federal Reserve (Fed) and market participants will likely increase their reliance on alternative indicators from private surveys and weekly reports. While these sources can provide valuable signals, they are often associated with higher volatility and require careful interpretation.
Workforce and institutional considerations
The current shutdown introduces a unique variable: the possibility of permanent reductions in the federal workforce if funding is not restored, as outlined in internal agency documents. This marks a departure from previous shutdowns, which were treated as temporary funding lapses. Such a move would represent a structural shift in fiscal policy, with potential long-term effects on household income and economic demand.
The situation also brings the independence of institutions like the Fed into focus. The legal framework protecting the Fed is robust, and governors can only be dismissed “for cause”. Recent challenges to this principle have tested the statutory barriers, reinforcing their importance. Market participants view central bank independence as a cornerstone of policy credibility, and they will continue to monitor the situation for any developments that could influence long-term risk assessments in bond markets.
Market response and outlook
To date, financial markets have responded with caution and re-evaluation rather than alarm. The reaction has been mixed. Equity markets brushed off the political peacocking between the Republicans and the Democrats and continued to rally on robust liquidity and the promise of lower interest rates. Assets like gold have seen increased interest as investors seek to hedge against political risk, while the US dollar has seen some softening. The volatility in Treasury yields reflects a balance between safe haven demand and concerns over fiscal trajectory. This measured response suggests that investors are actively assessing the situation rather than making defensive moves.
Potential scenarios to consider
- Short-term resolution: A brief shutdown would likely result in delayed data releases and a modest, temporary dip in output, followed by a rebound. In this scenario, markets might focus on the idea that a data-cautious Fed is supportive of risk assets.
- Multi-week impasse: A longer standoff would necessitate a greater reliance on proxy data, likely leading to increased market volatility as investors navigate a less clear information environment. Defensive assets – like cash, bonds and gold – may become more attractive in this context.
- Prolonged shutdown with workforce reductions: This scenario would introduce structural economic headwinds. Permanent staff cuts could impact consumer confidence and capital spending, with governance risks potentially affecting the dollar, Treasuries, and credit markets more directly.
The main effect of the shutdown extends beyond its immediate fiscal drag. It creates uncertainty for policymakers and investors by disrupting the flow of reliable data and testing institutional norms. Markets are capable of pricing in economic weakness, but navigating a prolonged period of reduced visibility could present a more complex challenge. The duration of the shutdown and any signals of lasting institutional changes will be critical factors in shaping the economic and market outlook.
MARKET MOVES
Equities
US equity futures have ticked higher as we head towards the final trading session of the week, extending gains from the previous session as artificial intelligence (AI) remains the dominant market theme. Tech stocks are driving momentum, with chipmakers like Nvidia, AMD, and Intel advancing. Sentiment was further lifted by AI research and development company OpenAI’s $6.6 billion funding round, which valued the firm at $500 billion.
Washington politics, however, remains a risk factor. The US government shutdown entered its second day. The closure has already delayed the release of the September Non-Farm Payrolls report today, creating an unusual data blackout for investors.
In Europe, London’s FTSE 100 eased after four straight sessions of gains, dragged down by information services company Experian. Grocery retailer Tesco, however, jumped on stronger profit guidance, while global investment firm 3i Group rallied on asset sale speculation. Frankfurt’s DAX gained 1.3%, supported by industrial tech giant Siemens and tech shares linked to AI.
Bonds
US government bond markets steadied at the end of the week, with the 10-year Treasury yield sitting close to 4.1%. Investors are betting heavily that the Fed will cut rates twice more this year, beginning with a quarter-point move in October. Political noise remains a complicating factor as the federal shutdown has entered its second day, delaying official economic data releases and raising questions about fiscal management. US Treasury Secretary Scott Bessent has flagged potential pressure on growth, while US President Donald Trump has threatened job cuts across the public sector in a bid to break the deadlock.
Across the Atlantic, United Kingdom (UK) borrowing costs climbed, with the 10-year Gilt yield reaching 4.7%. Officials at the Bank of England (BoE) voiced sharply different views – one stressing that inflation remains sticky, another cautioning that prolonged tight policy could do more harm than good. Markets still see no prospect of cuts before 2026. At the same time, the Chancellor of the Exchequer, Rachel Reeves, is weighing the removal of the two-child benefit cap, a politically charged decision expected to carry heavy fiscal consequences.
In Europe, German Bund yields rose above 2.7% as inflation data came in hotter than expected.
Commodities
Brent crude edged up to $64.40/barrel this morning, though prices remain pinned near their lowest levels in four months. The oil market is on track for its weakest weekly performance since June, with traders bracing for the possibility of the expanded Organisation of the Petroleum Exporting Countries, OPEC+, increasing its output. Reports suggest the alliance could approve another significant production boost in November, potentially lifting output by half a million barrels per day – far larger than October’s adjustment – as Saudi Arabia works to defend market share. Signs of oversupply were reinforced by US inventory data showing builds across crude, gasoline, and distillates, while refinery runs and fuel demand softened. Added pressure came from the return of Kurdish oil shipments from Iraq and concerns that the US government shutdown may weigh on economic activity. Meanwhile, the inter-governmental forum of seven of the world’s leading industrialised democracies, the G7’s finance chiefs pledged tougher enforcement against countries increasing their intake of Russian crude.
Gold hovered near $3,860/ounce, holding close to record levels and poised for a seventh straight weekly gain. Appetite for defensive assets (cash, bonds and gold) has strengthened amid the US shutdown, which has delayed major economic reports and heightened uncertainty. This week’s softer US private payrolls data and slowing job turnover reinforced expectations for further Fed easing though cautionary remarks from Dallas Fed President Lorie Logan capped bullion’s advance.
Currencies
The US Dollar Index has steadied near 97.8 this morning, regaining its footing after a volatile week. The US shutdown has, so far, caused little immediate disruption to the dollar but has amplified concerns about US fiscal stability, inflation pressures, and labour market fragility. Treasury Secretary Scott Bessent cautioned that prolonged funding gaps, caused by the government shutdown, could weigh on growth, while President Trump threatened sweeping public-sector job cuts. Fed officials remained cautious with Dallas Fed President Lorie Logan saying last month’s rate trim was a sensible safeguard but emphasised the slowdown is unfolding gradually. Markets nonetheless expect two more Fed cuts before year-end.
The euro is hovering above $1.17/€, up almost 7% year-on-year, while sterling consolidated near $1.35/£ as attention turned to the UK’s November budget. Chancellor Rachel Reeves’ suggestion to lift the two-child benefit cap, which will likely be funded by tax increases, will add further strain to a sluggish economy. Monetary easing in Britain remains a distant prospect, with no rate cuts expected until 2026.
*Please note that all information is at the time of writing.
Key indicators:
GBP/USD: 1.3430
GBP/EUR: 1.1463
GBP/ZAR: 23.22
GOLD: $3,858
BRENT CRUDE: $64.76
Sources: Bloomberg, Investing.com, LSEG Workspace/Reuters, Trading Economics and Trading View.
Written by Citadel Advisory Partner and Citadel Global Director, Bianca Botes.
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