When Will the Shutdown Affect Markets? - Thoughts on the Market

Summary

Podcast Summary: Thoughts on the Market – "When Will the Shutdown Affect Markets?"
Host: Michael Zezas, Global Head of Fixed Income Research and Public Policy Strategy, Morgan Stanley
Date: October 8, 2025

Episode Overview

This concise episode, helmed by Michael Zezas, explores the ongoing U.S. federal government shutdown, now in its second week, and scrutinizes why markets remain surprisingly stable. Zezas methodically lays out the three key checkpoints he and his colleagues are monitoring that could signal when and how the shutdown begins to impact investor confidence and market movements.

Key Discussion Points & Insights

1. Why Markets Remain Calm (00:20)

Zezas spotlights the general market calm despite the political turmoil, noting:
- Stocks are steady
- Bond yields are stable
- Volatility remains low

"Stocks are steady, bond yields haven't moved much, and volatility is low."
— Michael Zezas [00:21]

2. Potential Triggers for Market Reaction (00:45)

Zezas presents the central question:

“What, if anything, about this government shutdown could shake investor confidence and start moving markets?”
— Michael Zezas [00:44]
He references prediction markets indicating the shutdown is likely to continue for at least another week, increasing risk as time goes on, echoing past patterns where the economic drag accumulates the longer the shutdown lasts.

3. Three Checkpoints to Watch (01:13)

a. Missed Paychecks for Federal Workers (01:18)

The first missed paycheck for furloughed federal employees is imminent.
This reduces spending power, which can decrease spending by 2-4% among affected workers.
While this is a small direct hit to GDP, it's the first sign the shutdown is harming the broader economy.

“Less pay naturally means less spending. Studies suggest that spending among affected workers can drop by 2 to 4% during a shutdown.”
— Michael Zezas [01:28]

b. Potential Layoffs & Legal Uncertainty (01:48)

This shutdown could see permanent layoffs rather than temporary furloughs, a new development.
The administration is considering permanent staffing cuts; unions plan to litigate.
If layoffs or legal uncertainty increase, the economic impact could broaden and deepen.

“The administration has hinted that agencies could move to permanently cut staff, something we haven't seen before… if those actions start, or even if legal uncertainty grows around them, it could raise the economic stakes.”
— Michael Zezas [01:53]

c. Disruptions to Economic Activity (02:16)

Zezas recalls how the prior longest shutdown ended: critical air travel delays forced government action.
Air traffic delays are already cropping up nationwide.
If delays worsen or halt travel—especially without clear negotiation progress in Washington—investors could lose confidence.

“We're already seeing substantial air traffic delays across the country. More substantial delays or ground halts obviously impede economic activity related to travel.”
— Michael Zezas [02:23]

Notable Quotes & Memorable Moments

Markets are calm, but patience is not infinite:

"Markets may be right to stay calm for now, but the longer this shutdown lasts, the more likely one of these pressure points pushes investors to rethink their optim."
— Michael Zezas [02:49]
Historical precedence meets new risk:

“This time might be different. Because of potential layoffs, the administration has hinted that agencies could move to permanently cut staff, something we haven't seen before.”
— Michael Zezas [01:48]

Timestamps for Important Segments

00:00: Introduction and context (current state of markets, shutdown overview)
00:44: Key question: What might move the markets?
01:18: Checkpoint 1: Missed federal worker paychecks
01:48: Checkpoint 2: Possible layoffs and legal uncertainty
02:16: Checkpoint 3: Disruptions in economic activity (esp. air travel)
02:49: Zezas’s bottom line and summary

Conclusion

Michael Zezas concludes that, for now, market calm appears justified, but he stresses vigilance. The longer the shutdown drags on—especially with emerging risks like missed paychecks, permanent layoffs, and real-world economic disruptions—the more likely it becomes that these “pressure points” will force investors to reassess their outlook.

Listeners seeking timely, expert analysis of the short- and medium-term market implications of the U.S. government shutdown will find this episode both clear and actionable.

Transcript

A (0:00)

Welcome to Thoughts on the Market. I'm Michael Zezas, global head of fixed income Research and Public policy strategy. Today, three checkpoints we're watching for as the U.S. government shutdown continues. It's Wednesday, October 8th, at 10:30am in New York. The federal government shutdown in the United States has crossed the one week mark. But if you're watching the markets, you might be surprised at how calm everything seems. Stocks are steady, bond yields haven't moved much, and volatility is low. It's more or less the scenario my colleague Arianna and I had talked about in anticipation of the impasse in Washington, we noted the potential for uncertainty for investors and market reaction, depending on how long the shutdown would last. So that raises a big question. What, if anything, about this government shutdown could shake investor confidence and start moving markets? The question's worth considering. Prediction markets now suggest the most likely outcome is that the government shutdown will not end for at least another week. And as we've seen in past shutdowns, the longer it drags on, the more likely it is to matter. That's because risks to the economic outlook start to accumulate and investors eventually have to start pricing in a weaker growth outlook. There's a few checkpoints we're watching for for when investors might start feeling this way. First, the missed paycheck for furloughed federal workers. The first instance of this comes in a few days. Less pay naturally means less spending. Studies suggest that spending among affected workers can drop by 2 to 4% during a shutdown. That's not huge for GDP at first, but it's a sign the shutdown is having effects beyond Washington, D.C. second, this time might be different. Because of potential layoffs, the administration has hinted that agencies could move to permanently cut staff, something we haven't seen before. Unions have already said they challenge that in court, but if those actions start, or even if legal uncertainty grows around them, it could raise the economic stakes. Third, we're watching for real disruptions to economic activity resulting from the shutdown. The last shutdown ended when air traffic in New York was curtailed due to a shortage of air traffic controllers. We're already seeing substantial air traffic delays across the country. More substantial delays or ground halts obviously impede economic activity related to travel. And if such actions don't coincide with signals from DC of progress in negotiating a bill to reopen the government, investors concerns could grow. So here's the bottom line. Markets may be right to stay calm for now, but the longer this shutdown lasts, the more likely one of these pressure points pushes investors to rethink their optim. Thanks for listening. If you enjoy thoughts on the market, please leave us a review and tell your friends about the podcast. We want everyone to listen. The preceding content is informational only and based on information available when created. It is not an offer or solicitation, nor is it tax or legal advice. It does not consider your financial circumstances and objectives and may not be suitable for you.