US Government Shutdown and Jobs Data: Why Are Stock Markets Happy?
US Government Shutdown and Jobs Data: Why Are Stock Markets Happy?
By:Ilya Spivak
Stock markets swallowed the US government shutdown amid hopes for more Fed rate cuts. Now what?
- Wall Street managed to close with gains despite a US government shutdown
- ADP private payrolls and ISM manufacturing data helped feed Fed rate cut bets
- Upbeat ISM services and (maybe) official US jobs data may cap stocks markets
Stock markets took in stride a much-talked-about US government shutdown, triggered amid a budget impasse between Democrats in Congress, their Republican rivals, and the Trump administration. Vital services will continue, but hundreds of thoughts of federal workers have been furloughed or are working without pay.
Russ Vought, the Trump team’s director of the Office of Management and Budget (OMB), said in a call with Republican lawmakers that a wave of layoffs would begin in the coming day or two. White House Press Secretary Karoline Leavitt confirmed the statement in a press briefing thereafter.
Stock markets found a way to rise amid the US government shutdown
Nevertheless, the bellwether S&P 500 shrugged off intraday losses of as much as 0.87% to finish the day up 0.34%. The tech-tilted Nasdaq 100 offered a similar showing. It closed up 0.46%, having fallen as much as 1.08%. The shutdown, along with a dollop of complimentary economic data, seemed to encourage traders with Fed rate cut hopes.
An estimate of private sector payrolls growth from Automatic Data Processing Inc (ADP) showed that the economy unexpectedly shed 32,000 jobs in September. Economists were penciling in a rise of 50,000 ahead of the release. August’s result was revised from a rise of 54,000 to a loss of 3,000.
Taken together, this amounted to the largest one-month payrolls drop since March 2023 and the first series of back to back monthly job losses since mid-2020, amid the Covid-19 pandemic. A separate report from the Institute for Supply Management (ISM) showed manufacturing employment fell for an eighth month straight.
Fiscal pressure, ADP and ISM data helped markets dream of rate cuts
The same ISM report also showed that inflation in the sector fell for a third consecutive month. While price growth remains dramatically elevated by historical standards, it has moderated to the slowest since January. Taken together, all this seemed to give cover to the Federal Reserve to continue cutting interest rates.
The markets have long since priced in another 25-basis-point (bps) rate cut in October. However, mounting fiscal headwinds and soggy jobs data helped buoy the probability of another move in December, pushing it to a commanding 89% from 77.3% just yesterday and only 40.1% a month ago.
Not surprisingly, Treasury bonds rose as yields fell against this backdrop. The US dollar narrowly weakened against an average of its major currency counterparts, with the rates-sensitive Japanese yen scoring the lion’s share of gains. Plainly, the markets seem to have decided to embrace labor market weakness if it brings more rate cuts.
Will upbeat US economic data put a lid on Wall Street and boost the dollar?
From here, this puts the spotlight on official US employment data from the Bureau of Labor Statistics. Its Friday release was due to show that the economy added 50,000 jobs while the unemployment rate held at 4.3% last month. The shutdown may now have delayed its publication.
Meanwhile, ISM will publish its survey on the service sector, which is expected to show that economic activity growth kept pace in September after growth there hit a six-month high in August. Close to 70% of nonfarm payrolls are on the services side, while only 8% fall to manufacturing. That makes this data a key input into the markets’ current calculus.
Analytics from Citigroup show that US economic data has tended to outperform relative to forecasts over recent months. Stock markets may wobble as the US dollar rises alongside yields if that translates into an upbeat ISM print that eats into Fed rate cut bets. A hot official jobs report – if it appears at all – might be doubly impactful.
Ilya Spivak, tastylive head of global macro, has 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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