By Lewis Krauskopf
NEW YORK (Reuters) -With an end to the U.S. government shutdown potentially on the horizon, investors who feared more economic fallout breathed easier and turned to an expected flood of delayed data to shed more light on growth and the likely path for interest rates.
Markets on Monday welcomed the prospect of a federal reopening. Stocks are recouping some of their losses from last week, following news late on Sunday that the U.S. Senate reached a compromise and moved forward on a measure aimed at getting the government back to business and ending the disruption that began on October 1.
Investors had been growing concerned that an even more protracted shutdown, which had already become the longest in U.S. history, would hurt travel and consumer spending heading into the holiday season.
“The shutdown is having an increasingly negative impact on the U.S. economy the longer it lasts,” said Angelo Kourkafas, senior global investment strategist at Edward Jones.
“The worst-case scenario in terms of the government shutdown would have been if it went throughout Thanksgiving… so that lifts one of the headwinds.”
RELIEVING ECONOMIC, LIQUIDITY WORRIES
Leading the stock market rebound were technology shares that had been hit particularly hard in recent days over rising concerns about expensive equity valuations.
Signs of increasing optimism about a resolution were evident in foreign exchange markets, where risk-sensitive currencies including the Australian dollar rose, while safe-haven U.S. Treasuries fell, driving yields higher.
Investors initially expected the economic fallout of the shutdown to be minimal, with much of any lost spending recouped when the government reopened and federal employees returned to work.
But more worrisome signs had emerged recently. For example, a report last week showed U.S. consumer sentiment slumped to near a 3-1/2-year low in early November.
The shutdown “did start to hit the real economy pretty meaningfully here over the last couple of weeks,” said Matthew Miskin, co-chief investment strategist at Manulife John Hancock Investments. Its ending “is likely to help the economy into year end and minimize downside risk.”
The end of the shutdown is also expected to alleviate a tightening of liquidity conditions recently seen in money markets, which has caused repurchase agreements (repo) interest rates to rise over the past few weeks.
“The end of the shutdown may also help ease the recent liquidity squeeze at commercial banks, as government ‘liquidity’ balances will be drawn down and then re-enter the private credit system,” Thierry Wizman, global FX and rates strategist at Macquarie Group said in a note.
BRING ON THE DATA
Investors were also eager to clear a “data fog” that has been in place since the shutdown began, with the government not releasing critical reports that both investors and the Federal Reserve rely on for views into the health of the economy.
Sunday’s Senate compromise means the shutdown could end this week though it was unclear when Congress would give its final approval.
Data covering September, including that month’s employment report, will likely be released fairly quickly once the government reopens because those releases were likely close to being ready for publication before the shutdown started, said Nancy Vanden Houten, lead U.S. economist at Oxford Economics.
But the pace of releases after that “is less clear,” she said.
“I think the government agencies will make every attempt to make up all the lost data,” Vanden Houten said. “But we can’t rule out that maybe some will just have to be skipped or that we get more than one month of an indicator at a time.”
Fed Chair Jerome Powell at the central bank’s meeting last month had suggested that a lack of data due to the shutdown could make policymakers more cautious about cutting interest rates at their next meeting in December. Fed funds futures on Monday afternoon were pricing in a 63% chance the central bank eases by a quarter percentage point on December 10.
With a resolution to the shutdown, “hopefully (the Fed) should be able to see some of the data that they are missing on employment… before their December meeting,” said Jake Seltz, portfolio manager at Allspring Global Investments.
How much of a boost a resolution to the shutdown would give to stocks remained to be seen.
“We don’t think it will solve all the stock market’s problems,” said Lori Calvasina, head of U.S. equity strategy at RBC Capital Markets, in a note on Monday, “as issues like stretched valuations, the peak in earnings sentiment, and AI jitters would remain.”
(Reporting by Lewis Krauskopf; additional reporting by Davide Barbuscia; Editing by Alden Bentley and Bill Berkrot)
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