GM. This is Milk Road Macro, the newsletter that's more reliable than government data right now, because at least we didn’t ghost you for six weeks.
Here’s what we got for you today:
- ✍️ Everything you need to know about the end of the government shutdown
- 🎙️ The Milk Road Macro Show: Is the Fed Losing Control? Why a Leadership Change Could Reshape Markets w/ Barry Knapp
- 🥛 Milk Road AI is live
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EVERYTHING YOU NEED TO KNOW ABOUT THE END OF THE GOVERNMENT SHUTDOWN
The longest ever US Government shutdown is coming to an end.
Large parts of the Government have been frozen for 43 days.
Services have been stopped and huge numbers of staff have been furloughed.
But it’s the end of the road for the shutdown, with the Government due to fully reopen.
So, what’s the latest?
What are the impacts of the shutdown so far on asset markets?
And what will happen after the shutdown ends?
Let’s take a look…
What’s the latest?
On Wednesday, President Donald Trump signed legislation to end the Government shutdown that began on October 1.
Federal workers are expected to be back on the job today, with normal operations resuming.
But it could still take days or even weeks for the Government to “fully restart”, as the huge federal machine is rebooted.
I think one of the biggest reasons why politicians have now suddenly got together to find a way out of the shutdown is that it’s now starting to affect air travel in a big way.
Some flights have started to be canceled - and if the shutdown had continued, everything would “radically slow down”, according to Chicago O’Hare International Airport.
Then people would really not be happy - because this is a direct nuisance to their everyday lives.
Even with the shutdown ending this week, it could still take days for air travel to return to normal.
In terms of impact on wages, estimates vary, but generally the consensus is that a cumulative 8 million paychecks have not been paid since the shutdown started - including Government workers, and those linked to the Government in some way.
What are the impacts of the shutdown so far on asset markets?
If we look at asset price performance since the shutdown began on October 1, the S&P 500 has risen by 3%, gold has risen by 9%, while bitcoin has fallen by 9%.
But what are some of the measurable direct impacts to asset markets?
One is a fairly substantial hit to GDP growth.
GDP growth is an important metric for many sophisticated investment firms - who spend millions of dollars on perfecting real-time “nowcasts” of GDP growth and rely on them heavily for investment decisions.
Estimates put the negative GDP growth hit at anywhere between 0.9 and 1.5 percentage points.
This is a relatively meaningful hit to GDP.
Although, this negative GDP effect is sort of a “mirage” - because most of it will likely then be “recouped” in the following quarter (Q1 2026) after the Government reopens - so GDP growth next quarter may be higher than anticipated.
It’s difficult to know exactly how much this might be affecting asset markets - because they should be able to “look through” the temporary GDP hiccup.
But some quantitative strategies tied to GDP nowcasting may have started to sell assets/shuffle portfolios.
What has been noticeable since the shutdown began is a general market rotation out of more speculative assets and into safer or more defensive assets.
This can be seen through the slide in bitcoin/crypto prices since the start of October - but also within the equity market.
My “speculation gauge” - ARRK/SPX* - has been falling since early October.
*Ark Innovation Fund (“disruptive tech” equities) relative to the S&P 500 (broad large cap equities)
It’s hard to say if this “speculation rotation” has been largely caused by the shutdown specifically - but it is something that has been noticeable.
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EVERYTHING YOU NEED TO KNOW ABOUT THE END OF THE GOVERNMENT SHUTDOWN (P2)
What will happen after the shutdown ends?
One big factor during this shutdown period is that we’ve not seen a large majority of official Government economic data releases - including unemployment, job growth, retail sales and some inflation metrics.
I’m not entirely certain how this will play out once the shutdown ends.
Some of the data points may be unlikely to ever be released.
The October CPI report is in doubt, because staff typically work through the month collecting data.
Also the October jobs report could be axed, according to the White House.
While other economic data will be “caught up on”.
JP Morgan analysts have revealed their best estimate of when we can expect various reports over the coming weeks.
In terms of the labor market specifically, any potential October jobs report we do see could be an incredibly messy one when it does drop.
Temporarily laid-off (furloughed) federal workers, amounting to around 700k, could push the headline unemployment rate from 4.3% to around 4.8%, according to some estimates (but this depends on how furloughed workers are classified - I’ve seen different forecasts on this).
That being said, you would of course expect the vast majority of these workers to return to payrolls immediately once the shutdown comes to an end.
It’s possible we see a mini market freak-out if the October jobs/employment data is released, furloughed workers are indeed classified as “unemployed” and market participants aren’t engaging their brains.
If this happens, it’s probably a good buying opportunity.
Another big factor is the Treasury General Account (TGA) - which I outlined here.
This is essentially the Government’s “bank account” at the Federal Reserve.
This had been moving back up to the “target level” of $850bn following the debt ceiling deal in June - a normal and widely expected path.
But it’s overshot this level - essentially sucking up to $150bn more from the economy than expected, which is a “liquidity drain” from the financial system.
This is because the Government has not been spending as much money, but still taking in the same amount of money.
This has caused some issues in the banking world.
As the Government “catches up” on spending, this TGA balance should return back to the target level of $850bn - alleviating some of the liquidity stress as cash is pushed back into the economy.
Will the Government shut down again in the medium-term?
Potentially.
It looks like the bill that has been passed is a "compromise plan” that will fully reopen the federal Government until January 30 2026 and fund some agencies through to September 2026, according to Bloomberg.
So - it’s possible that we’re back in a shutdown again early next year.
Fantastic…
Wrapping up
The message from my previous newsletter at the onset of the shutdown was essentially “this doesn’t really matter for asset markets”.
However, because this shutdown has lasted so long - the impacts on asset markets are definitely not inconsequential.
Risk asset markets on the whole have been reacting positively in recent days to the news that the Government will soon reopen.
This makes sense, because the market can now fully refocus on what still remains a solid bull case of the underlying economy remaining resilient, earnings growth looking excellent, the Fed remaining broadly tilted towards dovish policy and a calmer tone being taken on trade and tariffs.
However, this outlook will quickly come under the microscope as missed Government economic data starts trickling in.
How much of this missed data we see before the next Federal Reserve meeting on December 10 will also be a big factor in whether we see a rate cut - given Fed Chair Jerome Powell’s recent “a December rate cut is not a foregone conclusion” comments.
That’s it for this edition - catch you in the next one.
MILK ROAD AI IS LIVE 🥛
In case you missed it, yesterday we launched Milk Road AI, our new podcast that’s all about investing in the biggest technological revolution of our lifetimes.
We kicked things off strong with Mike Novogratz, CEO of Galaxy Digital, and chatted to him about his data center plans, tokenization, leadership, and his thoughts on whether we’re in an AI Bubble.
If you haven’t watched it yet, go check it out.
But make sure you’re subscribed on your streamer of choice (YouTube / Spotify) because the next episode drops tomorrow!
From now on, on Wednesdays, we’ll have big-name interviews with capital allocators and founders shaping AI’s future.
And on Fridays, Duncan (Flood Capital) and Patrick (Head of AI at a stealth Web3 startup) will break down the week’s biggest AI investing news. Plus what it means, why it matters, and how they’re playing it.
We’re also launching an AI newsletter very soon so if you want to get smarter about AI Investing, join the waitlist here.
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BITE-SIZED COOKIES FOR THE ROAD 🍪
Federal Reserve officials are becoming more cautious on cutting interest rates in December. Boston Fed president Susan Collins is the latest in a growing number of Fed members throwing shade on what was previously a widely expected December cut.
More and more negative commentary is emerging regarding the recent slump in the price of bitcoin. The latest is a piece from Bloomberg detailing a “bruising October”. Time for a bounce?
While trade war headlines have died down - discussions are still very much alive behind-the-scenes. The EU is set to propose a plan for implementing the “next phase” of its trade agreement with the US.
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