How the U.S. Government Shutdown is Affecting the Markets

the government shutdown went into effect after midnight and this morning we got the release of the ADP employment report.

The US shed 32,000 private sector jobs in the latest month.

Meanwhile, the Labor Department says the BLS will halt all economic reports during the government shutdown, and that means no jobs report.

Well, joining me this morning to weigh in is James Knightley, chief international economist at ING New York.

James, great to have you here.

Thank you so much for.

Joining me.

Well, what a 2025 it has been so far.

Here we are on October 1st, about to head into the final quarter of this year, and we did get the government shutdown at the stroke of midnight and we also got the release of the ADP report, which did surprise to the downside.

So what does the shutdown mean for the US economy and with the lack of data, NFP potentially inflation, what could it mean for the market?

Yeah, I mean in terms of the economic impact, it tends to be quite small because yes, unfortunately for 3 million people they're not going to get paid until this gets resolved, and some people are at risk from permanent job reduction because of what we've seen from President Trump and the administration, the comments on perhaps using this as an opportunity to trim government spending more aggressively.

So that could be something of a negative, but typically when we see these events, people get their back pay paid to them and we get the rebound quite quickly.

But as you say, We are flying a little bit blind now because the key reports that we are really wanting to know about the jobs report, the inflation data from next week, retail sales, industrial production.

All of these are looking as though at risk, and that means that we're going to have to put more emphasis on third party data such as today's ADP, such as today's ISM index as well.

But also we've got to remember we've got the Federal Reserve still working, and they are going to be releasing the Beige Book next week and that historically has been a really important report because if you remember back in September last year, a downbeat Beige Book assessment was the catalyst for a 50 basis point rate cut.

So it's not as if we've got no information, it's That we haven't got the complete picture that we normally would have and James, as you mentioned, we don't have a crystal ball, but we still have recent economic data out from the United States, and that includes the latest GDP figures as well as the PC report and consumer spending is key to the US economy.

So how much do you think growth will be trimmed as we head into the final quarter?

Yeah, I think there is a nervousness that consumer confidence, as we saw yesterday.

Very subdued, very weak.

People are concerned about tariff induced price hikes squeezing their spending power.

They are concerned about a cooling jobs market potentially leading to the rising risk of job loss, and that makes people more cautious.

So yeah, we had a really good 2nd quarter GDP report last week, good trade numbers, good inventory numbers.

It looks as though there's decent momentum heading into the 3rd quarter given the data we've had so far, but there are risks, and the most notable risk is of course what's going on in the jobs market.

And of course as we head into the final quarter of 2025, I've been looking at the countdown clocks now that we are no longer counting down to a potential government shutdown since the government did shut down, so apparently 57 days.

Until Thanksgiving and 85 days until Christmas, so the clock is ticking here, but you mentioned tariffs and the month of November is expected to bring Supreme Court cases when it comes to tariffs.

So what can we actually expect here?

Yeah, so far the point I would make about this is the tariff revenue flows, tax revenue flows have actually been somewhat disappointing notionally we've got an effective tariff rate of about 18% based on the individual country, based on the individual sectors, but in terms of realized tariffs based on tax data and goods data, we've only got an effective rate of about 10%, so there's a miss.

So that explains why the inflationary impact hasn't been so strong as of yet.

But as you say, there is a vulnerability to these tariffs.

I think they still will get.

Through, I think we've just got to base it on the plan that they need the revenue. we will see the tariffs remaining in place and that still is a headwind for growth.

And you mentioned headwinds, so we will continue to monitor both headwinds as well as tailwinds.

We have to keep in mind when we're looking at equities or even commodities such as gold or silver, 2025 is turning out to be a good year so far, but of course we're going to keep an eye on the economy, and it comes down to the labor market.

We've been hearing about this low.

Higher low fire environment.

Do you expect that to continue?

Well, hopefully, you know, the worrying story is that the Beige book that we got from the Federal Reserve last time around did talk about rising firing rates, and that's why I think next week's report is going to be really critical.

So far, as you say, the data is suggesting low high low fire, but there is a sense based on today's ADP, job losses coming through, what will the feds say about the base rate?

What are they seeing?

What are they feeling?

And if they see more job losses coming through.

That's going to really keep the pressure on them to cut rates and that in itself may support commodity markets and other assets as well.

And finally, before I let you go, a quick look at the tenure.

We're at 4.1 after that ADP report.

What does that tell you?

Yeah, I think there's still a relaxed sense about this.

I mean, we've seen bond yields really fall on the expectation of Federal Reserve interest rate cuts, and that tends to be the case, and I think that will remain the story in the near term as the Fed is cutting in this early stages, but I still worry about the fiscal sustainability of the United States.

We're borrowing 6.5% of GDP when things are good.

What happens if we do see a slowdown in growth?

What happens to that borrowing requirements?

What happens to demand and supply in the bond market?

The risk we would argue is that yields could start to rise through next year.

OK, James, always wonderful talking to you.

Thank you so much for joining me and I look forward to continuing the conversation soon.

Thank you.