Markets Take US Government Shutdown in Stride

[Ben Graham]

Overview: The US federal government is under partial closure following the inability to approve appropriations to start the new fiscal year. The president has threatened to permanently fire not just furlough many "non-essential" government workers, but note that as of yesterday, some 150k federal workers have accepted the government's buyout. The longest shutdown in this macabre and repeated political drama has been 35 days in President Trump's first term. We fear this one may also be protracted. The dollar is narrowly mixed, steadying in late European morning turnover after initially being sold.  The dollar is also mostly firmer against emerging market currencies. 

The rising yen, the strongest of the G10 currencies in recent days, has weighed on Japanese equities, but other markets in the Asia Pacific region are higher, though China and Hong Kong markets are closed for the national holiday. Australia is the chief exception today. Europe's Stoxx 600 is higher for the fourth consecutive session, matching the longest advance since May. US index futures are off around 0.50%-0.60%, though government shutdowns have not typically been negative for US equities. European benchmark 10-year yields are mostly 1-2 bp higher. The 10-year US Treasury yield is nearly flat, slightly below 4.15%. Gold has soared to a new record, a little above $3895. It finished last week near $3760. November WTI is extended its pullback. It is below $62. Last month's low was near $61. Before last weekend, it briefly traded above $66.   

 

USD: With a three-day pullback in tow, the Dollar Index met the (38.2%) retracement of the rally since the FOMC meeting at 97.70. The (50%) retracement is near 97.40 and this has been approached today. The next retracement (61.8%) is slightly below 97.15. The 97.70-80 area may provide the nearby cap. With large parts of the federal government closed, one may appreciate the importance of private sector data. The Mortgage Bankers Association provides the weekly mortgage applications, the final September manufacturing PMI, and manufacturing ISM, and auto sales are all from non-government sources. Arguably, the most important report today is the ADP private sector jobs estimate. It has done a better job than economists in anticipating the BLS estimate. In the first eight months of the year, ADP estimates that the US private sector added an average of 80.4k jobs a month. With the revisions, the BLS puts the average closer to 74k. In 2024, the BLS estimated the US private sector created an average of 130k jobs a month. ADP's estimate was a little more than 144k. Auto sales will trickle in today. The median forecast in Bloomberg's survey calls for a 16.2 mln annualized pace. Through August, the average has been 16.26 mln, up from 15.52 mln in the first eight months of 2024. 

EURO: The euro rose to a new five-day high today near $1.1780. The (50%) retracement of the losses since the four-year high was set (~$1.1920) after the FOMC statement on September 17 is a few ticks above today's high and the (61.8%) retracement is near $1.1815. Initial support is seen in the $1.1730-50 area. Following the September CPI reports of the largest four eurozone members, the 0.1% rise in the eurozone aggregate CPI for a 2.2% year-over-year rise was taken in stride. The core rate was steady at 2.3%. Also, the final manufacturing PMI was 49.8, up from the preliminary estimate of 49.5, but confirming the first decline of the year, after August saw the first move above the 50 boom/bust level since before Russia's invasion of Ukraine. 

CNY: Mainland markets are closed for the extended national holiday. They re-open next Thursday, October 9. The main US narrative has been that China needs the US markets and source of protein. Yet, Chinese actions have shown otherwise. Despite a fall in exports to the US, China trade surplus has grown. China has found substitutes to US soy (Brazil and Argentina) and beef (Australia). Due to the risk of security compromise, it has discouraged the use of Nvidia's AI chip (H20). The US, and other high-income countries remain reliant of processed rare earths and magnets from China. Beijing must feel it has the upper hand, otherwise it might not have asked, according to reports, for the US to decline that it "opposes" Taiwan independence, which is stronger rhetoric that the Biden administration's iteration of US does not support Taiwan seeking formal independence. During the long holiday, we expect the dollar to mostly remain confined to the recent range against the offshore yuan, call it roughly CNH7.11-CNH7.15. Today's range has been roughly CNH7.1230-CNH7.1400. 

JPY: The dollar has been sold for the fourth consecutive session against the yen, and it has overshot the (61.8%) retracement its gains since the FOMC meeting on September 17, which was found near JPY147.20. Today's low has been about JPY146.90, the lowest since September 18. The Bank of Japan's Tankan survey was released earlier today, and it was little changed from the Q2 survey. The main surprise was the large industry capex estimate for the fiscal year was lifted to 12.5% from 11.5%. The September manufacturing PMI was tweaked up to 48.5 from the initial estimate of 48.4 (49.7 in August), but still the lowest since March 2024. The 1.2-index point decline was the largest since November 2022. At the end of August, the swaps market was discounting a little more than a 50% chance of a hike at this month's meeting. Today, the first session of Q4, the odds of a hike this month are slightly below 63%. 

GBP: Sterling is firmer for the fourth consecutive session. With today's gains to $1.3480, it met the (38.2%) retracement of its losses since the FOMC meeting. Above there, the 20-day moving average in found near $.3500 and the (50%) retracement is about $1.3525. UK's Nationwide house price index unexpectedly ticked up in September to 2.2% from 2.1%. It has been expected to slip below 2% for the first time since last June. Separately, September's manufacturing PMI was confirmed at 46.2, the weakest since March. It has not been above the 50 boom/bust level since last September. Some observers talk about stagflation in the US, but it has not stopped the Fed from easing. Yet, UK growth is weaker than the US and inflation higher, and the Bank of England has signaled it is not in a hurry to cut rates again. The swaps market does not have another cut fully discounted until the middle of Q2 26.

CAD: The US dollar slipped for a third consecutive session against the Canadian dollar yesterday. It briefly traded below CAD1.3900. It is holding above it today but has not been above CAD1.3935. The (38.2%) retracement of the gains since the FOMC and Bank of Canada cut rates on September 17 is near CAD1.3870. A regularity is that in a soft US dollar environment the Canadian dollar is typically a laggard. In September, its roughly 1.2% decline was only bested by the New Zealand dollar that fell near 1.5%. Through the first three quarters, all the G10 currencies have appreciated against the greenback, but the Canadian's dollar's gain of 3.4% is the least. Today sees the September manufacturing PMI, which is not typically a market-mover. It rose for the previous two months, and at 48.3, it is the highest since January, the last time it was above 50.

AUD: A hawkish hold by the Reserve Bank of Australia coupled with the broadly weaker US dollar saw the Australian dollar rise to almost $0.6630 yesterday. So far, today's high has been $0.6620. The (61.8%) retracement since the Fed's rate cut is a little higher, near $0.6635. Above there, the next technical hurdle may be around $0.6665. The high for the year on September 17 was slightly above $0.6705. Australia's September manufacturing PMI was slipped to 51.4 from 51.6, the initial estimate (down from 53.0 in August). It is one of the few G10 countries with a manufacturing PMI above 50. Australia reports the August goods trade and household spending first thing tomorrow. Australia's goods trade surplus averaged A$4.67 bln a month this year, which is almost a quarter smaller than in the first seven months of 2024. Meanwhile, household spending is expected to rise 0.3% in August, slightly below the average so far this year.

MXN: The dollar traded quietly against the peso yesterday, staying with the range seen Monday (~MXN18.2955-MXN18.4000). It has broken down to almost MXN18.2655. There is little to deter a test on the year's low set on September 17 near MXN18.20. Today's Mexican data includes the manufacturing PMI. It rose above 50 in August (50.2) for the first time since June 2024. Mexico's IMEF surveys are also like the PMI, but the manufacturing and non-manufacturing readings were below 50 in August. The most important source of hard currency for Mexico is worker remittances. They have been trending lower this year. Through August, workers (mostly in the US) have sent a little more than $35.1 bln back home compared with $37.1 bln in the first eight months of 2024. The trade surplus in Jan-July this year was about $1.41 bln. 

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