Weekly focus – US Government shuts down amid labour market focus

The US labour market is the focus in markets and for the economic outlook. This week we received some weak signals from the private ADP employment report and the Challenger report. The ADP report showed private employment growth stalling in both August and September against expectations of continued moderate rises. The Challenger report revealed that firms' hiring plans continued to drop sharply. On the other hand, actual layoffs continued to decline while the JOLTs job openings data landed close to expectations. Hence, the US job market indicators are sending mixed signals. Overall, most indicators are consistent with the view that job growth is slowing mainly due to weaker supply growth and not indicating an urgent need for more demand stimulus. This was also underscored by the ISM manufacturing data that remained at 49 as expected. Yet, the risk picture of the US labour market is shifting to the downside. Due to the government shutdown, we will not receive the September labour market report, which could have a significant impact on the view of the labour market and Federal Reserve outlook.

US politics remains in focus following the government shutdown and the supreme court ruling on Fed's Lisa Cook. The government shut down as deep partisan divisions have prevented Congress and the White House from reaching a funding agreement. The direct macroeconomic impact is expected to be limited, but markets are likely to focus on two key implications: delays in the publication of US economic data, and the potential layoffs of public sector workers as highlighted by the White House. While these factors may not significantly alter the macroeconomic outlook, they could, all else being equal, modestly increase the likelihood of the Fed considering a rate cut in October. At the October meeting Fed governor Lisa Cook will attend since the Supreme Court temporarily blocked Trump's attempt to remove her, deferring the case until January 2026. This marks a significant victory for both Governor Cook and the independence of the Federal Reserve.

In the euro area, inflation rose to 2.2% y/y in September from 2.0% y/y as expected. The main reason for the rise in inflation was base effects on energy prices that drove up energy inflation. This was visible as core inflation held steady at 2.3% y/y. Monthly price increases in services and core goods were like recent months so there was not much new in the September report, but a continuation of the recent inflation developments. The unemployment data was also similar to recent months with almost no change in the number of unemployed persons, despite the unemployment rate rising to 6.3% from 6.2%. As this week's data was close to expectations it supports view that the ECB is done cutting rates.

In Asia, the Chinese PMIs came out better than expected and suggests that the weakness over the summer was partly affected by temporary weather events. It also revealed that Chinese exports continued to cope well despite the US tariffs, while domestic demand suffers and needs further stimulus. In Japan, the Tankan business survey showed stable but high business conditions, which means BoJ can continue hiking the policy rate in our view.

Next week we have a very light calendar with no tier-1 global macro data scheduled but we might get the delayed US labour market report if the government shutdown ends. We do receive the private University of Michigan consumer confidence as well as FOMC minutes in the US, sentix and retail sales in euro area, and wage data in Japan.

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