U.S. Government Shutdown Hits Markets, But Stocks Rally

The U.S. federal government’s partial shutdown, now grinding into its sixth day over intractable funding disputes, has injected raw uncertainty into global markets, postponing vital economic releases and stoking recession fears. Yet, in a display of counterintuitive resilience, major stock indices bucked the dread, closing the week higher and highlighting the decoupling power of corporate earnings and AI hype amid fiscal paralysis.

The impasse stems from partisan gridlock: House Republicans demand spending cuts tied to border security, while Democrats decry “hostage-taking” of essential services. Over 800,000 federal workers face furloughs, and $1.7 trillion in discretionary funding hangs in limbo, freezing agencies from NASA to the IRS. Key casualties include October’s nonfarm payrolls,slated for Friday but indefinitely delayed,leaving investors blind to labor trends. Bond yields whipsawed, with 10-year Treasuries dipping to 3.8% on flight-to-safety bids, while the dollar index slumped 1.2% against a basket of currencies.

Despite the turmoil, equities staged a improbable comeback. The S&P 500 clawed 0.9% higher to 5,850, buoyed by megacap tech: Nvidia surged 4% on AI chip demand, and Apple added 2% post-iPhone 17 leaks. The Dow Jones climbed 1.1% to 42,500, led by industrials like Boeing, which inked a $10 billion defense deal unscathed by the freeze. Nasdaq’s 1.3% gain reflected biotech rebounds, with Moderna up 3% on mRNA patent wins. “Markets are pricing in a short shutdown, betting on blue-chip stability over Beltway drama,” analyzed Goldman Sachs’ Lindsay Rosner in a flash note.

Private-sector data offered scant solace. ADP’s payrolls report clocked a meager 98,000 jobs added in September,half the 200,000 forecast,signaling cooling amid 4.2% unemployment whispers. ISM manufacturing PMI slipped to 48.5, contracting for the third month, fanning slowdown flames. Volatility reigned: the VIX, Wall Street’s fear gauge, spiked to 26 midweek before easing to 20. Oil prices tumbled 3% to $72 per barrel on demand worries, while Bitcoin’s 5% pop to $123,000 siphoned risk from stocks.

Fed watchers parse the mess for rate clues. Chair Jerome Powell, in unscheduled remarks, flagged “elevated uncertainty” but held fire on hikes, hinting at a November pause if data,when it emerges,confirms softening. Futures now price 85% odds of a 25-basis-point cut by year-end.

Broader ripples unsettle allies: EU stocks dipped 0.5% on transatlantic trade fears, and emerging markets like Brazil shed 2%. Yet, U.S. consumer sentiment, per University of Michigan’s prelim at 72, held firm on wage gains outpacing inflation at 2.4%.

As weekend negotiations loom, with Speaker Mike Johnson eyeing a clean CR, the rally’s fragility glares. “This is euphoria on borrowed time,” cautioned Morgan Stanley’s Mike Wilson. For traders, it’s a high-wire act: bet on resolution, or brace for the fiscal cliff’s echo.