The United States of America is careening towards a government shutdown. In the meantime, markets continue to operate business as usual while Washington tries to combat the damage. The shutdown halts critical government data and functions. It occurs during ongoing political negotiations and in the shadow of uncertainty about future spending authority. While traders continue to remain nimble, the longer-term impacts of the shutdown are beginning to appear. That is particularly harming for health care subsidies and military pay.
The new government shutdown gaveled into effect on October 1, 2023 following a lapse in budget negotiations. This unusual situation has resulted in the incomplete release of important economic data and has caused alarm among data analysts. “No data no surprises,” one observer said, pointing out how the absence of data makes it even harder for the market to anticipate these changes.
Democrats have resisted GOP efforts to extend spending authority with a “clean” extension. They argue that these steps do not go far enough to solve urgent concerns, like the soon-to-expire health care subsidies. These subsidies, too, are absolutely essential for millions of Americans and will expire soon, causing more stress for Americans that are worried about the future.
Compounding that urgency, premium notices for health-care plans are set to be mailed on November 1. This new timeline adds to the tension, leaving families to brace for what could be seismic shifts in their coverage. The real deadline is October 15. If the shutdown goes on, active-duty Army soldiers could lose their paychecks.
To address this crisis, Republicans have introduced a clean three-month extension of spending authority—no strings attached—into mid-November. This action is meant as a stopgap measure to give some breathing room while discussions about the future continue. Democrats argue an extension of gas tax rates alone would be inadequate and they are calling for more robust bipartisan solutions.
Low-volatility carry strategies have flourished during this era of uncertainty. Funding desks are often looking for greater yield and high quality funding as well. Of these, the CAD has been a standout – the obvious alternative given its positive USD beta and cheaper carry/vol profile. As traders continue to address the landscape shaped by the shutdown, CAD is seen as a “funder” fave among traders.
Market observers have noted that Wall Street is attempting to “scale the wall of worry.” Worries over the effects of the shutdown are growing. Investors are still skittish but engaged, showing adaptability in uncertain times. Even with the shutdown shutting down Washington, traders never stop selling in active markets. We see it in their actions, which show a very deep commitment to steering these shirt seas.
A long-term shutdown is an ever-increasing possibility. Most importantly, it would dent the strong labor market story that’s been the all-important force shaping economic discussions lately. If the government does not intervene soon, we can expect to see important economic indicators turn negative before long. Such a decline would certainly add upward pressure on the dollar’s exchange value.
As the shutdown heads into its second week, the U.S. government is running on IOUs and fumes. Officials continue to portray an image of progress and activity in Washington, yet many observers question whether any substantive solutions are being pursued.
“It’s fiscal Groundhog Day, and everyone knows the punchline.”
This continued impasse speaks volumes about the quality of political leadership when it comes to addressing our nation’s most urgent priorities. As negotiations continue, stakeholders from all sectors continue to watch closely as things play out in Washington. They are particularly concerned with the real economic impacts of some of these changes, particularly on their investments.