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RESEARCH

What's the Market Fallout from the U.S. Shutdown?

J.P. Morgan addresses the implications of a record government shutdown and political deadlock in the United States.

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January 23, 2019

As the longest government shutdown in U.S. history endures, the J.P. Morgan Research team pinpoints the impact on U.S. economic growth, asset classes and sectors. While some fallout may be short-lived, the impasse over President Trump’s $5.7 billion demand for a U.S.—Mexico border wall raises wider questions on consumer and business sentiment and what this means for another looming flashpoint: The U.S. debt ceiling that is set to expire on March 1.

A Setback for Growth

J.P. Morgan has lowered its U.S. growth forecast from 2.25% to 2.0% in the first quarter due to the economic fallout from the shutdown. News reports indicate some 400,000 government workers are not working at all during the period and J.P. Morgan predicts this will reduce annualized growth by 0.12% for each week the government remains closed. However the direct repercussions are not yet expected to be felt by the second quarter and J.P. Morgan is not revising projected Q2 GDP of 2%.

Equities: History Repeats Itself

An analysis of 18 shutdowns over the past 40 years reveals equity markets fell by around 2% on average, with longer shutdowns accompanying a steeper fall in share prices. While the stock market has staged a recovery since the lows of late 2018, the historical data suggests the rally would be stronger without the drag of the shutdown. Furthermore, the SEC says it is operating with “a very limited number of staff members” and a protracted impasse is expected to delay the IPO pipeline as well as M&A activity, injecting uncertainty into the markets.

Credit Concerns

With no sign of compromise, the political deadlock in Washington also raises greater concerns over the ability of the White House and lawmakers to resolve future crucial areas of public policy. The U.S. debt ceiling was extended until March 2019 and the prospect of a standoff on the issue presents a potential economic flashpoint. While the U.S. Treasury is expected to be able to borrow through the summer or early fall, historic research shows equity markets decline by as much as 4% when a shutdown is accompanied by the need to raise the debt ceiling. In addition, Fitch has warned such a scenario would mean it would reconsider its AAA rating for U.S. debt.

FX Implications

Concerns over the political paralysis evident in the shutdown are also weighing on the U.S. dollar and exacerbating the greenback’s recent weakness, with J.P. Morgan models suggesting the USD has undershot by around 2% due to the closure. Tied into this are anxieties over the debt ceiling as well as the ratification of NAFTA’s successor, USMCA.

With other challenges also facing the White House including the Robert Mueller investigation, U.S. domestic politics has replaced international politics – such as U.S.-China trade tensions – as a volatility generator for U.S. and potentially global markets.

U.S. Treasuries Rally

An analysis of previous shutdowns in 1995, 1996 and 2013 reveals 10-year Treasury yields fell by an average of 16bp in the lead up as risk-adverse investors moved towards the safety offered by U.S. government bonds. The behavior of the Treasury market in recent weeks has been consistent with this dynamic, but the decline has been more severe due to other factors including slowing global growth and dovish signals from the U.S. Federal Reserve.

Aviation Sector Hits Turbulence

Delta Air Lines has warned that reduced government travel will hit January revenues by $25 million and tourism will likely decline in subsequent months as government workers miss paychecks. In terms of service, Delta has delayed the launch of its Airbus A220 due to delays in approvals while Southwest Airlines has postponed launching flights to Hawaii as FAA employees remain on furlough. Wait times in airports are expected to rise with the TSA reporting high levels of absenteeism and some travelers may opt to drive to short-haul destinations.

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