US
Shutdown resolved or merely rescheduled?
The US government shutdown has finally ended after a record 43 days. Markets initially reacted positively to the news, with Treasury yields declining, equities recovering and the dollar stabilising. However, the positive mood didn’t last, especially in the US where equities finished the week lower, while bond yields and the dollar also weakened.
While concerns on demanding valuations may have weighed on investor sentiment, fiscal concerns might have played a role too. Federal funding only secured until 30 January, so the risk of another shutdown looms. For now, investors will likely refocus their attention on economic and earnings growth, as well as interest rates.
On the fiscal front, however, little has truly changed. The funding deal is temporary and leaves major budget issues unresolved. US interest costs are elevated, and the deficit is widening. With the mid-terms approaching, political polarisation is intensifying. Credit rating agencies have already warned that repeated episodes of fiscal brinkmanship could put pressure on US sovereign ratings.
From a market perspective, the shutdown’s end removes an immediate headwind but does not materially change the outlook. In equities, attention quickly shifted back to the earnings expectations, particularly of AI leaders. In fixed income, the Treasury market no longer seems convinced that the US Federal Research (Fed) will cut interest rates in December. Plus, market concerns on elevated debt and deficit levels remain. We’re underweight US Treasuries.
Central banks
Is a December Fed rate cut still on track?
In October, the Fed cut rates for the second time this year, lowering the Fed funds range to 3.75–4%. It also announced that, from December 1, it will reinvest some of the maturing assets it bought during the ‘quantitative easing’ period, when it attempted to stimulate economic growth and support markets via asset purchases, into Treasuries to help stabilise market liquidity.
Markets expected both of these decisions, but what they did not expect was Fed Chair Powell’s slightly more hawkish tone. He made clear that a December rate cut is far from guaranteed and stressed the Fed’s desire to keep its options open.
Why the shift in tone? The Fed is navigating a complicated economic and market backdrop. Inflation remains sticky, but the labour market is cooling. Markets have been resilient so far, consumer spending relatively solid and investment surprisingly firm. At the same time, the government shutdown has interrupted data collection, reducing visibility and making it harder for policymakers to judge the true state of the economy. This data fog is causing nervousness. As a result, bond markets have scaled back expectations for a December cut and equities have given back some of their recent gains.
Even so, we still see a cut at the turn of the year, either in December or January, as likely. The rationale is clear: the labour market’s slowdown looks genuine, and neither jobs nor inflation is likely to rebound sharply before the next meeting or two. Historically, when the Fed delivers a series of risk management cuts, it rarely stops after two. Moreover, Powell acknowledged that policy remains modestly restrictive, and the Fed does not want further deterioration in the labour market, which supports the argument for cuts.
This week
Economic activity, inflation & job data catch-up after the shutdown
This week brings a broad set of inflation data from the UK, the Eurozone and Japan, offering a timely check on global price momentum.
On Wednesday, the minutes of the latest Fed meeting should shed light on the Fed’s appetite for further interest rate cuts. Thursday’s catch-up release of initial jobless claims will be closely watched as an important input on the labour market.
On Friday, US consumer confidence, UK retail sales and purchasing managers’ indices (PMIs) across regions will help assess the recent growth momentum.