Dollar Index Slips, Shutdown Reduces U.S GDP by 0.1% Weekly
The United States (US) dollar index (DXY) snapped a two week rally to 97.7, representing a 0.5% decline for the week, pressured by growth concerns and signs of a softening labor market.
The ongoing government shutdown stalled public economic activity, risked job cuts, and delayed the September Bureau of Labor Statistics (BLS) jobs report, leaving markets to rely on weaker private data.
Deal to re-open the government does not appear imminent. Indeed, an off-ramp still seems difficult to envision. The US federal government was forced to close by the inability of Congress to pass a single appropriations bill for the new fiscal year that began October 1.
Despite the disruption for government workers and their families, and in projects, which the White House has targeted opposition-led states, the capital markets barely took notice, except for the missing high-frequency data, including the September employment report.
ISM services activity unexpectedly stalled, while labor indicators showed contraction – ADP payrolls fell consecutively, voluntary quits declined per Job Openings and Labor Turnover Survey (JOLTS), and Challenger hiring slowed.
These trends reinforced expectations of a significant slowdown, prompting the Federal Open Market Committee (FOMC) to restart its rate-cut cycle last month. Despite persistent inflation, markets now price in two additional Fed cuts by year-end.
The US government shutdown will remain the focus next week, as the extended impasse between members of Congress showed little signs of improvement.
History shows that government shutdown typically has little impact on the capital markets or the economy. The rule of thumb is that every week it is closed, GDP dips by 0.1%.
The shutdown jeopardizes releases from federal agencies, including the trade balance, jobless claims, and the budget statement, after the September jobs report and other key data have already been delayed.
Still, the minutes from the FOMC’s last meeting is still expected. Among non-governmental releases, October’s Michigan Consumer Sentiment survey will be eyed.
Also on the monetary policy front, the European Central Bank (ECB) will release its meeting account, and the RBNZ will set its policy rate.
Meanwhile, key data in Europe includes Germany and Italian industrial production and the Eurozone’s retail sales. Inflation will be due from Brazil, Mexico, Russia, and major ASEAN members.
JP Morgan said Federal agencies including the Bureau of Labor Statistics have suspended operations, which means that the publication of official economic data — including the U.S. jobs report and the Consumer Price Index (CPI) report — will be delayed.
This could pose a headache for the Federal Reserve, which is mulling the prospect of further rate cuts ahead of its next meeting in October.
“For as long as the government shutdown goes on, we will be operating a little bit blind. But we think that in this current economic environment, it still makes sense for the Fed to cut in October,” said Michael Feroli, chief U.S. economist at J.P. Morgan.
The longer-term outlook is murkier, however, especially in the continued absence of key economic data. “It’s going to be challenging to discern what this means for the direction of Fed policy.
“If the shutdown is lengthier, it could muddy the waters about how markets price the likelihood of any rate cuts past December,” added Jay Barry, head of Global Rates Strategy at J.P. Morgan.
The shutdown could also affect economic productivity. “Each week, a shutdown subtracts about 0.1% of annualized GDP growth via reduced government activity.
“There could be a sentiment channel as well if the duration of the shutdown enters uncharted territory,” Feroli said. Looking at jobs, the shutdown affects a fairly small part of the government, and many furloughed employees will receive back pay.
“However, the impact could be worse this time due to the threatened layoffs and actual job loss, which could create risks for the labor market and consumer spending,” Feroli noted. Market Watches as Stanbic IBTC Group CEO Inherits N50mn Fine
