Making sense of macroeconomic and market moves and what the shifting landscape means for investors.
This week, legislation in the US finally ended the longest-ever government shutdown – at least until January. We look at the potential impacts from the expected flood of pent-up economic data. In addition, with debt still a concern in many major economies, will we see volatility in bond markets?
Top stories
- President Trump signed into law a new spending package, ending the 43-day government shutdown – the longest on record. The legislation keeps the government funded until the end of January 2026, ie just 78 days from now. The legislation included provisions to reinstate those federal workers fired during the shutdown. Resolution came after transport officials warned that air travel in the US would slow to a “trickle” over the upcoming Thanksgiving holiday on 27 November, with airlines forced to cancel or delay more flights as a result of understaffing in air traffic control towers. The spending bill passed through the Senate with support from eight Democrats, despite the issue of extensions of health insurance remaining unresolved. The outcome confounds expectations that the Democrats would be emboldened by recent election wins in New Jersey, Virginia and New York. It also highlights divisions in the party given the bill passed without a firm commitment to extend healthcare funding, which was the reason stated for initially holding out.
- Switzerland is “inching closer” to a deal to cut tariffs on its exports to the USA to about 15%. The Swiss government was shocked in the summer when it learned it would face levies of 39%, the highest of any developed country. Switzerland was expecting a tariff of around 15%, in line with that imposed on the European Union. Trump said earlier this week that he had not yet settled on the tariff rate he would impose, but confirmed they were “working on a deal to get the tariffs a little lower … We hit Switzerland very hard, [but] we want Switzerland to remain successful”. Exports make up 70% of Swiss GDP, with the US the top export market.
By the numbers
- 5% – the UK unemployment rate in September, up from 4.8% and higher than expected. Wage growth also slowed in the three months to September, boosting expectations that the Bank of England will cut interest rates next month. Unemployment is now at the highest level for a decade (excluding Covid). Revised data showed payroll employment has fallen 180,000 since the chancellor, Rachel Reeves, announced higher taxes on employers in the 2025 budget. Youth unemployment is now at a 10-year high (Covid-excepted) at 12.7%.
- 0.1% – third quarter economic growth in the UK – below expectations of 0.2% and the weakest since the end of 2023 when the economy was in recession. Services grew by 0.2% and construction by 0.1%, while manufacturing fell by 0.5%. September’s GDP contracted by 0.1%, impacted by a 28% decline in vehicle manufacturing thanks to the cyber-attack-related shutdown at Jaguar Land Rover.
- 0.2% – inflation in China in October compared to a year ago, which was ahead of expectations of a decline of -0.1%, following a -0.3% fall in September. Chinese CPI has been negative in six of the past nine months; time will tell if this is a “blip” or a sign that deflationary pressures in China are easing.
- $2,000 – the amount Trump has floated giving to individual Americans as a dividend, funded from tariff revenues. Trump said that people deserved a rebate after “four years of Biden policies that have devastated families’ savings and livelihoods”. US Treasury Secretary Scott Bessent suggested the payments could be in various forms, and would be limited to households with incomes below $100,000. This would mean 150 million adults would be entitled to a payment, totalling close to $300 billion – over $100 billion more than has so far been collected from tariffs this year. With 2026 seeing US midterm elections, and the President’s approval rating having dropped to 42.8%, some sort of disbursement will not be a huge surprise. While it might go down well with US consumers, bond markets may take a different view.
Market movers
With the reopening of the US government, financial markets could see a wall of delayed US economic data released (although the White House has cast some doubt as to whether certain economic reports will ever see the light of day). The data, particularly around employment and inflation, has the potential to shift expectations on the shape of the US economy and what that means for interest rates. We should be mindful that even before the shutdown the quality of the data has been poor, and this will only be exacerbated by the shutdown. For example, response rates for the crucial monthly Non-Farms Payroll report were only around 50% in 2024, having been around 75% in 2010. The inability to collect data means more modelling and assumptions have to be made, with the potential for revisions more likely. As such initial market reactions may not be correct. So, take data releases with a pinch of salt, even if we see dramatic headlines as the pent-up data is published.
The investment lens
Are the stars aligning for more volatility in bond markets?
In the US, the lack of economic data has seen investors flying blind as to the state of the US economy. Have they been too optimistic on how swiftly the Federal Reserve will cut interest rates? A raft of economic data should now be released and could disrupt recent calm in bond markets. Likewise, if the Supreme Court rules tariffs to be illegal, the revenues apparently earmarked for balancing the books may dry up, and the messy process of refunding tariffs already paid may begin. Republicans will be inclined to run the US economy hot to ensure a feel-good factor going into the mid-terms, with consequences for both inflation and the fiscal outlook.
In the UK, the government is working hard to manage expectations around tax rises in the upcoming budget. Measures set to be announced should confirm the downward trajectory of the deficit, albeit leaving targets around economic growth looking well out of reach.
So, given the situation in the US, the UK and France – who, although it has not lost a prime minister for several weeks, is yet to agree a budget – it is quite plausible that bonds will again see a bout of volatility should the narrative around debt be called into question.
