- US government heading for shutdown amid impasse over fundings and subsidies
- Congressional Budget Office expects this shutdown to result in the furlough of 750,000 fed workers
- Historical data suggests that this will largely be a non-event for markets
- A shutdown will lead to the blackout of jobs data, causing greater confusion in markets
US government shutdown looms amid impasse at Capitol Hill. The US government is heading for a shutdown as lawmakers at Capitol Hill remain stuck in negotiations over fundings and subsidies. The Democrats have rejected the Republican proposal, insisting that any potential deal must include a permanent extension to health insurance subsidies which are due for expiry at the end of the year. A shutdown will bring some US government services to a halt and the Congressional Budget Office (CBO) believes this could lead to the furloughing of 750,000 federal workers (broadly similar to the previous shutdown which took place during Trump’s first term). But the White House has gone one step further with the suggestion that workers might be permanently laid off during this exercise as opposed to being temporarily furloughed.
Past shutdown: A non-event for markets. The economic impact of a US government shutdown depends on its duration. The furloughing of workers will hit consumer sentiments and weigh on domestic consumption. Based on estimates by the CBO, the last government shutdown, which lasted five weeks, reduced US economic output by USD11bn. The impact on financial markets, however, will be more muted given the broad assumption that such episodes are typically short-lived. Based on our analysis of six shutdowns that took place since 1990, the key observations are:
- Equities: The S&P 500, on average, gained 2.3% one month after the start of a shutdown and 6.8% over a three-month period.
- Bonds: Global IG bonds gained 1.2% on average one month after the start of a shutdown and 1.8% over a three-month period.
- Gold: Gold gained 0.5% on average one month after the start of a shutdown and 0.6% over a three-month period. Given lingering fiscal concerns in the US, we expect gold prices to be well supported this time round.
- Oil: On a one-month basis, oil prices fell on four occasions during the last six episodes of government shutdowns.
- US Dollar (DXY): The impact on DXY is muted, with the index registering a slight average decline of 0.3% one month after the start of a shutdown and an average gain of 0.4% over a three-month period.
Beyond the political drama: The blackout in economic data matters more. Historical data suggests that a US government shutdown will largely be a non-event for markets. But since the shutdown will lead to a temporary closure of the Bureau of Labour Statistics, the blackout of jobs data will potentially cause greater confusion in markets and make the job of the Fed more difficult. Stay diversified and hedge your portfolio downside.
Figure 1: US government shutdown has historically been a non-event for markets
Source: Bloomberg, DBS
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