The U.S. could soon be headed for a government shutdown. Here's how financial markets might react

"A prolonged shutdown risks delaying or canceling key economic data releases investors use to assess macroeconomic trends, such as the monthly employment and inflation reports, analysts at Nomura said in a note this week. That would mean the Federal Reserve is "flying blind", making it more likely to stick with its own economic projections of two 25-basis-point rate cuts for the rest of 2025, the analysts said."

"With investors unable to assess the extent of a U.S. economic slowdown, the Treasury yield curve could steepen further as rate cuts get priced in with more conviction, leading to a wider gap between short- and long-dated Treasury yields, TD Securities said in a note. A lengthy government shutdown could also affect some market participants' ability to conduct complex trades for which they may require regulatory guidance."

"While U.S. President Donald Trump's administration had not widely shared its contingency plans as of Tuesday, a shutdown would likely reduce the U.S. Securities and Exchange Commission (SEC) to a skeletal staff, according to its October 2024 plan for a lapse in government funding. This would severely limit the agency's ability to review corporate filings, investigate misconduct, and oversee markets. Likewise, the Commodity Futures Trading Commission would furlough almost all of its employees and cease most market oversight activity, according to its 2023 contingency plan."

A partial U.S. government shutdown could begin next week as congressional Democrats and Republicans fail to agree on continued federal funding. The shutdown would limit financial regulators' operations and delay publication of key economic data, including monthly employment and inflation reports. Delays in economic releases would hinder investors' ability to assess macroeconomic trends and could leave the Federal Reserve operating with less timely information, increasing the likelihood it follows current projections of two 25-basis-point rate cuts in 2025. Investors' uncertainty could steepen the Treasury yield curve as rate cuts are priced more confidently. Prolonged furloughs at the SEC and CFTC would constrain oversight, filing reviews, and complex trading that requires regulatory guidance.

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