Washington goes dark, Wall Street hits record highs

AI boom defies Washington's data blackout

For the most part, Week 40 was defined by a striking resilience in global equity markets, which surged to fresh peaks even as political and economic uncertainty poured out of the United States. This uncertainty stemmed from the federal government shutdown, which formally got underway on Wednesday, October 1, after lawmakers failed to hammer out a funding deal. The shutdown, in turn, triggered an "economic data blackout," which led to the delay of the vital September nonfarm payrolls report and other key figures. With no official data coming out, investors found themselves relying on private reports, which consistently painted a bleak picture for the labor market. The ISM Services PMI slipped to 50 in September, with its employment gauge remaining deep in contraction territory, a reading that lined up with an unexpected slide in the ADP private payrolls report from earlier in the week.

This consistent flow of negative data anchored the market's belief that the United States labor market was cooling down significantly, ultimately leading the market to price in two additional 25-basis-point rate cuts from the Federal Reserve before the year was out. This dovish pivot in pricing fueled a broad softening of the USD. But instead of triggering a risk-off scramble, equity markets embraced the "bad news is good news" narrative. The enticement of easier monetary policy, coupled with ongoing excitement surrounding the artificial intelligence investment theme, propelled major indices across the United States, Canada, Europe, and Japan to new all-time highs. The Nikkei 225 surged 1.85 percent on Friday to a new record, while Canada's TSX Composite also climbed one percent to a record close of 30,472, mostly thanks to a 6.5 percent leap in Shopify.

Central bank policy, on the other hand, shifted dramatically worldwide. The Reserve Bank of Australia delivered a hawkish hold on Tuesday, September 30, citing persistent inflation concerns and giving the AUD a leg up. In stark contrast, grim domestic figures emerging from Canada, including a tenth consecutive monthly slide in private sector activity, reinforced expectations for a looser monetary policy from the Bank of Canada, placing significant pressure on the CAD. The week ultimately concluded with two significant developments playing out over the weekend: Japan's Liberal Democratic Party picked pro-stimulus lawmaker Sanae Takaichi as its new leader, and OPEC+ approved another modest output increase for November.

Inflation and employment data to test policy paths

As we look to Week 42, the market's path is going to hinge almost entirely on the settling of the United States government shutdown and the eventual release of crucial, delayed economic data. The key reports, when they finally arrive, will be the September Consumer Price Index (CPI) and retail sales numbers, which were slated for Week 42. This data will offer the first real glimpse at inflation and consumer health in the middle of the political upheaval, representing a big test for the dovish path markets have already banked on for the Federal Reserve. An inflation reading that runs hotter than forecasts could well drive a sharp reset in prices, leading to a strong rally in the USD and a pullback in bonds and equities as the "bad news is good news" narrative gets put at risk.

Central bank decisions and key data from other nations are also going to be crucial, setting the stage for significant volatility fueled by policy paths that are moving apart. The outcomes are going to test if domestic fundamentals can take back the driver's seat over the overarching global trends.

• United States (Week 41): With the data blackout still in effect, the FOMC meeting minutes on October 8 are going to carry more weight. The market will pore over the report for any discussion around the extent of future easing; any sign of cold feet from the committee might well trigger a quick market reset.

• Canada (Week 41): The September employment report on October 10 is key for the CAD. Following a run of abysmal job reports, where the unemployment rate hit a four-year high, another weak print would virtually seal the deal on a Bank of Canada rate cut at its October 29 meeting.

• New Zealand (Week 42): The third-quarter inflation rate, due on October 19, is a significant driver for the NZD. The RBNZ is already on track to cut rates on October 8, but an unexpected dip in the quarterly inflation print would anchor expectations for even more aggressive cuts at its final meeting of the year in November, piling on to the currency's downside bias. The current annual inflation rate is 2.70 percent.

• Australia (Week 42): The Reserve Bank of Australia meeting minutes on October 14 and a speech from Governor Bullock will be under the microscope for more evidence of the central bank's hawkish pause after recent data showed a worrying pick-up in monthly inflation to 3.0 percent.

A TUG-OF-WAR BETWEEN DATA AND DIPLOMACY

The market is wading through a complex and uncertain landscape, as the US government shutdown and divergent central bank policies unleash a flurry of conflicting forces that are making their mark on every asset class.

• The United States government shutdown stands out as the main market wildcard, not only delaying crucial data but also muddying the waters for the Federal Reserve's policy decisions.

• Divergent monetary policies are carving out clear winners and losers, with the hawkish RBA and BoJ standing in stark contrast to a more dovish RBNZ.

• The AI boom continues to be a powerful force behind the stock market, but there are mounting worries that the market might well be in a bubble.

• Commodity markets are grappling with a host of challenges, with oversupply concerns putting a lid on oil prices while Gold is getting a boost from its safe-haven appeal.