RECAPPING LAST WEEK
U.S. equity indices recorded yet another weekly record close despite the government shutdown—
the fifteenth such stoppage since 1981 and the first since late–2018. The release of the key
September jobs report was a casualty of the shutdown, but weakness in other labor market data
lifted odds for two additional rate cuts by year–end. The S&P500, Nasdaq Composite, and Russell
2000 indices rose between 1% and 2%. Strong sector performance was dominated by healthcare,
which surged nearly 7% after Pfizer reached a deal with the government to lower prescription drug
prices in exchange for relief from tariffs that could otherwise have approached 100%. The
agreement sparked optimism that other pharmaceutical companies may be able to negotiate
favorable outcomes. Sliding oil prices weighed on the energy sector as crude futures tumbled 7%
following news that OPEC+ was weighing another production increase at its October 5 meeting.
Gold soared 3% to another all–time high above $3,900 while Bitcoin and Ethereum each spiked
12%. U.S. Treasury yields fell after Wednesday’s ADP private payrolls report revealed a reduction
of 32,000 jobs last month.
The release garnered more attention than usual given the halt in
government data reporting and gave investors more confidence that further rate cuts are
forthcoming. According to the JOLTS report, job openings increased only marginally in August
while hiring declined. This year has seen employers announce more job cuts than in any year since
2020, while hiring plans are the lowest since 2009. A new “real–time” estimate from the Chicago
Fed stated that the unemployment rate was likely unchanged at 4.3%. In other economic news,
U.S. consumer confidence worsened this month as concerns over job availability mounted. The
ISM manufacturing PMI edged up to 49.1 in September, although new orders and employment
remained subdued and prices paid were still elevated. ISM services PMI fell to 50.0 from 52.0 the
prior month.
On the international side, inflation in Germany and the wider Eurozone accelerated
last month to +2.4% and +2.2%, respectively. Economic trends suggested this was a temporary
uptick and the European Central Bank is predicted to keep rates steady later this month.
Australia’s central bank held its benchmark rate at 3.6%, acknowledging that economic and
inflation data has firmed. In China, September’s manufacturing PMI was the strongest in six
months, driven by gains in output and new orders. Last of all, sentiment among Japan’s large
manufacturers improved for a second straight quarter, strengthening the case for the Bank of
Japan to raise rates. A hawkish shift emerged at last month’s BOJ meeting, with markets pricing
in around a 60% chance of a hike at the October 30 gathering.
THE WEEK AHEAD
Historically, U.S. government shutdowns have not had a significant impact on the economy, and
any lost activity is typically recovered fairly quickly. However, the delayed publication of key
reports could impact both investors and FOMC policymakers. If the shutdown lasts a few weeks
or more, important releases like CPI, PPI, retail sales, and housing data may not be published.
With the Fed having emphasized data dependence heading into its next rate decision at month–
end, investors may need to brace for rising volatility if the interest rate path becomes less clear.
Additionally, tariff concerns persist with new levies announced last week on heavy–duty trucks,
kitchen and bathroom materials, and home furniture.
On this week’s economic calendar, reports that may be impacted by the shutdown include the U.S. trade
balance and consumer credit figures along with weekly unemployment claims. Treasury auctions have typically not been
postponed by prior shutdowns, and there are 10– and 30–year sales scheduled for Wednesday
and Thursday. Minutes from the last FOMC meeting also arrive mid–week while Friday brings the
University of Michigan’s preliminary consumer sentiment reading and inflation expectations for
September. Third–quarter earnings season won’t begin in earnest until the week of October 13
but reports on Thursday morning from Delta Airlines and Pepsico may provide insight into
consumer spending trends. Overseas, most of the economic news will flow from Europe with
several low to medium–impact reports. German factory orders and industrial production along
with EU retail sales and investor confidence are on the docket. Minutes from the last ECB and
Bank of England meetings round out the calendar. The Japanese yen rallied last week amid rate
hike speculation, but the outcome of the ruling party’s leadership election over this past weekend
is crucial as the two candidates have opposing views on fiscal and monetary policy.
(Schwab)
