The Impact of the Government Shutdown on Economic Data and Markets

While Wall Street opening higher with the major stock averages up at least 0.5% point now CPI for the latest month rising less than forecast.

And it is also day 24 of the US government shutdown.

The Senate failed to advance a GOP-backed measure to pay federal employees, military members, and contractors who have kept working without pay.

This did mark the 12th failed Senate vote on the House passed funding bill to end the shutdown.

Well, joining me this morning to weigh in on markets as well as data's Brian Jacobson, chief economist.

For annex wealth management.

Brian, happy Friday.

Thank you so much for joining us.

So we finally got that key economic data point on inflation, and the next Fed meeting is coming up next week.

Hard to believe, on October 28th to 29th.

Now markets are expecting the Fed to cut the Fed funds rate by 0.5 point.

So what does the inflation report actually tell you?

Yeah, thanks for having me, and it was really nice to actually get some data from the federal government here.

It's like we've been waiting for this for quite a while, and the number came out better than expected in the sense of that core inflation was up a lot less than what was feared, and I think it does lock in the idea that the Fed will be cutting rates 25 basis points next week.

And the problem is, is that when we're looking at, well, what's next, what's after the Fed's Cut next week because now that we're this far into October, the Bureau of Labor Statistics is not collecting the data to calculate the October CPI.

So the number that came out today was for September.

The October data we're not going to have now.

They will be able to retroactively go back and find out what the prices were, but we're actually, I think, in a little bit of a stickier situation.

The longer the shutdown goes in terms of figuring out what is the trajectory for inflation here.

Yeah, and Brian, you bring up an important point in terms of what's happening with corporate America though, we have been getting earnings reports which have been mostly leading to a bigger, bigger and better picture of the industry performance and guidance this week.

So on the heels of big banks, we can now look ahead to a big week for tech in the upcoming weeks.

So what did the latest earnings calls actually tell you?

Yeah, it was really interesting, the loan quality for the big banks.

I think that was reassuring.

Obviously there were some concerns about some specific cases like, you know, Zion's Bank, as far as the fraud with the first brands and you have Tricolor, but there was Very isolated and it looked like there were plenty of loan loss reserves there where banks can do what they're in business of doing, which is lending out money.

So not too concerned about the health of the banking system, not too concerned about the health of the consumer as far as the credit quality.

But then when we look at the rest of corporate America with some of the companies with, let's say autos, right, very big difference between Tesla and General Motors there.

Tesla was able to increase their sales, but their costs rose.

Also, you have the elimination of those electric vehicle credits, so their costs have gone up faster than their revenues.

So that was disconcerting.

When we look at consumer goods, you know, Procter and Gamble, they released earnings this morning.

I thought that was really interesting because it looked like they were able to Push prices higher, so it wasn't a volume story, so it wasn't the quantity.

It was more about the prices and so are they able to take advantage of name brand recognition and just this general perception that, you know what, inflation is rising anyways because of tariffs and so we may as well hike prices along with it.

So it's good for corporate America, but that can lead to a little bit further pressure on consumers as we go on to the ever important holiday season here.

Yeah, and speaking of corporate America, Brian, how might Trump's upcoming meeting with China's leader Xi Jinping actually impact US-China trade relations and what could it mean for global markets as well as US economic growth?

It's a really critical meeting.

My expectation is that we're seeing a little bit of applied pressure going into it to give room to walk that back.

We heard about the Section 301 investigation on China being launched as to whether or not they were complying with the 2020 trade agreement, which, you know, honestly they haven't been, so I Kind of know what the answer to that investigation will be.

There's also the chips curve, the technology curbs.

So I think that President Trump and the administration, they've been increasing the pressure to leave room for negotiation and getting to some sort of negotiated settlement.

So I'm actually optimistic about what the outcome of that will be.

Probably, you know, President Trump said how the Tariffs on China as of November 1st are scheduled to go up to more than 150%.

Well, that is like a worst case scenario, I think.

The more reasonable base case is that the tariffs coming out of this are going to be 30% or less, and I think that's going to give investors and corporate America in general a bit of a sigh of relief here.

Yeah, and I have a feeling that next week we will be paying attention not only to headlines but also to our social media feeds.

And as we approach the end of October, the countdown to the holidays and year end is on, as you mentioned, Brian, and with that comes price target watch.

So what are you watching when it comes to equities yields, as well as precious metals?

Yeah, I'm a little concerned about some of the areas of the market thinking that there is some froth out there that investors really need to think more about, you know, looking for growth.

It's an environment in which growth is still scarce and so if something's scarce, people bid up the price for it.

So it's understandable why growth stocks in the United States have done quite well, but pay attention to the valuations, right?

Maybe re-embrace growth at a reasonable price as opposed to growth at any price.

Price and I think that some of the volatility that we've seen in the markets are really suggesting that now price does matter once again, even though there is a good growth story there, there does have to be some substance to it.

So we're looking at the market, maybe taking a bit of a breather here, probably let's say going down to 6600, ending the year close to about where we are now 67, so probably a little bit of a wild ride.

But when we look into 2026.

Look for the opportunity to maybe look at 6500 on the S&P 500 as a really good entry point because we're likely to end 2026 closer to 7000 than 6000, for example.

OK, Brian, well thank you so much for joining us on this Friday morning and thank you so much for sharing all of your insights.

Have a great weekend.

You too, thank you.