Market preview for the coming session

The prospect of a partial government shutdown has moved from political theater to market variable. The Labor Department warned that the Bureau of Labor Statistics will completely cease operations if a shutdown occurs, which would delay publication of Friday’s closely watched jobs report and other monthly economic releases. That single procedural change has to be viewed through two lenses. First, what a data blackout would mean for trader behavior in the near term. Second, whether this episode will be different from past shutdowns when the macro effect was limited.

History offers some surprising context. Previous shutdowns have produced only small ripples in headline economic measures. During the most recent long shutdown that ran from December 2018 into mid January 2019 payroll employment grew at an average monthly pace of 221,000, stronger than the 166,000 monthly average for 2019. The 16 day 2013 shutdown coincided with a 220,000 gain in payrolls in October of that year, above that year’s monthly average. Initial jobless claims also showed little distortion. The reason is straightforward. Furloughed federal workers historically remain on payrolls and do not register as unemployed for statistical purposes. That behavioral pattern limits the direct hit to headline employment and consumer spending in the short run.

Markets, however, react to perception and information availability as much as to the underlying data. A gap in key labor and price releases would leave investors and policy makers relying more on private sector indicators. That can raise volatility and complicate interpretations. The Federal Reserve explicitly relies on incoming government data when setting policy. The central bank faces a particular challenge now because it is weighing how aggressively to cut rates while both inflation readings and hiring have shown mixed signals. A missing or delayed jobs report will reduce the clarity of the economic picture as officials approach their next policy meeting at the end of October.

Flashbacks to 2013 show the real world implications for monetary policy. Transcripts from the Fed’s late October meeting that year record officials saying delayed publications increased uncertainty about the outlook and made it harder to interpret the data that did arrive. One senior official observed that data and anecdotal information were colored by households’ and businesses’ reactions to the drama in Washington. Another warned that missed price observations can create errors in inflation measures that persist for months because not all items are surveyed each month. Those are not theoretical concerns. The Labor Department noted in a memo that a reduction in the quality of data collected could affect future estimates.

Two important distinctions are worth noting for traders. During the 2018 shutdown the Bureau of Labor Statistics ultimately remained funded and released its reports as usual. This time the department has signaled a full stoppage in the event of a lapse. Second, the current political environment introduces a new variable. The administration has threatened to use a shutdown to permanently dismiss many thousands of federal employees. If that threat were carried out it would change the usual mechanics that limit economic fallout. Economists at a major firm have estimated that the unemployment rate could temporarily rise by as much as 0.2 percentage point if furloughed employees are categorized as they have been in prior shutdowns. Any attempt to move rapidly to large scale dismissals could prompt protracted legal challenges but markets do not always wait for legal outcomes before adjusting prices.

For the trading session expect a cautious tone that emphasizes information risk. Equity markets may find directionless trading attractive until the data flow resumes, with sectors tied to economic activity and consumer confidence more exposed to headline uncertainty. Investors who look for clarity on monetary policy may push bond yields around as they reassess the timing and size of rate cuts given fewer official readings to lean on. Reduced data can magnify the importance of private economic indicators, regional Fed surveys and market-based signals. Those substitutes can be useful but often offer a noisier and less standardized signal than the government series the Federal Reserve typically cites.

There is also an overlay of trade policy risk that could concentrate selling pressure in specific pockets. The renewed threat to impose 100 percent tariffs on foreign-made films was followed by a similar pledge for imported furniture. Those announcements bring additional policy uncertainty for the entertainment sector and for import dependent retail and manufacturing supply chains. Even if these measures do not materialize, the threat alone can sharpen risk premia for companies exposed to international production and distribution.

From a portfolio management perspective, the immediate task for market participants is to reassess their reliance on calendar based events. With the possibility that Friday’s jobs report and other price indicators could be delayed, traders may reduce directional risk ahead of the weekend and favor more nimble approaches to incoming private data. Larger institutional players will be watching communications from the Labor Department and the Office of Management and Budget closely for signals about the depth and duration of any pause in statistics. The Fed’s October meeting will be an important focal point and the lack of fresh government data could make the October decision appear more tentative and subject to revision after the data flow resumes.

In short, the immediate macro fundamentals remain familiar. Past shutdowns did not create large measurable damage to aggregate growth or employment. The present situation has two features that could alter that historical outcome. One is the declared intention to furlough or potentially dismiss a larger number of federal workers than in prior episodes. The other is a real risk that the Bureau of Labor Statistics will stop producing routine monthly releases while a shutdown persists. That combination increases the odds that markets will price higher near term uncertainty and place extra weight on private sector indicators and market signals when forming views about inflation and the Fed’s path. Traders should prepare for a session that is more about information scarcity than about a sudden change in underlying economic momentum.

Watch for updates from the Labor Department and any statements about staffing decisions at federal agencies. Also track private employment and price indicators that could acquire outsized market power while official series are delayed. Those inputs will determine whether the market response settles into a short lived period of higher volatility or whether the episode produces a longer run reassessment of policy expectations.