Connor Hare

Equity markets sold off this week amid concerns about high tech-stock valuations and aggressive AI capital spending. As of writing, the tech-focused Nasdaq Composite was down 2.5% on the week, while the S&P 500 had declined 1.9%.

Official economic data began to trickle in, with September’s payroll report being the most notable. However, reporting backlogs are expected to persist. October payrolls will be released with November’s figures on December 16, not in time for the FOMC’s next meeting on December 9–10. Other data points, like October CPI, will not be released. On the housing side, existing home sales edged higher in October, supported by falling mortgage rates. Still, the housing market continues to tread water as affordability remains stretched, despite some modest improvement in recent months (Chart 1).

A busy slate of Fed speakers reaffirmed the lack of consensus among FOMC members for another rate cut in December. Some, like Governor Jefferson (voter), advocated for a cautious, “meeting-by-meeting approach,” as the policy rate moves closer to neutral. Chicago Fed President Goolsbee (voter) joined the hawkish camp, downplaying the recent labour-market weakness and emphasizing the lack of progress on inflation.

Minutes from the October FOMC meeting also highlighted the growing divide, with many participants  seeing no case for easing in December. This contributed to market pricing shifting towards the next cut coming in January rather than December. After that meeting, Chair Powell stated that a December cut “is not a foregone conclusion, far from it.”

But policy doves like Governor Waller (voter), argued that another rate cut in December is warranted, given his assessment that the labor market remains weak, longer-term inflation expectations are anchored, and the impact of tariffs on inflation are likely to be transitory. Echoing this view, FOMC Vice Chair Williams emphasized that inflation expectations remain “very well anchored” and noted room for further cuts over the ‘near-term’. These remarks helped to tip market odds back in favour of a December cut on Friday morning.

The delayed September payrolls report did little to reconcile the divide among policymakers. Hawks were likely reassured by the better-than-expected job gains: payrolls rose by 119k—the strongest reading since April (Chart 2). However, policy doves are likely to point to the negative revisions to prior months, the narrow concentration of job gains, and the uptick in the unemployment rate.

All in all, hawkish voters appear to outnumber the doves on the FOMC for now, and there is no official jobs or inflation data before the next meeting to shift views. Therefore, we expect the slow-and-steady approach to carry the day and for the Fed to hold rates steady in December. Chair Powell perhaps said it best: “when you’re driving in the fog, you slowdown”. That said, the door for a cut in January remains open.

Ksenia Bushmeneva, Economist | 416-308-7392

The government shutdown entered its 31st day on Friday, and if it extends past November 3rd, will become the longest in U.S. history (Chart 1). At the time of writing, there is no offramp to end the shutdown. On Tuesday, Senate Democrats rejected (for the thirteenth time) a House-passed stopgap measure to fund the government through November 21st, while Senator Thune pushed back on the idea that Republicans were considering piecemeal bills that would reopen portions of the government. Elsewhere, President Trump traveled to Asia this week, which culminated in three new trade agreements and a further easing in trade tensions with China. Stateside, the Federal Reserve delivered another rate cut and signaled an end to its quantitative tightening program. Powell’s remarks that a December rate cut “is not a foregone conclusion” led to some firming in Treasury yields, as market pricing for a December cut fell to 70%. A healthy slate of earnings reports capped off the week, pushing the S&P 500 up 1.0%.

In a further move to de-escalate trade tensions with China, President Trump agreed to cut the fentanyl tariffs from 20% to 10%, suspend the increase of its reciprocal tariffs (scheduled to rise from 10% to 35% on November 10th) and ease restrictions on blacklisted Chinese firms. In return, China eased its restrictions on rare earth exports and said it would increase purchases of U.S. soybeans. Both countries also agreed to suspend their port fees, which came into effect earlier this month.

The U.S. also reached trade agreements with three other counties this week, including Thailand, Malaysia and Cambodia. Trade to these countries account for roughly 3% of total U.S. annual imports, but combined with the other seven agreements, 30% of U.S. trade is now covered by a new trade deal (Chart 2). Details of this week’s agreements remain vague, but based on White House fact sheets, each country will face a 19% reciprocal tariff rate and have agreed to reduce tariffs and trade barriers on U.S. imports along with making commitments to purchase energy products and aircrafts.

The Federal Reserve’s move to cut its benchmark rate by another 25 basis points – bringing the target range to 3.75-4.0% – came as little surprise. However, Powell’s remarks in the press conference regarding a December rate cut being far from guaranteed offered a shot in the arm to market odds, which had another cut as a near certainty. Indeed, the statement showed a growing divide among FOMC members. Recently appointed Stephen Miran dissented in favor of larger (50bps) cut, while Jeffery Schmid voted to hold rates steady. Given the data fog created by the government shutdown, Powell noted that there was a “growing chorus to at least wait a cycle” before making another cut, particularly given today’s policy rate is at the upper end of some estimates of neutral. We interpret Powell’s hawkish tone as a way of bringing more balance into market expectations. Another cut in December remains our base case, but we acknowledge that a flurry of data releases once government reopens could quickly shift views on the economic outlook and reshape the Fed’s thinking on its policy adjustment.

The ongoing government shutdown became the 2nd longest in history this week, as it stretched into week 4. With divisions in Congress largely unchanged relative to September, a resolution remains out of sight, but as the economic impacts become more material, intransigence will likely yield. Elsewhere in D.C., President Trump called off trade negotiations with Canada over the use of anti-tariff television advertisements broadcast in the U.S., forestalling a near-term trade agreement with the nation’s second largest trading partner. Despite political dysfunction in the Capitol and rising trade tensions in recent weeks, the S&P 500 still managed to rise 2% this week from a host of positive third quarter earnings reports.

While the Department of Labor remains unfunded, the CPI data for September was released on Friday owing to its use in the annual inflation adjustment to social security payments. The data showed that recent inflationary pressures moderated slightly in September but remained elevated on aggregate, with the three-month annualized percentage change in core CPI running above 3.5% (Chart 1). With price growth still well above the Fed’s 2% target and the timing of future data releases uncertain, policy decisions are expected to be cautious moving forward.

The shift in the Federal Reserve’s stance on monetary policy over the past few months came on the heels of a slowdown in the labor market, tracking of which has been obscured by the lapse in data releases. As the FOMC begins deliberations next week, they will likely assume that the slowdown persisted through September and opt to meet financial market expectations for a quarter-point rate cut. Chair Powell’s press conference will be closely watched for insights into how the policy response function of the Federal Reserve will adapt to a prolonged government shutdown, as inference becomes more difficult the further we are from the last official data release.

On the trade front, U.S. Treasury Secretary Bessent will be meeting with a Chinese delegation in Malaysia over the weekend. The deadline to reach some form of agreement is becoming tight, with President Trump’s threat of 100% tariffs on China starting November 1st. The President will also be travelling to Asia Friday night, with plans to visit Malaysia, Japan, and South Korea, culminating with the Asia Pacific Economic Cooperation (APEC) summit where he is expected to meet with his Chinese counterpart. Amid rising trade tensions in recent weeks, financial markets will be watching for any signs of de-escalation.

Markets will also be watching for several big tech earnings reports next week, including Microsoft, Apple, Alphabet, Amazon, and Meta, which collectively account for nearly a quarter of the S&P 500 (Chart 2). Given the high level of concentration in equity markets, growing concerns about elevated valuations, and the influence of these trends on the economy, these results will be monitored closely on the heels of Wednesday’s Federal Reserve decision.

This week’s U.S. economic landscape remained shrouded in fog due to the lack of official data amidst the ongoing government shutdown. If it continues until Monday, it will be the third longest in history. In the official data drought, focus has shifted to alternative indicators, particularly from the Federal Reserve, which is still operating during the shutdown. US-China trade tensions ebbed and flowed, while concerns surrounding regional banks made a comeback, weighing on equity markets. Still, equities managed to eke out some gains, with the S&P 500 up 1% from last Friday’s low. Bond yields declined amid uncertainty and expectations of further monetary easing. Notably, the 10-Year Treasury yield fell below 4% and is now hovering near last year’s level.

In the absence of the CPI report, alternative inflation indicators are sending conflicting signals. The Cleveland Fed’s Inflation Nowcasting model estimated core inflation at 0.26% month-over-month in September, suggesting year-on-year core inflation remained near 3%. The lack of acceleration would support another Fed rate cut amidst a deteriorating labor market. However, the Fed’s Beige Book reported further price increases, with several districts noting “faster input cost growth due to higher import prices and rising costs for services like insurance, health care, and technology”. The NFIB’s small business survey also showed moderate upticks in its price metrics (Chart 1). The CPI report is set to be released next week, which should help clear some of the fog.

The September retail sales report is also delayed, but the Chicago Fed’s Advance Retail Trade Summary (CARTS), which tracks weekly sales, offers some insight. CARTS indicates that retail & food services sales excluding autos rose by 0.5% in September, suggesting a solid finish to the third quarter (Chart 2). However, given ongoing uncertainty and other consumer challenges, momentum is expected to ease in the fourth quarter. The Beige Book echoed this, noting that overall consumer spending, especially on retail goods, trended down in recent weeks, with auto sales being the main exception.

On the employment front, the Beige Book described labor demand as “subdued” and employment levels as “largely unchanged”. More employers reported lowering headcount through layoffs and attrition, citing weak demand, high uncertainty, and, in some cases, increased investment in AI. Layoffs were mentioned 14 times, up from 6 previously. NFIB employment metrics also pointed to a weak hiring trend among small businesses in September.

Fed Chair Powell reiterated recent messaging and placed more emphasis on labor market risks in a speech this week, supporting additional easing. Powell also signaled the central bank could soon stop reducing the size of its balance sheet. While he provided no set timeline for the end of quantitative tightening (QT), he stated “we may approach that point in the coming months,” noting early signs that liquidity conditions are gradually tightening.

Reading the tea leaves, labor market risks remain the key focus. As such, the Fed is likely to deliver another rate cut at the end of this month. The signal that QT may soon end further reinforces the Fed’s dovish stance.

Up until Friday, markets had been relatively calm amid the ongoing government shutdown, which has entered its 10th day. President Trump’s threat to increase tariffs on China this morning, in response to China’s export controls on rare-earth metals, has upended that. President Trump has gone so far as to declare he is not interested in meeting President Xi in person as previously scheduled for the end of the month, leading to a sharp sell-off in US equities and pushing Treasury yields lower. Markets stoically withstood the failure of seven separate proposals to re-open the government, but the possible breakdown of U.S.-China trade negotiations may be too much to bear. If that wasn’t enough, the end of the shutdown is not clearly in sight. The Senate is now adjourned until October 14, which all but guarantees that military members will miss a full pay cycle, an unprecedented development.

The outlook for the shutdown is not the only thing that is cloudy. The government shutdown means that official economic data are not being published, and policymakers, businesses, and households are unable to see new data on the state of the economy. Various private-sector groups have produced estimates of what happened to employment in September, shown in Chart 1. This was the key piece of data which was due to be published last Friday. While these alternative estimates generally suggest the labor market continued to cool through September, these measures are at best imperfect proxies for the official data. As for what data we do have this week, the preliminary reading of the University of Michigan’s consumer confidence ticked a touch higher in October. However, expectations on the future outlook continued to slide for a third consecutive month, likely driven by the softening labor market and still elevated uncertainty on trade policy.

Several members of the FOMC spoke this week, offering some insight into their thinking amidst the shutdown. New York Fed President Williams indicated that the lapse in government data would not deter him from further easing the policy rate at the Fed’s coming meetings. Meanwhile, other speakers continued to reiterate prior views. Kansas City Fed President Schmid voiced concern about inflation, while Miran, the only FOMC member to vote for a larger 50 basis point rate-cut at the last meeting, again indicated how he expected inflation to moderate. It is little surprise that market pricing at the next Fed meeting has remained relatively unchanged through the government shutdown. Expectations for further easing at a moderate pace are in line with the general view we observed in the FOMC minutes released this week, that interest rates are currently moderately restrictive and risks have shifted somewhat to the downside.

Normally, we would be looking ahead to next week’s release of CPI for more information on how prices are reacting to tariffs, but we are following the shutdown. We will also be closely watching trade negotiations between the U.S. and China to see what comes of today’s escalation.

On October 1st, the U.S. government shut down all “non-essential” services, as Congress failed to pass a bill necessary to fund government in the current fiscal year. Financial markets have shrugged off the shutdown so far, with equities ending the week higher, bond yields declining, and the U.S. dollar weakening only slightly. In past shutdowns in 2013 and 2018, equities and the USD declined modestly and recovered quickly, so the reaction this time is even more muted.

If this shutdown is brief, the markets may be right to discount it. Most lost output in previous shutdowns was eventually recovered. Studies show shutdowns reduce annualized quarterly real GDP growth by up to 0.1 percentage points for each week. However, negative effects increase non-linearly the longer the shutdown lasts as disruptions accumulate (report).

The lack of updated official economic data is another casualty of the shutdown. September’s payrolls release has been postponed. A prolonged shutdown may delay other key indicators like the Consumer Price Index (CPI). A lack of official data complicates decision-making for the Fed. For now, the Fed will have to rely on private and internal data sources. Earlier this week, Chicago Fed President Goolsbee (who is a voting member of the FOMC) echoed that, but also acknowledged that it worries him “that we wouldn’t be getting official statistics at exactly a moment when we’re trying to figure out is the economy in transition.”

Without official payrolls data, employment surveys—such as ADP and JOLTS—filled the gap. The ADP report showed continued weakness in job growth in September, with private payrolls declining by 32,000. Though ADP data can be volatile, recent trends show greater alignment with payroll figures through 2025, especially on a three-month moving average (Chart 1). The August JOLTS report, released before the shutdown, also showed a hiring drought, with job openings below the number of unemployed for a second consecutive month (Chart 2). Although job opportunities were scarce, layoffs have remained subdued. Employers seem to be in “low hire, low fire” mode, supporting stability in the unemployment rate and helping to cushion consumer spending for now.

In terms of economic growth, ISM indexes pointed to slowing momentum in September, with businesses increasingly citing the growing impact of tariffs on their bottom lines. The ISM manufacturing index edged higher, but remained in contractionary territory, with only 5 out of 18 industries reporting growth. Activity moderated in the services sector, with the ISM non-manufacturing index declining to 50.0 from 52.0, narrowly avoiding slipping into contraction. Details were disappointing: new orders and business activity moderated, prices rose and the employment subcomponent remained in contractionary territory. While limited, this week’s data continues to support the case for additional monetary stimulus from the Fed, with another rate cut in October being nearly priced in by markets.

Numerous Fed speeches, a looming government shutdown, and a handful of new tariff announcements made for a busy week. Chair Powell’s remarks on Tuesday were parsed for any hints surrounding the Fed’s next move. However, Powell stuck to the script, reiterating the challenging environment faced by policymakers due to rising inflation and a weakening labor market. But fears of a softening economy were lessened this week, following an upward revision to Q2 GDP, a healthy read on August personal income & spending and a sharp drop in jobless claims. Meanwhile, President Trump’s announcement on Thursday evening to impose a 100% tariff on pharmaceuticals, 25% on heavy trucks, and 50% on furniture did little to jar markets. The S&P 500 is trading slightly higher on Friday morning but looks to end the week 0.6% lower.

In recent years, the threat of a government shutdown has become a regular occurrence marking the beginning of each new fiscal year. This year appears to be no different. House Republicans passed a ‘clean’ continuing resolution (CR) on September 19th that would have funded the government through November 21st. However, the bill failed to garner the 60-vote majority required to pass the Senate. Meanwhile, Senate Democrats put forward a separate CR, which came with several provisions, including a permanent extension to the expiring expansions of the Affordable Care Act subsidy. The bill had no chance of passing the Senate, but was meant to serve as a stake in the ground from which Democrats hoped to negotiate. However, this all backfired on Tuesday when President Trump cancelled his meeting with top Democratic leaders. With both the House and Senate on recess until next week, odds now heavily favor a government shutdown come October 1st (see report).

Turning to the economic data, the third revision to Q2 GDP showed a notable upgrade to growth (3.8% from 3.3%). Nearly all the additional strength came from consumer spending on services (2.6% from 1.2%) and business investment (7.3% from 5.7%). As a result, final sales to private domestic purchasers – our best gauge of underlying demand – was revised to 2.9% (from 1.9%), suggesting a more resilient economy (Chart 1).

Encouragingly, the new-found momentum looks to have carried into Q3. Personal spending for August advanced 0.35% m/m (Chart 2), while income growth also remained healthy. Elsewhere, durable goods orders – a leading indicator of CAPEX – also came in on the hotter side. After incorporating this week’s data, our Q3 GDP tracking is now north of 3%.

But even with the renewed strength, the labor market remains an ongoing concern for the Fed. Higher frequency data on jobless claims and job openings suggest conditions have stabilized in the ‘low hire, low fire’ environment, but next week’s payrolls report will be key in shaping the Fed’s next move. However, a government shutdown would delay its release, leaving both policymakers and market participants in the dark.

The Federal Reserve resumed its easing cycle after a nine-month pause, cutting the policy rate by 25 basis points at this week’s FOMC meeting. The move was widely anticipated, and while bond yields initially dipped, they ultimately rose as markets digested the broader implications. Equities, however, rallied, with the S&P 500 climbing another 1% on the week at time of writing.

The FOMC statement signaled a shift in emphasis from the ‘price stability’ mandate toward ‘full employment’, noting that “downside risks to employment have risen”. This echoed Fed Chair Powell’s remarks at Jackson Hole last month and set the tone for what he later described as a “risk management cut”. In essence, while inflation remains elevated, the Fed deemed it prudent to begin easing the policy rate to help guard against further labor market deterioration.

The decision was accompanied by the latest Summary of Economic Projections (SEP), which offered a mixed picture. Unemployment rate forecasts were largely unchanged, while growth projections for 2025 and 2026 were nudged up 20 basis points (bps) to 1.6% and 1.8%, respectively. Core inflation expectations for next year were also bumped up by 20 bps to 2.6%, with this measure now projected to return to target only by 2028 – which would mark seven consecutive years above the Fed’s 2% goal. The median forecast now calls for three cuts by year-end (including this week’s) up from two, and is in tune with our expectations. But one member projected the equivalent of three jumbo 50 bps cuts total (Chart 1). Stephen Miran, President Trump’s newly appointed Fed governor, is likely the one projecting more aggressive cuts as he was the lone dissent at this week’s meeting, favoring a larger 50 bps cut.

Economic data released this week did little to bolster the case for continued easing. Initial jobless claims fell back last week, following a surge in the week prior. And while housing remained a soft spot, with homebuilding pulling back in August, consumption-related data came in better than anticipated. August retail sales and food services rose 0.6% on the month, matching July’s gain. Sales in the ‘control group’ – which strip out volatile components – rose a solid 0.7%, building on gains in the prior two months (Chart 2). While tariffs are still expected to chip away at spending power and weigh on consumption, this recent data suggests consumers may still have some gas in the tank.

The bottom line is that while the Fed has resumed rate cuts to guard against further labor market weakness, its “risk management” approach means future moves will remain highly data dependent. The Fed will continue to have a hard time balancing the risks with respect to its dual mandate. But ultimately, we believe that the tariff impact on inflation will be temporary, and we expect the central bank to continue to cuts rates to support the economy (see our latest Quarterly Economic Forecast here).