US Government shutdown fails to 'rattle' markets but USD and yields could fall

Day two of the US government shutdown with no finish line in sight just yet, as Congress remains deadlocked over nontrivial disagreements to the funding bill.

With the White House instructing agencies to prepare for mass federal layoffs, not just furloughs, we are not particularly hopeful that an end to the impasse is imminent, and markets are bracing for the possibility that the closure could run on at least through the end of next week.

Friday’s Nonfarm Payrolls report appears almost certain to be delayed. While not a complete disaster, it does mean that the bad smell left from the dismal ADP jobs report will linger a little longer, which is unlikely to do the dollar any favours. US stocks are better bid, however, as the clear cooling in the labour market almost guarantees that the Fed will cut rates in both October and December, which should provide welcome relief to American businesses.

For now, markets are not overly rattled by the shutdown, but a prolonged political tug of war that drags on beyond a week or two could shift sentiment.

We would expect the dollar to grind lower, particularly against the yen.

US equities could struggle amid the prospect of lower government spending and the risk of a hit to consumer confidence and the economy. Treasuries may see increased demand given their safe-haven status, and yields could fall, albeit these moves would probably reverse quite quickly once the shutdown is over.