Macro
The immigration growth in the U.S. is now one of the lowest in the last 80 years. For this reason, payroll numbers can be much lower to maintain low unemployment. Some measure that the monthly payroll number can be as low as 20 to 25K to maintain the unemployment rate.
The government shutdown has kept markets in a catalyst vacuum this week, but optimism held on to broader expectations of only a temporary labour slowdown, coupled with Fed rate easing prospects. Market pricing shows more than a 90% probability of two additional rate cuts this year. Historically, shutdowns have had little lasting impact, with a median duration of 4 days since 1976, and the S&P 500 has posted a median return of 12.3% 12 months later. However, this one may extend longer than usual amid entrenched gridlock centred on healthcare subsidies, and risks could rise if temporary furloughs turn into permanent dismissals. Federal employees make up about 2% of the workforce, and a quarter of them face furloughs. If dismissals materialise, total employment could fall by 0.5%, weighing on consumption at a time when hiring is already slowing. Still, markets remain remarkably calm, as the dollar softened modestly but equities and bonds barely reacted, with investors assuming a temporary continuing resolution will soon emerge. The longer the standoff persists, however, the greater the risk that it spills into data quality, as the shutdown delays major economic releases, including payrolls and inflation reports.
Alternative indicators point to softening, not collapsing, labour conditions. ADP payrolls fell 32K in September, the weakest since March 2023, while job openings dropped below the number of unemployed for the first time since the pandemic. Consumer confidence weakened, and ISM Services declined to 50.0, right on the expansion threshold, though prices rose to 69.4, well above long-term averages. The labour market is not crashing but rather stabilising, and with current immigration trends, monthly job gains of 20 to 25,000 are now sufficient to maintain a steady unemployment rate. Fed officials have struck a cautious tone, signalling gradual easing as inflation remains sticky. The base case remains two more cuts this year as the Fed removes restrictions at a measured pace rather than shifting to outright stimulus. The absence of official data during the shutdown has only amplified reliance on private indicators, increasing near-term volatility in expectations around Fed policy.
Equities have been resilient despite data noise and tariff overhang, supported by optimism around AI-driven demand. CRWV rallied 12% after signing a $14 billion computing power agreement with Meta, while investors continued to rotate into semis and large tech as part of a broader AI trade. Still, weak labour data, cautious Fed commentary, and high expectations heading into the Q3 earnings season keep downside risks in view. Meanwhile, geopolitics returned to the forefront as President Trump unveiled a 20-point “Peace Plan” to end the war in Gaza, a proposal that, while ambitious, faces deep scepticism over enforcement and governance. The plan calls for Hamas to surrender arms and release hostages in exchange for U.S.-led guarantees. Still, Israel’s control over key crossings and the uncertain makeup of any new Palestinian administration raise doubts about its viability. Markets welcomed any step toward de-escalation, though few see it as a lasting resolution.
Sanae Takaichi’s victory as head of Japan’s ruling Liberal Democratic Party positions her to become the country’s first female prime minister. Market reaction was very positive: the Nikkei 225 jumped 4.8%, and 2-year JGB yields fell to 0.895%, reflecting expectations of a more dovish path, while the yen weakened to ¥150.40 per dollar. Known for favouring expansionary measures and having once called BOJ rate hikes “stupid,” she may push for looser policy and closer government influence over the central bank. Economists, including former BOJ officials, now see reduced odds of another rate increase this year. Her ascent marks a potential shift toward fiscal activism at a time when Japan faces both political transition and global trade uncertainty tied to U.S. tariffs and regional realignments.
Her platform, reminiscent of Abenomics, leans toward fiscal expansion aimed at supporting the supply side of the economy through investment in innovation and AI. Yet, given the LDP’s loss of majority, a coalition with opposition parties may shift the focus toward consumption support, potentially through subsidies or tax relief. This could heighten the risk of policy misalignment with the BOJ, which has been slowly normalising since ending negative rates in March 2024 and tapering bond purchases in July.
Two weeks ago, the Bank of Japan announced it would begin selling around ¥330 billion ($2.23 billion) of ETFs. The BOJ is proceeding cautiously to avoid disrupting markets. At this pace, the process could take over 100 years as the BOJ holds a ¥37 trillion ($251 billion) ETF portfolio. The move marks a symbolic shift away from Abenomics-era stimulus. Japan has secured lower tariff rates than initially proposed by Washington. However, Japanese companies are still facing higher costs, and the BOJ continues to monitor capital spending, wage growth, and business sentiment.
The BOJ has kept the policy rate at 0.5% thus far, and it is likely to remain at this level this year unless wages continue to increase, which could necessitate a hike after the October 29–30 meeting. With the next parliamentary vote on October 15, the central bank will have a clearer picture of the coalition’s fiscal stance before deciding its response. A consumption-heavy package could trigger a more hawkish tone, while a supply-side plan would support a dovish approach. Investors remain positioned for continued yen weakness and sustained equity inflows as policy accommodation extends. Japan’s exporters, in particular, are likely to benefit from the combination of fiscal expansion and a patient central bank.
With U.S. tariffs weighing on sentiment and inflation still cost-driven, investors should anticipate prolonged accommodative policy in Japan, yen softness, and continued equity support, especially for exporters.
In Europe, the ECB continues to benefit from a calmer environment. September inflation came broadly in line with expectations, while growth indicators suggest no major deterioration in real activity. France remains in a holding pattern as political divisions delay progress on a formal budget, raising the likelihood of a special law to bridge the gap. Broader European data show mixed momentum: manufacturing remains weak in France and Italy, while Germany’s business confidence has stabilised, and Spain’s services sector continues to outperform. Despite fiscal strains, core sovereigns such as Germany and the Netherlands continue to raise funds at favourable rates, a sign that bond markets remain calm for now.
Overall, global macro dynamics remain defined by gradual normalisation rather than abrupt shifts. The U.S. faces a soft landing with slow job growth and measured Fed easing, Japan navigates political transition and policy misalignment risks, and Europe maintains stability under moderate inflation. Markets remain supported by liquidity, AI-led growth themes, and expectations of policy accommodation into year-end. Yet, the combination of geopolitical uncertainty, from Trump’s peace efforts to renewed friction in Ukraine, and domestic U.S. policy paralysis underscores a world where politics, not economics, increasingly sets the tone for markets.
Rates
A shutdown-driven data blackout has traders leaning on private trackers in place of BLS prints. Alternative estimates for September point to muted hiring: ADP reported a 32K decline, while other real-time proxies show small positive gains, underscoring cooling rather than collapse. The ISM Services index slipped to 50.0, with the prices index at 69.4, a mix that suggests a gradual removal of restrictions rather than abrupt policy shifts. The shutdown is also pushing key releases at risk, including CPI and retail sales, which complicates near-term Fed read-throughs.
Fed communication remains cautious. Market commentary has focused on the odd combination of record-high equities, very tight credit spreads, and rising policy uncertainty. Policy framework chatter picked up too, with fresh coverage of Dallas Fed President Lorie Logan’s case for targeting the tri-party general collateral repo rate. That change would be operational, not directional, aligning the target with the deepest funding market rather than the shrinking fed funds arena.
FinancialContent
The immediate watchlist: speed of a shutdown resolution, timing of the first clean data prints once agencies reopen, ISM-style surveys for confirmation, and the evolving odds of two additional cuts priced for year-end.
Credit
Primary markets were the headline. September concluded as one of the busiest months ever for U.S. high-grade issuance, with approximately $207 billion issued as large multi-tranche deals were absorbed smoothly. Investors put cash to work despite compressed premia. That late-September surge carried into last week’s narratives about ample demand meeting heavy supply.
Loans and CLOs echoed the strength. Leveraged-loan calendars remained active and reception constructive, while U.S. CLO issuance through the week ended October 3 continued to add to a strong year-to-date pace, reinforcing the bid for floating-rate paper even as investors flag thinner compensation. The takeaway from desks has been consistent: yield appetite is healthy, but selection matters.
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Positioning is shifting toward quality carry and credit picking. Managers highlight a “picker’s market” as idiosyncratic stress pops up in weaker names, while the macro overhangs are straightforward: shutdown duration, labour softness, and consumer fatigue. In the near term, watch for follow-through on jumbo financings and whether October supply meets the same robust demand that made September look easy.
Corporate bonds are rallying alongside record U.S. equities, with investors showing the least concern about defaults or downgrades in 25 years. Investment-grade spreads have tightened to 0.72 percentage point, the lowest since 1998, as demand surges despite Fed rate cuts. Yields remain well above those of the 2010s, attracting buyers eager to lock in returns before rates fall further. Confidence is supported by solid corporate balance sheets, high earnings-to-interest coverage, and limited new issuance, which has made bonds scarce. The result is strong credit performance driven by yield appeal, healthy fundamentals, and constrained supply rather than falling risk.
Recent failures such as auto-parts maker First Brands Group and subprime lender Tricolor Holdings have exposed growing fragility in the fast-expanding private credit market. Both companies relied on complex non-bank financing structures that masked rising risks behind opaque disclosures. First Brands’ $11 billion bankruptcy revealed gaps in receivables accounting and possible double-pledging of collateral, while Tricolor’s liquidation exposed weak underwriting and collateral misuse across subprime auto loans.
These cases echo warnings from Fitch Ratings, which sees the $1.7 trillion market as a potential transmission channel for systemic stress. Fitch cited “bubble-like” features such as rapid innovation, retail participation, and rising leverage, noting that while private credit remains a small share of the financial system, poor transparency and asset-liability mismatches could amplify shocks. With banks, insurers, and institutional investors increasingly exposed, the sector’s limited disclosure and hidden leverage risks could magnify losses in the next downturn.
Equities
U.S. equities extended their advance this week, with the Dow, S&P 500, and Nasdaq all closing at new record highs. Gains were broad-based, and the Equal Weight S&P 500 ETF outperformed the main index by 33 basis points, reflecting improved market breadth beyond the mega-cap names. Sector leadership rotated toward defensives and select cyclicals. Healthcare led with a 6.82% surge on strong earnings and renewed demand for stable growth exposures. Utilities climbed 2.39% as falling yields boosted appetite for income-oriented stocks, while Technology rose 2.25% on continued optimism around AI and cloud spending. Industrials added 1.17% amid resilient manufacturing data and solid order books.
Energy (-3.34%) was pressured by weaker commodity prices, a 7.4% drop in WTI crude. It was followed by Communication Services (-2.10%) due to softness in media and streaming. Consumer Discretionary (-0.81%) also slipped amid mixed retail updates, while Consumer Staples (-0.43%), Financials (-0.26%), Real Estate (+0.21%), and Materials (+1.06%) delivered muted returns. The week’s performance reflected defensive positioning and an emphasis on earnings quality ahead of the reporting season.
Among large caps, Nvidia stood out with a 5.3% gain ahead of its November 19th earnings, while Netflix lagged, down 4.7%. Sector-wise, pharma, managed care, utilities, semiconductors, China tech, homebuilders, apparel, machinery, and railways all contributed to the week’s strength, underscoring a broad-based but measured risk appetite.
The third-quarter earnings season begins the week of October 13. By the end of the month, nearly 70% of S&P 500 companies, representing roughly 72% of market capitalisation, will have reported. Consensus expectations call for S&P 500 earnings growth of 6% year-on-year, down from 11% in the second quarter, though actual results are likely to exceed forecasts as stronger-than-expected sales and upside surprises from the Magnificent 7 continue to drive index-level gains. Still, earnings growth should decelerate modestly due to smaller foreign exchange tailwinds, higher tariff costs, and the absence of a one-time charge that had boosted year-on-year comparisons last quarter.
Revenue growth is projected to slow from 6% in Q2 to 4% in Q3, a figure that appears conservative given nominal GDP expanded 4.7% over the same period. Tariffs were a more pronounced headwind, with US companies paying $93 billion in customs duties during the quarter—a 33% increase from Q2. Profit margins likely held near recent levels, but substantial expansion appears limited. For the Magnificent 7, analysts once again set a low bar, with consensus expecting 14% earnings growth—half the pace achieved in the first half of the year. AI-related capital expenditure will remain a focal point for investors. Hyperscaler commentary around demand and infrastructure spending will be critical for gauging the durability of the AI trade. Street forecasts suggest capex growth of 75% year-on-year in Q3, slowing to 42% in Q4 and near 20% in 2026, though realised spending has consistently outpaced these projections in recent quarters.
The macro backdrop remains complex. The VIX is calm, reflecting subdued hedging activity despite October’s historical tendency toward volatility. The Gold-to-Oil ratio continues to flash caution: gold rose 2.7% to fresh record highs, while oil fell sharply, highlighting divergence between safe-haven demand and growth-linked commodities. The US dollar has weakened more than 10% year-to-date, on track for its worst annual performance in over two decades. Notably, more than 80% of equity ETF inflows are now hedged, compared with almost none earlier this year, underscoring investor anxiety about currency risk. While a softer dollar may benefit US exporters and multinationals, it also raises broader concerns about the erosion of US financial credibility.
Cross-asset moves reflected a supportive environment for rate-sensitive equities. Treasuries were firmer, the yield curve steepened, and the Dollar Index declined 0.4%, all of which helped to underpin gains in defensives such as healthcare and utilities.
In the private markets, secondary fundraising remains one of the brightest spots in the current environment. By mid-2025, $47 billion had been raised across 13 funds, following $60 billion in 2024, putting the asset class on track for another record year. GP-led transactions, robust private wealth inflows, and limited liquidity in primary markets are driving activity. Historically, post-crisis vintages have delivered outsized returns, benefiting from lower entry valuations and clearer asset visibility. With tentative signs of recovery in M&A and IPO markets, exit pathways are beginning to reopen, reinforcing confidence across private capital strategies.