Beyond the obvious impact on consumer spending, government shutdowns create tighter financial conditions through a less visible channel. The decline in disbursements to government programs and employees reduces bank reserves, tightening liquidity and putting downward pressure on equity markets.
The market fears the Federal Reserve will be slow to cut rates, creating tension. However, emerging weakness in private labor data, combined with political pressure to 'run it hot,' suggests the Fed will ultimately deliver more accommodative policy than is currently priced in.
Stocks most affected by tariffs showed a muted reaction to a pending Supreme Court decision. This suggests investors believe the executive branch could use other authorities to maintain tariffs and that any potential refunds from an overturn would take years to materialize, diminishing the news's immediate market impact.