Stocks Slip on Shutdown Worries

Phil Orlando, Chief Equity strategist at Federated Hermes, talks about the market's asymmetric risks.

Stocks wavered with traders concerned that the delayed release of crucial economic data because of an imminent US government shutdown would cloud the Federal Reserve’s path of interest-rate cuts.

The S&P 500 and the Nasdaq 100 have been vacillating between being little changed and posting modest moves for the past few hours. The Bloomberg Dollar Spot Index fell. Treasuries gained for the third straight quarter. Oil extended a sharp decline as OPEC+ considers boosting the pace of its output hikes in the coming months.

Even with Friday’s release of nonfarm payrolls data in doubt as the US government veers toward a shutdown, traders are still getting glimpses this week of how the labor market is faring. The JOLTS report on Tuesday showed US job openings were little changed in August while hiring was subdued, indicating that demand for workers is slowing. Wednesday’s data will provide insight on company hiring.

Still, many federal operations would pause in the event of a shutdown, and the Bureau of Labor Statistics — responsible for a number of gold-standard US economic releases — would cease operations and likely delay Friday’s payroll report.

This hindrance wouldn’t change the Fed’s decision for at least its upcoming meeting in October, according to David Seif, Nomura’s chief economist for developed markets.

“The less data that comes out, the less reason the Fed would have to deviate from the dot plot,” he said on Bloomberg Television on Tuesday. “The dot plot indicates 25 basis points in October. It is our view that will happen, whether or not they get the data.”

Even so, “things could get ugly if the shutdown creates an information vacuum for jobs and inflation data ahead of the next Fed rate decision,” said Michael Bailey at FBB Capital Partners. “Also, with stocks and valuations near prior peaks, we could see some minor bad news snowball into a correction near term.”

Traders have also been hearing from a handful of Fed speakers. Boston Fed President Susan Collins said further rate reductions may be appropriate this year given a weaker labor market, but officials need to remain wary about the possibility of persistent inflation. Fed Vice Chair Philip Jefferson warned that the central bank faces a cooling labor market alongside rising inflation pressures, complicating the policy outlook.

“I see the risks to employment as tilted to the downside and risks to inflation to the upside,” Jefferson said in remarks prepared for the fourth International Monetary Policy Conference hosted by the Bank of Finland. “It follows that both sides of our mandate are under pressure.”

Despite the uncertainty swirling in markets, the S&P 500 is headed for a second quarter of gains, fueled by looser policy and optimism over artificial intelligence.

“We would remind investors that shutdowns are common, and once resolved, agency operating budgets and employees are made whole, blunting any broader market and economic impacts,” wrote Monica Guerra, head of US policy at Morgan Stanley Wealth Management.

However, the length of the shutdown is important to note, as stocks typically weaken in the event of longer shutdowns while rates rally, according to Citi Research.

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