Dollar rebounds, Wall Street at records, yen awaits election

Attention turns to Fed and private data amid gov shutdown

The US dollar rebounded against most of its major peers yesterday, but today it is trading indecisively as with the US employment report being suspended due to the government shutdown, traders may be looking for a fresh catalyst.

The shutdown sparked uncertainty as key economic data will not be released until the government reopens, but it seems that investors are trying to figure out how the US economy may have been performing by paying extra attention to the Federal Reserve and private economic releases. Therefore, the chaos may not be as severe as initially feared.

Yesterday, a Chicago Fed report estimated a 4.3% unemployment rate for the month of September, which is the same as in August. Evidence that a rapid increase in the jobless rate has not yet materialized may have been a reason why the dollar recovered some ground, but the details of the report pointed to ongoing softness in the labor market.

That’s why, according to Fed fund futures, investors’ bets about how the Fed may need to conduct monetary policy in the foreseeable future have not changed. Two quarter-point reductions by the end of the year remain almost fully priced in, while another three are nearly fully priced in for 2026.

Today, in the absence of the NFP report, investors are likely to lock their gaze on the ISM non-manufacturing PMI for September. The manufacturing sector in the US only accounts for around 10% of GDP. Therefore, today’s report is about the remaining 90% and may provide sufficient evidence about the performance of the economy. The prices charged and employment indices may be closely scrutinized for more clues about how inflation and the labor market fared.

Stocks at records, but prolonged standoff could pose risks

On Wall Street, all three of its major indices extended their gains, marking record closing highs mainly due to a boost from the technology sector. As already mentioned, investors have begun looking for information from alternative sources, and it seems that they may have found one more labor-market report that allows them to maintain their risk exposure.

A private report from Challenger, Gray & Christmas said that US employers announced fewer layoffs in September but that hiring plans so far this year were at the lowest since 2009. Combined with the 3.8% GDP estimate of the Atlanta Fed for Q3, investors have little reason to panic about deep economic wounds, even with the government closed.

After all, history has shown that investors do not worry about whether the government will shut down but for how long. Therefore, as time passes without Republicans and Democrats leaning towards an agreement and, should the delay translate into poorer economic data, investors may become more nervous, thereby enabling a corrective retreat on Wall Street.

US President Trump has already said that federal workers could be fired and projects cut if a government shutdown continues, which is a sign that a prolonged standoff could have severe consequences. Given the polarization of the two parties this time around, a shutdown lasting more than two weeks is no longer far-fetched.

Japan’s LDP holds elections to determine new PM

In Japan, the yen slipped, trimming its sharpest weekly gain in more than four months as BoJ Governor Ueda appeared more cautious than expected, weighing on expectations of a 25bps hike at the Bank’s upcoming meeting. What’s more, yen traders may be sitting on the edge of their seats in anticipation of the Liberal Democratic Party election on Saturday that will determine Japan’s next prime minister.

Among the candidates is an ultra-dovish party veteran, named Sanae Takaichi, whose election may prompt investors to further trim their rate hike bets, and thereby push the yen even lower. Currently, the probability of a quarter-point hike on October 30 rests at around 35%.