Despite entering the second week of a government shutdown, which has halted the release of economic data, equity markets viewed the data blackout as a reason to rally. The Dow hit a new all-time high on October 3, while the S&P 500 and NASDAQ hit new highs on October 6. Markets calmed down on Tuesday after five consecutive daily session gains as traders reassessed whether upcoming corporate earnings merit the recent artificial intelligence stock boom. 

In the absence of government labor data, the Carlyle Group attempted to fill the void with its own proxy data. Consensus estimates for the nonfarm payrolls report due last week were for a 54,000 increase. Carlyle estimates only 17,000 jobs were created in September. After the report, Anna Wong, chief U.S. economist for Bloomberg, commented, “Without any shutdown, we think the Fed wouldn't cut rates again until December. But given our expectations that the shutdown will last for several more weeks — and the uncertainty and hit to confidence it has created — we now think the Fed will follow through with a 25-basis point cut in October.” 

In the absence of government economic data, it’s worth taking a second look at the Fed’s balance sheet. We’ve alluded to macro-level funding pressures in a previous BTN newsletter and markets made it through quarter-end without incident. However, volatility has persisted since the middle of September and short-term rates remain elevated as the Treasury rebuilds its cash pile in the wake of the debt ceiling increase in June.  As a result, the gap between SOFR and the Fed Funds rate is near its widest level since the end of last year and bank reserves have fallen below $3 trillion, the lowest level since January. For context, the level of reserves considered “ample” is $2.7 trillion. We have been in an “abundant” reserves environment for the last few years, with limited exception. More than anything, the reduced funding levels could force the Fed to further slow the pace of its runoff of securities on its balance sheet. 

The FOMC meeting minutes from September reflected some participants’ concerns about how close bank reserves are to “ample” levels, with Deputy Manager Julie Remache noting if the balance sheet runoff were to continue at its current pace, the Fed’s securities portfolio would fall to around $6 trillion by March 2026, with reserves at or around $2.8 trillion at that time. This reflects a lack of concern about macro-level liquidity issues for now.

KEY INDICATORS THIS WEEK

Gold - Reached a new all-time high of $4,000/ounce this week, reflecting investors’ desire to diversify away from dollar-denominated assets as international trust in the U.S. may be starting to fade.

Next week - CPI, PPI, retail sales, Fed Beige Book, maybe?