U.S. Government Shutdown Nears an End: What's Next for Markets?

TradingKey - The U.S. Senate passed a temporary funding bill, setting the stage for the end of a record 40-day government shutdown as early as this week. The impending resolution is expected to ease liquidity pressures, providing a boost to U.S. equities and Bitcoin, even as safe-haven assets like Treasuries and gold moved in different directions.

On Sunday, November 9, after arduous compromises between Democrats and Republicans on issues such as the Affordable Care Act, the U.S. Senate approved a temporary appropriations bill by a 60-40 vote, meeting the "minimum threshold" required to end the government shutdown.

The core issue prolonging the shutdown to a record 40 days or more was the Democrats' insistence on including health insurance subsidies from the Affordable Care Act, set to expire at the end of December, in the funding bill. Republicans, however, argued that this could be handled separately to restore government funding more quickly.

The healthcare subsidy dispute was the primary obstacle behind 14 consecutive rejections of the temporary appropriations bill this year. The breakthrough in this stalemate was attributed to the softening stance of centrist Democrats and new healthcare proposals from Republicans.

On one hand, some Democratic lawmakers accepted a plan to "reopen the government first, extend health insurance tax credits for a year, and then negotiate healthcare reform," despite strong resistance from other Democrats.

On the other hand, Republicans also shifted from their "no discussion" stance, proposing an alternative healthcare plan that would directly disburse funds to family accounts rather than in the form of subsidies.

U.S. President Trump stated, "It looks like we’re getting closer to the shutdown ending."

While the Senate's passage of the temporary appropriations bill is an optimistic signal, it does not immediately end the shutdown. It still requires unanimous consent from all Senate members, approval from the House of Representatives, and ultimately, President Trump's signature. Nonetheless, capital markets have reacted positively to the Senate's vote.

Prashant Newnaha, an interest rate strategist at TD Securities, anticipates a House vote on Wednesday and a reopening of the U.S. federal government by Friday. He noted that markets are feeling warmer about the idea that the U.S. shutdown is nearing an end.

As of Monday afternoon in Asian trading, S&P 500 futures rose 0.13%, Bitcoin prices surged over 4% in 24 hours, and Ethereum climbed over 5%. Major safe-haven assets showed divergent trends, with gold prices rising 2% and silver over 3% during the day, while U.S. Treasury yields moved higher.

Removing Obstacles to Rate Cuts

Analysts have pointed out that the U.S. government shutdown incurred a weekly economic cost of $15 billion, potentially dragging down the annualized quarterly growth rate of U.S. fourth-quarter real GDP by 1.5 percentage points.

Although core government functions continued, ordinary Americans experienced restrictions on travel, a worsening job market (especially for federal employees), and persistent high cost-of-living pressures.

Data released last Friday showed that the U.S. University of Michigan Consumer Sentiment Index fell to 50.3 in November, its lowest in three years.

Terry Haines, founder of Pangea Policy, stated that the latest political developments are positive for the market, implying greater clarity across sectors ranging from air travel and economic data to the Supplemental Nutrition Assistance Program (SNAP).This sends a strong signal to the market that Trump's economic policy vision will persist at least until the mid-term elections in mid-2026.

Beyond the anticipated end of the shutdown alleviating investor concerns, the resumption of key U.S. employment and inflation reports has become a central focus for markets. During the shutdown, U.S. stocks stumbled as the Federal Reserve operated "blindly" without official economic reports, and Fed Chair Powell tempered expectations for a December rate cut.

OCBC Bank noted that the removal of shutdown risk would allow investors to shift their attention to the Federal Reserve's policy outlook. If data indicates slowing growth, the Fed would have more room to ease policy sooner.

AT Global Markets also highlighted that the lack of data increased uncertainty, particularly regarding further Fed rate cuts; the resumption of data should pave the way for more certainty around rate cuts..

For safe-haven assets like gold and U.S. Treasuries, the divergence, with Treasuries selling off while gold regained momentum, could be significantly attributed to the Treasury's planned issuance of $125 billion across various maturities this week. Concentrated bond auctions may add pressure to an already strained market liquidity.

Easing Liquidity Pressures

During the U.S. federal government shutdown, as government spending was frozen while revenue continued to be processed, the balance in the U.S. Treasury's General Account (TGA) at the Federal Reserve significantly increased—its cash balance surged from $300 billion to $1 trillion over the past three months.

With "excess liquidity" in reverse repo balances drying up, the rise in the TGA balance effectively came at the expense of squeezing bank deposit reserves.

Some argue that during this period, the Treasury continued its planned financing through debt issuance while being unable to disburse funds to the real economy. The additional "$700 billion" in the TGA account turned the U.S. Treasury into a "hoarder," absorbing market liquidity without releasing it.

Anomalies in liquidity indicators, such as the sudden surge in the Secured Overnight Financing Rate (SOFR) in late October, reignited concerns about liquidity tightness. While this concept may not be widely recognized by ordinary investors, this overnight market is critically important for Wall Street.

ZeroHedge elevated the importance of the U.S. overnight repo market to the extent that "without it, Wall Street would not open," as market makers rely on it for balance sheet financing, hedge funds for leveraged funding, money market funds for overnight cash management, and the Federal Reserve uses it to transmit monetary policy.

Given that the U.S. government shutdown was a major contributor to worsening U.S. liquidity shortages, when the U.S. government shutdown ends, funds recalled by the Treasury from the market will be re-injected into the economy. This influx of liquidity is expected to reignite momentum for assets like U.S. stocks and cryptocurrencies.

Furthermore, after Bank of America urged the Federal Reserve to intervene quickly to address liquidity shortages, Fed policymakers also signaled their readiness to inject liquidity. New York Fed President John Williams stated last Friday that the Fed may soon need to expand its balance sheet by purchasing bonds.

Williams noted that, based on recent persistent repo market pressures and other growing signs of reserves transitioning from "abundant" to "ample," he expects it will not be long before sufficient reserves are reached, at which point the process of gradually purchasing assets would need to commence.

Following the Federal Reserve's announcement last month that it would soon cease "quantitative tightening," some analysts anticipate the Fed might begin "balance sheet expansion" by purchasing bonds as early as the first quarter of next year.