The U.S. Capitol in Washington. During the government shutdown, traders have been forced to make do without official U.S. economic data.Aaron Schwartz/Reuters
The U.S. government shutdown could be on the verge of ending. When it does, the market chaos will begin.
During the historic outage, traders have been forced to make do without the official government data that usually drives major investment decisions. Once the information backlog starts to clear and the disparity between best guesses and reality is revealed, the market response is expected to be dramatic.
“It is terrifying, to be honest with you,” Ian Pollick, head of fixed income, currencies and commodities strategy at CIBC Global Markets, said in an interview. “I know what happens the day this is done. You will get this copious amount of data printing all at once, or in small batches in very quick succession.”
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The list of delayed economic data releases has swelled to 28, Royal Bank of Canada senior economist Josh Nye said in a Nov. 4 report, including key payroll and GDP figures. Among the more notably absent information in recent weeks include several jobless claims reports, housing starts and the latest producer price index.
It isn’t just U.S. data either. Statistics Canada said on Oct. 24 that international trade data for September will not be published on time because the agency relies on key inputs from the U.S. Census Bureau.
If that data is still unavailable by the time Statscan compiles Canada’s third-quarter GDP numbers, the agency said it will need to “produce special estimates of Canadian exports to the United States,” but warned those estimates “would be subject to larger than normal revisions once actual data becomes available.”
It is that threat of widespread larger-than-normal revisions that have traders worried. According to Mr. Nye, “a slew of alternative indicators – including some that previously received little attention – is helping to fill that gap.”
The problem with those private-sector alternative indicators is they are considered much less reliable.
“We have had to kind of scrounge around for any and all economic data and try to figure out if it is representative or not,” Gennadiy Goldberg, head of U.S. rates strategy at TD Securities, said in an interview from New York. “Those don’t have a great track record.”
As an example, Mr. Goldberg said his team recently tried to glean insights from movie theatre ticket sales trends.
“There was a big drop in movie theatre ticket sales just shy of the summer months, and a lot of ink was spilled on that saying maybe it was a sign that the economy is not doing so great,” he said. “But an alternative explanation is that maybe there wasn’t anything good to watch. We just don’t know. You can poke holes in all this data because it is relatively new and untested.”
Many investors are sitting on their hands, Mr. Goldberg said, making no major decisions at all until the situation is resolved. Trading volumes are broadly lower as Mr. Goldberg said the risk of a widespread post-shutdown market shock rises each day the already record-long outage persists.
“If the data is not where the market expected it to be, there could be a pretty sharp move in things like interest rates, credit spreads, you name it,” he said. “And the longer we remain shut down, the more that path really diverges.”
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One scenario that CIBC’s Mr. Pollick considers possible involves U.S. jobs data experiencing large fluctuations as millions of federal government workers are considered employed in one report and unemployed in the next. He said that because of the way U.S. labour market data is calculated, federal employees who still received at least partial paychecks in the early days of the shutdown were counted as employed, but would have been considered unemployed after their payments stopped.
“I can see a world in which the first jobs report is actually spectacular and then it turns very much not spectacular and then we see a very sharp market adjustment,” Mr. Pollick said. “So strong jobs, interest rates higher, equities lower, but then actually whoops, just kidding, opposite direction.”
Part of the challenge facing traders is that they cannot anticipate exactly how the resumption of official data releases will unfold once the government reopens. The only thing they know for certain is the process will not be smooth.
Mr. Goldberg said some data, like the consumer price index for October, may simply never be released because the Bureau of Labor Statistics was not able to send staff to gas stations and grocery stores across the country that month to physically collect the required inputs.
Joseph Leary, co-head of fixed income at BMO Capital Markets in New York, said other inputs are sitting in BLS e-mail inboxes just waiting to be analyzed.
“The question is whether they decide to extrapolate from the e-mails in their inboxes, or do they wait to collect more and be a little bit slower and more methodical,” Mr. Leary said in an interview. “That is where I am unsure. It is hard to say. I could see either scenario.”
“Either scenario could happen where you’re going to get a lot of data that is going to be revised heavily, or you’re going to get a lot of data all at once, and either of those things means the volatility of the market is going to pick up when the government reopens.”