The Week in Review
This week brought a trio of headwinds: the federal government shut down amid fiscal disputes, August jobs growth stalled dramatically, and oil prices tumbled on demand concerns. Meanwhile, the Fed continues signaling further rate cuts as inflation moderates but remains above target, creating a delicate policy balancing act amid weakening labor momentum and compromised economic data visibility.
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U.S. Government Shutdown Begins
Fiscal disruptions risk near-term growth and data visibility.
The federal government shut down on October 1 after Congress failed to agree on fiscal 2026 appropriations, with the closure entering its third day by Friday. Approximately 800,000 federal employees are furloughed and another 700,000 are working without pay. Essential services continue, but many agencies are partially suspended, which is likely to delay some economic releases and program operations. The impasse reflects disputes over spending levels, foreign aid, and health subsidies. For markets, shutdowns typically have limited impact if brief, but the timing is challenging: a soft labor backdrop and an active Fed easing cycle increase the risk that an extended standoff dampens confidence, postpones investment decisions, and weighs on Q4 growth. Compromised data visibility ahead of the Fed's October meeting elevates policy uncertainty and may shift investor attention to high-frequency indicators and nowcasts in the weeks ahead.
KEY TAKEAWAY
The longer the shutdown persists, the greater the growth drag and policy uncertainty it introduces.
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Fed Signals More Rate Cuts
Policymakers telegraph a continued easing path amid cooling growth.
Following a 25 bp cut in September that lowered the target range to 4.00–4.25%, Fed Governor Jefferson noted that risks to employment are tilting downward even as inflation risks remain elevated. The latest FOMC projections point to another 50 bp of cuts by year-end 2025, and markets are anticipating at least two additional quarter-point moves. Strategists highlight that an easing cycle can bolster rate-sensitive sectors and ease financing conditions, but the policy trade-off is delicate: inflation remains above target and labor momentum is weakening. With some economic data likely delayed by the shutdown, communication and decisions may rely more heavily on nowcasts and private-sector indicators. Expect a measured, data-dependent cadence rather than an aggressive cutting cycle.
KEY TAKEAWAY
The Fed remains on an easing path, but sticky inflation and softening jobs argue for a cautious, data-driven approach.
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Jobs Growth Stalls in August
A sharp hiring slowdown increases the odds of additional easing.
August nonfarm payrolls rose by only 22,000, a marked slowdown, while the unemployment rate held at 4.3%. Hiring was concentrated in healthcare (+31,000), with losses in federal government and mining. Long-term unemployment increased by 385,000 over the year to 1.9 million, and both labor force participation and the employment-population ratio fell 0.4 percentage points year over year. The composition and breadth of the report point to late-cycle cooling, with potential implications for consumer spending and corporate revenue visibility. For policy, the weak print reinforces the Fed's bias to cut, particularly if subsequent data (when released) confirm a downshift. For investors, resilience in defensive services, alongside softness in cyclicals, underscores the importance of quality balance sheets and stable cash flows as growth slows.
KEY TAKEAWAY
Weaker hiring strengthens the case for further cuts but elevates growth and earnings risks for cyclicals.
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Inflation Still Above Target
Sticky core inflation complicates the Fed's easing path.
August CPI rose 2.9% year over year, with core inflation at 3.1%, both above the Fed's 2% target. High-frequency indicators point to gradual improvement: nowcasts suggest October CPI near 2.88% and PCE around 2.71%. Shelter remains the largest contributor to monthly gains, while energy prices advanced 0.7%. Policymakers also cite tariff-related pressures as an ongoing concern. The setup is challenging: inflation is easing but not yet benign, while the labor market is showing signs of fatigue. For fixed income, this mix argues for continued rate volatility as markets reconcile disinflation progress with lingering services inflation. For equities, a slow glide down in inflation supports valuations, but the persistence of core components limits how quickly policy can loosen.
KEY TAKEAWAY
Inflation is trending lower but still too high to permit a rapid easing cycle.
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Oil Sinks to $60, Outlook Softens
Falling crude eases inflation but flags demand concerns.
WTI crude rebounded to $60.90 on Friday but finished the week down roughly 7%, the largest weekly drop since June. Expectations of higher OPEC+ output, slower refinery demand, rising inventories, and seasonal factors weighed on prices. Forecasts point to Brent averaging about $59/barrel in Q4 2025 and near $50 in early 2026. For macro, cheaper crude is a near-term disinflationary tailwind, reinforcing the downtrend in headline inflation. For sectors, lower input costs may aid transportation, chemicals, and other energy-intensive industries, while upstream energy producers face revenue pressure if prices remain subdued. Credit markets could see dispersion inside energy, with balance sheet quality and hedging profiles increasingly important if the price slump persists.
KEY TAKEAWAY
Lower oil supports disinflation but may be signaling softer global demand ahead.
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Disclaimer: This communication is for informational purposes only and does not constitute investment advice or a solicitation to buy or sell any securities.
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