The stock market may trend up into the corporate earnings season, as the latter is expected to be strong. Although the government shutdown prevents the release of economic data (and presumably the collection of data for subsequent reports), the stable longer-end of the Treasury market and dollar indicate little change in the overall picture -- modest growth and contained inflation. The latest ADP Estimate suggests a weak September Employment Report, but there is mixed evidence. The stock market impact should be subdued even if the eventual September Payroll print confirms ADP. The prospects of multiple Fed rate cuts would balance fears of recession.
Fed monetary policy should not be affected by the government shutdown if the latter is short in duration. Any drag stemming from it would be viewed as temporary. Monetary policy could be pushed to further rate cuts if the Administration uses the shutdown as an excuse to permanently cut financial support for infrastructure building or other forms of government spending, such as subsidy or transfer payments. It is too soon to say whether this will be the case. The cutbacks announced so far may end with the shutdown.
The September CPI, when it does get released, looks like it should be in line with the prints of the past few months. Total looks to be a little on the high side, up 0.3-0.4% m/m. Core looks to be contained at 0.2-0.3%. Some of the increase in the CPI could be viewed as temporary. This is the case for boosts from tariffs, the impact of which the Fed thinks is likely to be one-time. However, other components remain stubbornly high. In particular, Owners' Equivalent Rent remains in a 0.3-0.4% range. It needs to get down to 0.2% for the Fed to be successful in achieving its 2% inflation target. Failure to do so, along with a desire to prevent a wage-price spiral developing from tariffs, could keep Fed monetary policy in a somewhat restrictive stance even after some rate cuts.
The labor market looks soft according to private surveys, such as ADP. It put September Private Payrolls at -32k m/m. ADP did a better job than the Bureau of Labor Statistics (BLS) First-Print Payrolls in predicting the final print for a month from March through June (see table below). It missed in July, but the BLS data for that month will be revised in the September Employment Report. So, it's too soon to say which was a better predictor of the final print for August.
There is mixed evidence regarding September Payrolls. ADP suggests a weaker BLS print in September than in August. However, the Claims data suggest a speedup. If the eventual Payroll print confirms a decline like ADP's, talk of recession and 2-3 Fed rate cuts in Q425 could heat up. The prospect of substantial Fed easing should offset concern about recession, allowing the stock market to be little damaged by a weak September Employment Report. Alternatively, a soft Payroll print could be the fall-out of AI and other efficiency drives by companies. In this case, GDP may not indicate recession but strong productivity growth. The latter would help lift corporate earnings -- a positive for stocks.
There is also the possibility that higher unemployment will free up resources to meet the needs for the investments and production being re-shored. It would allow the re-shoring to proceed without putting upward pressure on inflation. This would be good for the longer-term market outlook.
Private Payrolls (m/m change, 000s)
ADP Estimate First-Print BLS Latest-Print BLS
March 155 209 120
April 62 167 133
May 37 140 69
Jun -33 74 -27
Jul 104 83 77
Aug 54 38 na
Sep -32 na na
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