Wall Street left in the dark on US data if shutdown happens

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.

The U.S. Labor Department said on Monday that economic data releases would pause in a government shutdown, amplifying investor concerns that Friday’s monthly employment report would not be published as scheduled. Such a delay to the closely watched report could cause confusion for investors, including how to assess the Federal Reserve’s upcoming interest rate decisions.

“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.

“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 avert a shutdown.

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.

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.

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.