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When Will the Shutdown Affect Markets?

When Will the Shutdown Affect Markets?

Thoughts on the Market vor 1 Jahr

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An extended U.S. government shutdown raises the risk for weaker
growth potential. Our Global Head of Fixed Income Research and
Public Policy Strategy Michael Zezas suggests key checkpoints
that investors should keep in mind.

Read more insights from Morgan Stanley.

----- Transcript -----

Welcome to Thoughts on the Market. I'm Michael Zezas, Global Head
of Fixed Income Research and Public Policy Strategy.

Today: Three checkpoints we’re watching for as the U.S.
government shutdown continues.

It’s Wednesday, October 8th at 10:30am in New York.

The federal government shutdown in the United States has crossed
the one week mark. But if you’re watching the markets, you might
be surprised at how calm everything seems. Stocks are steady.
Bond yields haven’t moved much, and volatility’s low.

It’s more or less the scenario my colleague Ariana and I had
talked about in anticipation of the impasse in Washington. We’d
noted the potential for uncertainty for investors and market
reaction depending on how long the shutdown would last.

So that raises a big question: what, if anything, about this
government shutdown could shake investor confidence and start
moving markets?

The question is worth considering. Prediction markets now suggest
the most likely outcome is that the government shutdown will not
end for at least another week. And as we’ve seen in past
shutdowns, the longer it drags on, the more likely it is to
matter. That’s because risks to the economic outlook start to
accumulate, and investors eventually have to start pricing in a
weaker growth outlook.

There’s a few checkpoints we’re watching for – for when investors
might start feeling this way.

First, the missed paycheck for furloughed federal workers. The
first instance of this comes in a few days. Less pay naturally
means less spending. Studies suggest that spending among affected
workers can drop by two to four percent during a shutdown. That’s
not huge for GDP at first; but it’s a sign the shutdown is having
effects beyond Washington, DC.

Second, this time might be different because of potential
layoffs. The administration has hinted that agencies could move
to permanently cut staff — something we haven’t seen before.
Unions have already said they’d challenge that in court. But if
those actions start, or even if legal uncertainty grows around
them, it could raise the economic stakes.

Third, we’re watching for real disruptions to economic activity
resulting from the shutdown. The last shutdown ended when air
traffic in New York was curtailed due to a shortage of air
traffic controllers. We’re already seeing substantial air traffic
delays across the country. More substantial delays or ground
halts obviously impede economic activity related to travel. And
if such actions don’t coincide with signals from DC of progress
in negotiating a bill to reopen the government, investors’
concern could grow.

So here’s the bottom line: markets may be right to stay calm —
for now. But the longer this shutdown lasts, the more likely one
of these pressure points pushes investors to rethink their
optimism.

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