The long-anticipated government shutdown is upon us. The question now is how long will it last and what does it tell us about the coming debt-ceiling fight. The Washington players may not be publicly acknowledging the role of markets in this drama, but we know that they will closely be watching the market’s reaction.
Beyond all of this, we have a host of economic data on deck for release the rest of this week that will have a direct bearing on the Fed’s Taper decision. The most important of these reports is the September non-farm payroll report coming out on Friday. We have to be mindful, however, that the jobs report is produced by the federal government’s Bureau of Labor Statistics and its timely Friday release is far from guaranteed even in a temporary shutdown.
The partisan back and forth between the two chambers of Congress effectively guarantees that we are heading towards a shutdown tomorrow. A shutdown isn’t the end of the world. There have been plenty of shutdowns in the past and they seldom do any lasting damage to the economy or the markets, particularly when they are temporary. This one will likely be no different. The significance of this one is in its timing, as it comes just a couple of weeks ahead the significantly more important debt-ceiling vote in Congress.
The conventional wisdom is that the acrimonious partisan budget fight and resulting government shutdown will make way for a smoother passage of the debt ceiling issue in Congress as none of the two sides will have the stomach for another fight so soon. I don’t completely buy into that line of thinking. But if enough investors buy into that reassuring narrative, their trading actions may not amount to sufficient enough pressure on Congress to make the government shutdown a short-lived one. And that’s the gist of the conundrum that market participants have to deal with today and tomorrow. Congress likely needs to see a big enough reaction in the market to push them towards a compromise, but the market’s rationality may not produce a big enough swing.
Let’s hope we move past this stage without much damage and move back to the familiar Taper debate.