Wall Street is preparing for disruption to economic data if a looming U.S. government shutdown goes ahead, which could cause investors to rely more on alternative data or take on more defensive positions as they anticipate volatility in asset prices.
"A shutdown is an expected event...like the slow car crash that we're all watching happen," said Callie Cox, chief market strategist at Ritholtz Wealth Management. "There are ways to hedge this and I'm sure affected investors are already thinking about that."
The Fed relies on a range of data including regular government releases to make monetary policy decisions as it seeks to balance its key economic goals of price stability and maximum employment. Markets are pricing in a quarter-point rate cut by the Federal Reserve at its Oct 28-29 meeting. The central bank made such a cut earlier in September following weak employment reports.
WILL THE SHUTDOWN CASCADE THROUGH MARKETS?
"If a shutdown happens and it lasts any significant amount of time... you could see a cascade effect where data really just gets pushed back and pushed back," said Gennadiy Goldberg, head of U.S. rates strategy at TD Securities. "For markets, that's a difficult thing given just the sheer amount of data dependence that the Fed is leaning on."
With U.S. government funding due to expire at midnight on Tuesday, Republicans and Democrats in Congress are showing no signs they will agree to a temporary spending fix that would.
Andrew Brenner, head of international fixed income at NatAlliance, said a delay in the jobs report could cause traders with Treasury derivatives positions put on ahead of the labor data to close or hedge their exposure, spurring more volatility in the market.
Strategists are recommending clients prepare for both protection and opportunities as they navigate this period of uncertainty.
Phil Blancato, chief market strategist at Osaic, said clients should think about increasing their fixed income allocation, buying the belly of the U.S. Treasury yield curve, hedging portfolios to mitigate volatility, and pivoting towards companies that could benefit when the impasse is resolved.
"Keep a level of cash in the portfolio, five to ten percent short-term investments, that can be dry powder when" the shutdown is resolved, Blancato said.
LACK OF DATA COULD CLOUD FED'S VIEW
The labor market data due on Friday stand to be among the first impacted, while depending on length of a shutdown, other releases could be delayed, including the Consumer Price Index due Oct 15.
During a 16-day shutdown in 2013, the Bureau of Labor Statistics published the report originally scheduled for Oct 3, on Oct 22, the fourth business day after the government’s reopening, according to economists at Nomura in a note.
Once any shutdown ends, the BLS could likely publish data relatively quickly as it will likely have nearly completed the employment report by the end of September, the Nomura economists wrote last week.
DATA DELAY WILL RIPPLE THROUGH WALL STREET
Department of Labor spokesperson Courtney Parella said in a statement to Reuters that concerns about potential delays should be directed to Democrats in Congress, who she said are refusing to pass a "clean" continuing resolution to keep the government open.
A spokesperson for Democratic Senate Minority Leader Chuck Schumer did not respond to a request for comment.
Without data, investors will focus more on Fed officials' comments, said Adam Vos, global head of BNY Markets.
"There’s a diverse set of views across the Fed, and so that could be, I guess, tricky to get a handle on exactly where that will land," Vos said.
Fed Funds futures are pricing in nearly 90% odds of a quarter-point cut at the upcoming meeting, LSEG data showed.
"Fewer pieces of data can cloud the Fed's view in that meeting," Cox said. "Generally, less transparency in data affects everyone in markets from the bigwigs on Wall Street to the policymakers to the average investor."
Others argue it would be tougher for the Fed to justify veering from its "dot plot" of rate projections, making such a cut in October more likely.
"If no data comes out, they won't really have any information to deviate in either direction from that baseline," said David Seif, chief economist for developed markets at Nomura.
