Key Takeaways
- Minimal economic fallout expected from U.S. shutdown
- Private-sector jobs decline in September
- Eurozone inflation edges up
On this week’s edition of Market Week in Review, Pierre Dongo-Soria, principal investment strategist for EMEA, assessed the potential impacts of the government shutdown in the United States as well as the health of the country’s labor market. He also explained how the latest European inflation numbers could affect upcoming monetary policy decisions.
Shrugging It Off
Dongo-Soria started by noting the U.S. government ground to a halt Wednesday after lawmakers failed to reach an agreement on funding. As a result, many federal employees have been furloughed while some public services have been disrupted.
The U.S. stock market, however, has hardly blinked, with the S&P 500 hitting a new record Wednesday afternoon. Why? A look to history shows government shutdowns typically only have minor economic impacts and often last less than two weeks, Dongo-Soria said.
However, there are still some risks to monitor, he noted. “There’s a possibility some agencies could turn temporary furloughs into permanent job cuts, which could weaken the labor market more than anticipated,” Dongo-Soria explained. In addition, the shutdown means the release of some key data indicators—including the September jobs report—will be delayed. This makes it harder for U.S. Federal Reserve officials to get a full snapshot of the labor market ahead of their meeting later this month, he said.
Ultimately, though, the government shutdown is more about political noise than any kind of market signal—and there’s no reason for investors to be alarmed now, Dongo-Soria stated. “Although we are in October, it’s too early to get spooked,” he quipped.
Hiring Slump
Focusing more on the U.S. labor market, Dongo-Soria said ADP’s report on private-sector employment was released this week. The report showed private companies cut 32,000 jobs during September, marking the biggest decline in more than two years.
“This is a large negative number that fell significantly short of expectations for a positive gain,” Dongo-Soria remarked. While some of the weakness can be attributed to a benchmark update, the numbers clearly point to a slowdown in hiring, he said. On the flip side, layoffs remain low, with the latest JOLTS (Job Openings and Labor Turnover) survey putting the layoff rate at just over 1%—a very low number by historical standards, Dongo-Soria noted.
Together, these reports point to a quiet labor market marked by sluggish hiring but a low turnover rate, he said.
Pressure Rising
Dongo-Soria finished by reviewing the latest inflation numbers from the eurozone. He said the region’s inflation rate rose from 2% in August to 2.2% in September, while core inflation held steady at 2.3%. Services inflation, meanwhile, edged up to 3.2%—a move that’s likely to grab the European Central Bank’s (ECB) attention, Dongo-Soria said.
“ECB officials pay particular attention to this metric, as it’s often a leading indicator of domestic price pressures,” he explained.
Dongo-Soria said at the country level, the overall inflation numbers were more mixed, with inflation rising in Germany and Spain while softening in France.
“The picture in Europe isn’t uniform, but the September numbers suggest inflation is edging up at the margins, with services inflation particularly persistent,” he stated. This means the ECB will likely keep rates unchanged at its next meeting, Dongo-Soria said, noting markets also expect the bank to continue holding off on rate cuts.