When, on 5 November, the previous – 35-day – record for a US government shutdown during Donald Trump’s first term was broken, markets’ nerves were tested. Just four days later, however, an end to the political crisis over government funding came into sight, much to the relief of investors. So, what’s next as Congress returns to business?
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The circumstances under which Democrats and Republicans reached a compromise suggest that political considerations may become increasingly important in coming months as mid-term elections loom in less than a year from now.
While the shutdown was resolved, cracks have appeared in both political parties. Some Democrats broke ranks and joined Republican senators in voting for a deal that a number of observers labelled fragile.
Already by early December, the Senate is to vote on legislation to extend the enhanced Affordable Care Act (Obamacare) premium tax credits. These are set to expire at the end of the year, but so far, the House of Representatives has made no comparable commitment. The extension of Obamacare will be discussed in the House before, in all likelihood, being signed into law by President Trump.
On top of the prolonged political wrangling, tech-related investor convictions appeared to hit a speed bump. Disappointment over results, market-technical factors, and doubts over the sustainability of the rise in equity indices and the skyrocketing performance of a small number of (tech) stocks tested market confidence. The nervousness resulted in a 3.2% decline in the Magnificent-7 share index.
Worries over market concentration can be expected to continue to feature in decision-making processes as investors head into the end of the year.
Next steps
More fundamentally, a lack of visibility on the outlook for the US economy amid the shutdown-related absence of major statistics has also started to raise market concerns.
With the shutdown over, data releases should resume, if only gradually. In addition, the end of the shutdown will allow for the – also gradual – resumption of airline traffic (welcome timing ahead of the Thanksgiving holiday) as well as the funding of food aid (in the form of the Supplemental Nutrition Assistance Program). The Senate deal also protects federal employees: it reverses all shutdown-related layoffs and guarantees that all federal workers will receive the salaries owed during the closure of all but the essential government services.
Will there be any lasting fallout? At the end of October, the Congressional Budget Office issued an analysis of the effects of the shutdown on the economy. It noted that, depending on how long it would last, the shutdown would reduce fourth-quarter annualised real GDP growth by 1.0 to 2.0 percentage points. Most of the decline in real GDP should eventually be recovered.
As a final consequence of the end of the shutdown, the fog should now lift for economists: the release of important indicators (on jobs, retail sales, GDP growth, trade, inflation, etc.) should resume.
September’s employment report looks to be the first major indicator to be published. There is a question over the timing of October’s jobs report. As for inflation, indices might be sketchy as price information could not be collected during the shutdown.
While markets eagerly await the release of these indicators, investors might react in different ways: a lack of interest in months-old numbers, renewed concern over disappointing data, or relief that the numbers validate the prevailing assumption of a resilient US economy. Equally, good news might be interpreted as bad news as it affects expectations for monetary policy moves.
Alternative data – any clues?
In recent weeks, economists had looked for ‘alternative data’ in an attempt to gauge the health of the labour market. The latest ADP private employment survey was seen as encouraging, with a net 42,000 jobs created in October after two consecutive months of net destruction (-31,000 in total).
These figures do not call into question the slower momentum in employment seen recently. In the first half of the year, the private sector created 80,000 jobs on average per month. From July to October, this had been only 28,000.
Another survey attracted attention: The Challenger report on the number of announced corporate layoffs showed that more than one million jobs could be lost this year (January to October).
At the moment, these and other alternative indicators allow us to conclude only that companies are reluctant to hire, which weighs on demand for employment, a focal point in the US Federal Reserve’s assessment of the economy.
On the Fed’s monetary policy committee, analysis has started to diverge. Some members believe that, owing to the changes in migration policy in particular, a monthly pace of a net 30,000 jobs created is now sufficient to stabilise the unemployment rate. Others remain worried.
Committee member Christopher Waller, who is on the shortlist to replace Fed Chait Jerome Powell next May, has expressed concern. He favours pre-emptive interest rate cuts to prevent a sharp deterioration in employment: “Since we don’t know which way the data will break on this conflict, we need to move with care when adjusting the policy rate to ensure we don’t make a mistake that will be costly to correct”.
Indeed, there are often sudden inflexions in employment, presenting central bankers with challenges. While it is likely that the Fed will favour the ‘maximum employment’ component of its dual mandate in coming months, a group on the committee refuses to send an openly dovish message, thus sowing confusion among investors about the next steps in the rate cutting cycle.
Mixed survey data
Surveys of US household and business confidence carried out by professional associations and private business institutes continued during the shutdown. What lessons can we draw from them?
The decline in the ISM manufacturing index in October (from 49.1 to 48.7) was overshadowed by stronger activity in the services sector (from 50 to 52.4, for the highest level since February).
Small business confidence as per the National Federation of Independent Businesses survey fell slightly in October, leaving the index just above its long-run average. Fewer business owners reported they were uncertain about expansion, but the level of uncertainty remains high. The end of the shutdown could be helpful here.
On the consumer side, confidence, as measured by the University of Michigan, stalled in November, with the index posting a fourth consecutive decline to a three-year low. Households worry about their financial situation and the prospects for business. Their inflation expectations are mixed: They have ebbed since the highs in April, but remain high and are rising according to other surveys.
Several policymakers at the Fed have indicated that they do take household inflation expectations into account.
Politics, I say
In addition to the shutdown, investors scrutinised news on the Supreme Court’s first hearing on President Trump’s use of the International Emergency Economic Powers Act to levy extra taxes on products imported into the US. The act allows the president to ‘confront any unusual and extraordinary threats,’ and to ‘regulate’ imports of foreign goods, but it does not mention changes in customs duties.
The Supreme Court has expressed scepticism and considers that import tariffs can be seen as taxes on US consumers, even though imposing taxes is ‘a core power of Congress’, according to Chief Justice John Roberts.
Were the tariffs declared illegal, many questions would arise: for one, US importers could claim refunds from the government (exacerbating the budget deficit).
If we have learned anything from the latest developments, it is that trade policy is core to President Trump’s agenda, especially as a source of funding for tax cuts. To be continued.
Eurozone – More than green shoots
Purchasing managers’ surveys for October have confirmed the recent favourable trend, with the composite PMI reaching its highest since May 2023 at 52.5. Orders are at their highest in 2/2 years.
However, November’s ZEW index, which concerns German investor sentiment, fell. Does this reflect their perception of real activity or the most recent trends in financial markets?
Foreign trade data has looked particularly encouraging: After a contraction in August, exports rebounded in September in the main economies with a positive contribution from intra-EU trade. This could mean an improvement in domestic demand after national accounts data pointed to weakness in private consumption in the major eurozone economies in the third quarter.
With uncertainty on the trade front expected to ease off in 2026 and massive fiscal programmes supporting activity, our central scenario calls for stronger growth in the eurozone.
