The deepening US government shutdown is triggering a rare risk-off reaction in financial markets. Once again, investors have been treated to a dramatic rise in the US dollar, gold prices, and US equity markets. This decision follows growing concerns over the economic costs of continued government inaction. This is bad news, as both Democrats and Republicans are completely dug in. At the same time, demands for immediate reconciliation become increasingly urgent to protect the US economy from additional injury.
Everyone else—including traders, analysts, banks and corporations—are getting ready and making adjustments for that massive uncertainty. Next week will be an important one as the blackout period for all Federal Reserve speakers starts October 18. The absence of current official economic data is currently stoking doubts about the plausibility of the Fed’s eventual rate cuts. That uncertainty complicates the environment significantly for investors.
US Equity Markets Show Resilience
Even with the chaotic political environment in Washington, equities in the US have experienced stellar performance. Analysts have pointed to investors turning to safe-haven investments in anticipation of a long-term government shutdown as the primary driver behind this unusual resilience. That first dose of risk-off sentiment has ironically resulted in higher allocations to equities as investors settle in to ride the volatility.
Trade experts reason that the increased interest in US stocks is because they’re seen as the more stable option during unpredictable times. The government shutdown has sent many investors scrambling to reassess their plans. Now they’re starting to pick equities over other riskier assets.
The ongoing political paralysis still threatens to wreak havoc. As long as neither party is flexible enough to meet the other halfway, it’s a developing story. Economic experts warn that failing to reach an agreement could result in far-reaching consequences for the broader economy, further influencing market perceptions in the coming weeks.
Global Political Landscape Influences Economic Outlook
From Brexit to trade wars, as political developments unfold across the world they are increasingly impacting global economic forecasts. Sanae Takaichi’s success in winning the Liberal Democratic Party leadership contest has sent shockwaves around Japan. People are starting to doubt her ability to be that kind of leader going forward. Most analysts expect her position will only grow more tenuous as she contends with growing domestic challenges and increasing international scrutiny.
Simultaneously, China is preparing for a momentous occasion. The Fourth Plenary Session of the 20th Central Committee of the Communist Party will be held from October 20 to 23. Observers are eagerly tracking these trends, as they could portend major changes for China’s economic policies at home and abroad.
Across the Atlantic in Europe, French President Emmanuel Macron is now presented with the gargantuan challenge of naming a new Prime Minister. The state’s political landscape is a messy and deeply fractured tableau. Radical left-wing factions and Marine Le Pen’s National Rally are holding a lot of power in the National Assembly. This new instability has broken eurozone’s relative peace of mind and sparked justified fears of its pernicious effect on economic policy.
Economic Data and Central Bank Decisions in Focus
It’s an understatement to say that next week will deliver the most economically significant data of the year. This tally counts the new September Consumer Price Index (CPI) and Producer Price Index (PPI) reports. Investors and policymakers will be watching these numbers like hawks. Together, they provide important context for understanding what’s going on with inflation and how the economy is doing more generally.
Similarly, in the UK, the Bank of England may lean dovishly. This would be an important change indeed, especially if the claimant count change report leads with bad employment numbers. Any such turn would reflect a more dovish attitude given the economic outlook increasingly darkened by the last influx of data, both recessionary-looking and otherwise.
Negotiations on US-Canada tariffs initiated by the United States-Mexico-Canada Agreement (USMCA) have been put on hold. This stopgap measure has only quickly overcome the US dollar’s shockingly strong recent surge. As those negotiations come to fruition, their results will almost assuredly extend impacts on currency values and trade flows.
The Reserve Bank of Australia’s latest monthly indicators show inflation dis-inflation is coming to a halt. This initiative casts further doubt on the prospect of additional interest rate increases in the future. In light of today’s inflation-related releases, this outlook seems all the more justified and has already spurred debate over how monetary policy should change in the future.