The biggest bond market in the world has been pretty quiet lately, but traders are getting ready for sudden moves that might happen once a lot of important economic data comes out after the U.S. government shutdown ends.
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Once a big chunk of data comes in, the $30 trillion U.S. Treasury market could quickly shake up. Plus, the government shutdown might have made collecting this data more complicated. You can see in the options trading that investors are really interested in protecting themselves against different Federal Reserve moves before the year ends. The main point is that as Fed officials think about whether to cut interest rates again, the new data will show if rising inflation or a weak job market is the bigger problem for them.
Jack McIntyre from Brandywine Global Investment Management explained that if the government shutdown drags on—even just a little longer—they'll start to question how reliable October’s economic data really is. This uncertainty makes it tougher for the Fed and the markets to get a clear picture of the economy’s health, which could lead to quite a bit of market turbulence.
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This year, the way the market has reacted to monthly jobs and inflation reports has given some clues about what might happen once the shutdown is over.
Recently, these reports have caused quite a bit of movement in the bond market. Over the past year, on days when new employment data comes out, the 2-year Treasury yield tends to jump around 10 basis points on average. When the Consumer Price Index (CPI) is released, the typical move is about 5 basis points. On any regular trading day, though, the average change has been less than 4 basis points.
The employment report originally scheduled for October 3 has been pushed back. Now, everyone’s watching the CPI, which is due out on October 15. Last month, the Federal Reserve changed its approach because employment was softening, but since inflation is still above their goal, some officials are cautious about cutting interest rates further.
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Gregory Faranello, who leads U.S. Rates Trading and Strategy at AmeriVet Securities, mentioned that if the government sorts things out by next Thursday, we’ll see both the CPI and employment reports come out at the same time. But if there are unexpected surprises—either higher or lower—they could cause some market swings.
If the government stays shut for a while, it might be harder for officials to gather all the data needed for the October employment report, which was supposed to come out in early November. This could make it tricky to interpret what the numbers really mean and might also confuse the bond market about how the Federal Reserve will respond.
Liz Ann Sonders, Chief Investment Strategist at Charles Schwab, added that the big issue will be the October jobs report, especially if the government remains closed this week. In that case, a lot of the survey period for the report won’t reflect normal conditions because of the shutdown.
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