Financial News Highlights
- With the House and Senate unable to pass a continuing resolution and both chambers on recess until next week, a government shutdown looks increasingly likely on October 1st.
- President Trump announced new tariffs on pharmaceuticals, furniture and heavy trucks on Thursday, all effective October 1st. However, exemptions on pharmaceutical tariffs likely mean most drugs will remain duty free.
- Data out this week suggest the U.S. economy is faring considerably better than previously thought, but the softening labor market remains a concern for the Fed.
Waiting on Rates to Change
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.
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