Key Takeaways
- It appears the US government is poised to reopen, with a vote in Congress over the weekend the first step towards this happening.
- This would finally give the US Federal Reserve some clarity in terms of economic data and direction of travel, the absence of which has led to a slowdown in policymaking.
- The economic impact of the shutdown may have been limited, but problems around significant flight delays and the potential for the non-payment of food stamps have brought things to a head.
- There are other challenges still to come, however, with the Supreme Court looking at the legality of the imposition of tariffs by President Trump.
- Turning to interest rates, there are expectations in both the US and the UK that further rate cuts will arrive before the end of the year, given disinflationary forces and a softening employment market.
- Also in the UK, it would appear the ground is being prepared for tax rises to be announced in the upcoming autumn budget.
Welcome to this week’s market perspectives. The US Federal Reserve (Fed) Chair, Jay Powell, recently said, ‘What do you do when you drive through fog? You slow down.’ That reflects the lack of certainty the Fed has had around economic data, but now it feels like the mist is starting to clear a little. That is because it appears we are on the brink of the US government shutdown coming to an end. This means two things: firstly, not too much economic harm; and secondly, we get the economic data back. There was a vote in Congress over the weekend, which will be followed by another vote over the coming days before presidential approval is needed. But hopefully by the back end of this week a reopened government should once again be releasing economic data.
So it is possible that we will get important US inflation data on Thursday, along with (at some point) the delayed employment reports from September and October. Financial markets will take some comfort from the reopening. From an economic harm point of view there were two key factors: firstly, we saw significant flight delays last week because air traffic controllers are not working; and secondly, the risk of non-payment of food stamps to 42 million Americans. It seems a need to resolve these two factors brought politicians back to the table, and the reopening will help keep the economy on an even keel.
There is still plenty of ‘fog’ elsewhere, however. There remains uncertainty over the legality of US tariffs, with the argument reaching the Supreme Court last week. The views expressed by judges suggest a high level of scepticism over exactly how legal it was for President Trump to impose tariffs using legislation designed for a ‘national emergency’. Although it would appear the lower court rulings against tariffs will be upheld, that doesn’t mean an end to the story because there are plenty of other avenues for the US to impose tariffs.
Turning to interest rates, the outlook is still uncertain. In the UK we saw a dovish Bank of England meeting last week and future rate cuts are likely to occur. I think the Bank will have more confidence once they see what happens in the upcoming UK budget in terms of the policy and growth outlook and how far they can go in terms of cutting rates. UK inflation has levelled off some way above target, but we are now seeing disinflationary forces come to the fore. This should see inflation roll over and I think that if we get that lower inflation data over the coming weeks, it will give the Bank confidence to cut rates in December.
At the Fed, Powell said a rate cut in December ‘was not a foregone conclusion’, but certainly market expectations are that the Fed will be able to cut by 25 basis points next month. The employment market appears to be softening and the impact on inflation from tariffs has been lower than feared. The Fed itself will change soon, with Powell’s successor set to be announced before the end of the year. Longer-term monetary policy looks supportive given the Fed has signalled an end to quantitative tightening, and their balance sheet will likely begin to expand from early next year, which will provide liquidity and alleviate any potential stresses in money markets.
Returning to the UK, there remains huge uncertainty around the upcoming budget, but Chancellor Rachel Reeves gave a ‘scene-setting’ speech last week and reading between the lines it seems there is some pain coming our way. The chancellor said ‘we all have to contribute’ and talked up ‘more resilient public finances’. Everything points to tax hikes coming later this month, and at this point that is no surprise
It does appear that over the coming month or so we will get a lot more certainty over the issues that are weighing on markets in the short term. The market backdrop is pretty good thanks to a positive earnings season not only in the US, but in Europe and emerging markets as well. We may have seen equity markets a little softer in recent days, but with the mists potentially clearing there is scope to move forwards with more certainty very soon.
