By Laura Matthews
NEW YORK Delays of vital economic data releases could trigger financial market volatility if a U.S government shutdown goes ahead this weekend and drags on for weeks, leaving investors to use alternative data sources to determine the economy's trajectory.
Washington is days away from its fourth partial shutdown of the U.S. government in a decade if lawmakers cannot agree on funding levels for the full fiscal year beginning on Oct. 1.
A shutdown would disrupt government services including the publication of major U.S. economic data such as keenly-watched employment and inflation reports that can move equity and bond markets globally.
"If the government data releases are suspended, this will increase volatility and decrease visibility, in a time when forecasting is already difficult," said Clifton Hill, global macro portfolio manager, at Acadian Asset Management.
"Markets will be 'flying even more blind' and this will increase uncertainty to the Federal Reserve Bank's rate decisions over the next three to six months."
Hill said that investors would have to make assumptions based on survey and non-government economic data that is available.
Key government data releases due over the next two weeks include jobless claims, unemployment and inflation, which influence monetary policy.
"Markets could get volatile if investors and monetary policy makers cannot get timely data updates such as the latest snapshot on employment and unemployment, especially during this stage of the cycle," said Jeffrey Roach, chief economist at LPL Financial.
A shutdown may delay the Oct. 6 payroll report and other important releases, Roach added, which could cause the U.S. Federal Reserve to be "more patient and cautious as it assesses the economy."
ING's chief international economist James Knightley said a shutdown would be economically disruptive and would restrict the flow of data the central bank would need to justify further interest rates hikes, strengthening the case for the Fed to hold interest rates steady in November.
Peter Vassallo, a foreign exchange portfolio manager at BNP Asset Management said delays in economic data "is unfortunately just something that we have to deal with as it comes."
"It will force market participants to rely more on private measures in the interim, and when data is released, it will not be as timely," said Vassallo. "So, strictly speaking you would expect the market reaction to be a bit more muted."
Other impacts are on companies looking to go public. NYSE Group President Lynn Martin said a government closure would impede federal regulators from processing filings for initial public offerings and other transactions, potentially impacting investor's confidence and market performance.
ECONOMIC HIT FEARS
Chris Murphy, co-head of derivatives strategy at Susquehanna International Group, said the stock market has fully priced in a government shutdown, but the question remains how long it could last.
A recent Goldman Sachs analysis showed that, at a macro level, government shutdowns have had minimal gross domestic product impact and the economy typically recovers quickly once it reopens.
"If the shutdown lasts many weeks, then the market will start to worry about the... potential hit to growth with rates being so high," said Acadian's Hill.
Ratings agency Moody's warned on Monday that a shutdown could harm the U.S.'s credit rating, a stern warning coming one month after Fitch downgraded the U.S. by one notch on the back of a debt ceiling crisis.
Some investors say this potential shutdown could be more impactful than prior ones, pointing to a confluence of events such as a recent U.S. credit downgrade, rising interest rates, the United Auto Workers strike and the resumption of student loan payments.
"There was already uncertainty on how this would impact consumer behavior and now many loan forgiveness [or] deferral programs will not be funded as payments resume, which could increase the impact," Murphy said.
(Reporting by Laura Matthews; Editing by Megan Davies and Jamie Freed)