Flying blind

There are no charts or audio today due to travel commitments.

Global week in review: Shutdown met with a yawn 

Global equities moved higher last week, reflecting optimism around AI and weaker US economic data, which heightened chances of further US rate cuts.

The main event last week was confirmation of a US Federal Government shutdown due to a failure to agree on budget bills. Given shutdowns tend to be relatively frequent in the US, markets greeted the announcement with a collective yawn.  

That said, the shutdown could eventually have some notable macro implications. For starters, President Trump has threatened to use the shutdown as an opportunity to fire more public servants, which could make a weakening labour market even weaker. An extended shutdown would also curtail government purchases and spending by public servants lacking pay, weakening economic activity directly. Some estimates suggest every week of the shutdown will shave 0.1% off Q4 annualised economic growth.

Second, the shutdown means we’ll be flying blind in terms of official statistical updates on the economy for a while. Last week, for example, the release of both weekly jobless claims and the all-important monthly payrolls report were delayed. 

Given the current intense polarity in US politics, the shutdown risks being relatively long by historic standards. Indeed, the longest to date was 35 days during Trump’s last term in office.

What US economic data was released last week came from the private sector, with the ADP payrolls report suggesting further notable employment weakness. According to the ADP, private payrolls declined by 32k in September and the gain of 54k in August was revised down to show a 3k decline. The US ISM manufacturing service also showed weak employment demand yet still elevated pricing pressure – no doubt arising from the tariffs. 

At this stage, however, equity markets remain remarkably sanguine for two reasons. First, it remains a case of ‘bad news is good news’, as more economic weakness at least suggests the Fed is more inclined to cut interest rates further. Second, a flurry of deal-making around AI has investors still excited about the technology sector, and the potential boost to earnings and productivity down the track.  

Global week ahead: Payrolls (maybe!)

Depending on the length of the government shutdown, the highlight of the week ahead should be the delayed US payrolls report on Friday. Markets anticpated a still relatively soft employment gain of 50k. 

Otherwise, there are a bunch of Fed speaker littered through the week who will each give their own opinion on the outlook for rates. 

Australian week in review: RBA holds

The highlight last week was the ‘hawkish hold’ by the Reserve Bank.

While the decision to leave rates on hold was widely expected, commentary in the Bank’s post-meeting statement suggested it had found some discomforting inflationary signals from the August monthly CPI report. In turn, this suggests upside risk to the Q3 quarterly CPI report later this month and hence reduced risk of a rate cut in November. 

What signals? Pricing pressure in the housing sector and in market services has been a little firmer than the Bank expected in the past two months. In turn, this could reflect both the impact of the already lower level of interest rates on housing and consumer demand, allowing businesses some capacity to lift prices (or at least discount less) and so help restore battered profit margins. Indeed, we also learnt last week that the house price recovery is gathering pace, with a 0.9% gain in national prices in September. 

That said, consumer spending was also firmer in Q2 due to extended holidays, payback for which may come in Q3. Indeed, the so-called ‘household spending indicator’ from the ABS suggested only modest 0.1% growth in consumer spending in August.    

Either way, the Q3 CPI remains critical to the rates outlook. To my mind, an annual trimmed mean inflation gain of 2.6% or less – which is my expectation – would cement the case for a November rate cut. A gain of 2.7%, the same as in Q2, would make the case more line ball, and partly dependent on the next employment report. A gain of 2.8% or more would likely blow any chance of another rate cut this year. 

Australian week ahead: Business & consumer confidence

The main highlight this week will be parliamentary testimony by RBA Governor Bullock on Friday, although it’s unclear what more she could say to markets beyond her extensive post-meeting press conference last week.

The NAB and Westpac/Melbourne Institute respective measures of business and consumer confidence will also be released. Any gains in sentiment are likely to be contained by the lack of an RBA rate cut of late – although, barring a major slump, neither are likely to be especially market-moving.  

Have a great week!