Data supports the Fed’s analysis that the balance in the labour market might be tilting in a negative way

Markets

With most ‘official’ US data releases suspended due to the government shutdown, markets (and the Fed) now have to rely on the likes of the ADP private jobs report and ISMs. By the way, if the shutdown continues, most of this month’s market relevant US data might already be published after tomorrow’s US services ISM. Even so, especially the ADP private job report yesterday more than decently met heightened expectations as super-sub. According to ADP, the US economy in September lost a net 32k of private jobs, compared to a hoped for 51k gain. A big part of this was due to an annual benchmark revision. But the figure of the previous month was also downwardly revised to -3k from 54k. ADP assessed that job creation in the US continues to lose momentum across most sectors as US employers have been cautious with hiring. This evidently supports the Fed’s analysis that the balance in the labour market might be tilting in a negative way, supporting the case for more (precautionary?) rate cuts. Later in the session, the US manufacturing ISM was weak, but as expected (49.1 from 48.7). The employment index remained in contraction territory (45.3 from 43.8). Other details, including orders were mostly unconvincing as well. Even so, it was the big miss in ADP that triggered a sharp bull steepening on US markets with US yields declining between 7.6 bps (2-y) and 2.2 bps (30-y). Despite a possible lack of further official data evidence, markets now again fully discount a follow-up Fed rate cut at the October meeting. In Europe, September CPI data (headline 0.1% M/M and 2.2% Y/Y from 2%, core 2.3%) were exactly as expected and didn’t question the ECB status quo. German yields changed less than 2 bps across the curve. The shutdown and softer US data at least didn’t hamper stock market momentum with the S&P 500 closing at a record. Interestingly, also the EuroStoxx 50 closed at new all-time record. Also remarkable, the dollar held up well in context of positive global risk sentiment while at the same time substantially losing interest rate support. EUR/USD even didn’t try to attack the 1.18 big figure (close 1.1732). The yen outperformed, but that move already occurred before the ADP release (USD/JPY close 147.07, of the intraday low near 146.6).

Asian markets this morning follow the broader (low volatility) risk rally. Most US data releases (claims, factory orders) probably are suspend due to government shutdown. Data released outside the US are few and mostly with only limited market relevance. In Japan, we look out for a speech of Deputy governor Uchida as markets look for additional ‘confirmation’ on a next rate hike later this month. On global US yields markets, there is probably little reason for investors to change expectations for two additional Fed rate cuts later this year. Intrinsically, this is a dollar unfriendly, or even better, a non-USD FX friendly context, but the US currency mostly still has material technical breathing space before meeting key support levels against most other majors (DXY, EUR/USD). Even USD/JPY still has to way to go before reaching the 145.85/50 support area.

News and views

Italy is said to include a 3% deficit in its budget draft for 2026, people familiar with the latest version said. Italy has been running 3%+ deficits since 2019. The European Commission has put the country in the excessive deficit procedure as a result. But potentially narrowing it to the bloc’s allowed maximum of 3% puts Italy on track to exit it earlier than expected. That would pave the way to expand spending in other areas, including defense. The southern country has committed to meet the 5% NATO target. Italy’s recent fiscal track record has been awarded by financial markets via a steep drop in interest rates. Its credit risk premium (vs swap) has fallen to around 84 bps, just below France. That’s about half the amount since premier Meloni took office in 2022.

Rating agency Fitch doesn’t expect the US government shutdown to affect the country’s rating in the near term, adding that it nevertheless continues to “assess developments around the U.S. regulatory environment, rule of law, and institutional checks and balances as part of its sovereign credit analysis”. Neither does it thinks that the US dollar would lose its predominant reserve currency status - an important rating strength - in the foreseeable future. S&P, another rating agency, separately said government shutdowns usually have a marginal effect on the broader economy and does not consider them to be credit events for the US rating. It did warns for secondary effects that could build up over time, as furloughed workers cut spending while delays in economic data adding uncertainty for the Fed. It estimates the shutdown could trim GDP growth by 0.1-0.2% for every week the government is closed.

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