Will the US Government Shutdown have a major impact on the Forex market?
If the US Government shuts down, will it have a major impact on the Forex market?
The US government began a partial shutdown this morning for the first time in 17 years, putting as many as 800,000 federal employees out of work today, closing national parks and halting some government services after Congress failed to break a partisan deadlock. While this has occurred 17 times in the past 35 years, and despite the fact that the markets have remained modestly positive prior to this morning's expected sell-off, the greater concern comes as an October 17 debt ceiling limit fight looms. Depending on its duration, a government shutdown of all nonessential activities could shave more than 1% from Q4 GDP, but failing to refinance approved spending next month would likely severely bruise confidence in the Treasury markets.
Since both parties are beholden to affluent influential dollars, at some point both will be forced to capitulate in favor of a deal similar to reconciling now without the expected pain of equities, housing, and the bond market getting crushed. The dollar's recent decline continues (-4% QoQ), joined this morning by oil and precious metals. Q3 closes with gains for stocks and bonds in the US, so the medium trend has held, even though the data were relatively muted last week. Durable goods orders rose only 0.1% MoM and fell as much excluding transportation, new home sales picked up a touch to 421k annualized units sold, and initial jobless claims fell to 305k, besting consensus by 20,000.
There was no final revision to second quarter GDP, which stayed at 2.5% QoQ, however the price index fell to +0.6% from 0.8%, another indication of inflation running below the Federal Reserve's desired level. Personal income and spending rose 0.4% and 0.3% MoM, respectively, in line with consensus and supportive of that better economy. S&P Case-Shiller's home price index rose yet again, some 0.6% MoM and now 12.4% YoY for July, but the impact of higher mortgage pricing has yet to shine through.
With the September jobs data on Friday and Italian political turmoil, expect a choppy week. Prior to the Friday nonfarm payrolls report, when economists expect 182,000 net new additions to the labor force and a steady 7.3% unemployment rate for August, ADP will likely report 180k new private payrolls for the same period, ISM releases its manufacturing and service industry reports that should both be strong yet cooler than last month in the mid-50s. Factory orders and construction spending should advance 0.3% and 0.4% MoM, respectively, when revealed midweek. Don't expect any news on the Chairmanship role for the Federal Reserve until the budget is resolved, however Bernanke will briefly speak in St. Louis on Wednesday.