US Government Partial Shutdown and Market Overview

US Federal Government Status

The US federal government is currently experiencing a partial shutdown due to the failure to approve appropriations necessary to begin the new fiscal year. The President has issued threats to permanently terminate, in addition to furloughing, a significant number of “non-essential” federal employees. As of yesterday, approximately 150,000 federal workers have accepted buyout offers from the government. The longest federal shutdown on record occurred during President Trump’s first term, lasting 35 days. There are concerns that the current shutdown may also extend for a prolonged period.

Currency and Market Movements

US Dollar

The US dollar exhibits a narrowly mixed performance, stabilizing during late European morning trading after an initial sell-off. It shows strengthening against most emerging market currencies. The Dollar Index has experienced a three-day retracement, meeting the 38.2% Fibonacci retracement level of the rally since the latest Federal Open Market Committee (FOMC) meeting at 97.70. The 50% retracement (~97.40) has been approached today, with the 61.8% retracement acting as further support just below 97.15. Resistance is likely in the 97.70-97.80 area.

Japanese Yen and Asia-Pacific Equities

The Japanese yen has appreciated, emerging as the strongest among G10 currencies in recent days, exerting downward pressure on Japanese equities. Meanwhile, other Asia-Pacific markets are generally higher, though China and Hong Kong remain closed for the national holiday. Australia stands out as an exception, trading lower today.

European and US Equities

Europe’s Stoxx 600 index has advanced for the fourth consecutive session, equaling the longest streak since May. In contrast, US index futures are down approximately 0.50%-0.60%, even though historical data suggest that government shutdowns tend not to exert negative effects on US equities.

Bond Yields

European benchmark 10-year government bond yields have risen marginally by 1 to 2 basis points. The US 10-year Treasury yield remains nearly unchanged, just below 4.15%.

Commodities

Gold has surged to a new record high, exceeding $3,895, up from around $3,760 last week. November West Texas Intermediate (WTI) crude oil continues its pullback, trading below $62, approaching last month’s low near $61. Previously, it briefly surpassed $66 before the recent weekend.

Key Economic Indicators and Private Sector Data

With significant parts of the federal government closed, attention turns to private sector data releases.

Critical Reports

– **Mortgage Bankers Association**: Weekly mortgage application data remain relevant.
– **Manufacturing PMI and ISM**: Final September manufacturing Purchasing Managers’ Index (PMI) and Institute for Supply Management (ISM) data are from non-governmental sources.
– **Auto Sales**: Expectations suggest a slight increase; median forecasts from Bloomberg anticipate a 16.2 million annualized pace. Year-to-date through August averages are approximately 16.26 million, up from 15.52 million in the first eight months of 2023.
– **ADP Private Sector Jobs Estimate**: An important gauge, having historically outperformed economists in forecasting the Bureau of Labor Statistics (BLS) employment figures. From January to August this year, ADP estimates an average monthly private sector job addition of 80.4k, compared to the revised BLS estimate of approximately 74k. In 2023, the BLS estimated an average monthly addition of 130k private sector jobs, while ADP suggested slightly over 144k.

Currency-Specific Developments

Euro (EUR)

The euro has gained to a five-day high near $1.1780. The 50% retracement level of losses from the post-FOMC high (~$1.1920) is just above current levels, with the 61.8% retracement at approximately $1.1815. Immediate support is established in the $1.1730–$1.1750 range.

Following September Consumer Price Index (CPI) releases from the eurozone’s four largest economies, inflation data were generally well-received, with aggregate year-over-year CPI rising 2.2% and core inflation steady at 2.3%. The final manufacturing PMI reported 49.8, slightly above the preliminary reading of 49.5, confirming a contraction that resumed after a brief expansion observed in August.

Chinese Yuan (CNY)

Chinese mainland markets are closed for an extended national holiday, reopening on October 9. While the prevailing narrative portrays China as reliant on US markets and imports, recent developments suggest otherwise. Despite reduced exports to the US, China’s trade surplus has increased, supported by alternative sources of commodities such as soybeans from Brazil and Argentina, and beef from Australia. The use of Nvidia’s AI chip (H20) has been discouraged over security concerns. Rare earth elements and related processed goods remain key import dependencies for high-income countries, including the US.

Reports indicate that Beijing has requested the US clarify its position opposing Taiwan independence, a stronger stance than current US administration rhetoric. Against this backdrop, the offshore yuan (CNH) is expected to remain within a tight trading range between 7.11 and 7.15, with today’s range between roughly 7.1230 and 7.1400.

Japanese Yen (JPY)

The US dollar has weakened against the yen for a fourth straight session, slipping below the 61.8% retracement level of its September post-FOMC gains, with a low near JPY146.90—the lowest since September 18. The Bank of Japan released its Tankan survey, which remained largely unchanged from Q2, although the large industry capital expenditure forecast for the fiscal year was raised to 12.5% from 11.5%.

The final September manufacturing PMI was revised slightly upwards to 48.5 from 48.4 in the preliminary reading, marking the lowest level since March 2024 and representing the largest monthly decline since November 2022. Market expectations for a policy rate hike at this month’s Bank of Japan meeting have increased, with implied odds rising to just under 63%.

British Pound (GBP)

Sterling is up for the fourth consecutive session, reaching $1.3480, aligning with the 38.2% retracement of losses since the post-FOMC period. Resistance resides near the 20-day moving average around $1.3500, with the 50% retracement near $1.3525.

The UK Nationwide house price index surprised on the upside, climbing to 2.2% year-on-year in September from 2.1%, contrary to expectations of a decline below 2%. Meanwhile, the confirmed September manufacturing PMI stood at 46.2—the weakest since March. The index has consistently remained below the 50 boom/bust threshold since September 2023.

Despite concerns about stagflation in the US, the Federal Reserve has been easing policy, whereas the UK is experiencing weaker growth and higher inflation, prompting the Bank of England to signal a pause in rate cuts. Market pricing does not fully incorporate another rate reduction until mid-2026.

Canadian Dollar (CAD)

The US dollar has declined against the Canadian dollar for three consecutive sessions, briefly dipping below CAD1.3900 yesterday but remaining slightly above that level today. Resistance is near CAD1.3935. The 38.2% retracement of gains following the September 17 FOMC and Bank of Canada rate decisions lies near CAD1.3870.

Notably, the Canadian dollar tends to underperform in a soft US dollar environment. Its September decline of approximately 1.2% was only surpassed by the New Zealand dollar’s 1.5%. Year-to-date, the Canadian dollar’s 3.4% appreciation is the smallest among G10 currencies.

Canada’s September manufacturing PMI will be published today, though it is typically not a major market driver. After an increase over the previous two months, the index now stands at 48.3, its highest since January, yet still below the 50 neutral level.

Australian Dollar (AUD)

A hawkish hold by the Reserve Bank of Australia combined with a generally weaker US dollar propelled the Australian dollar close to $0.6630 yesterday. So far today, the AUD has reached $0.6620. The 61.8% retracement level since the Fed’s recent rate cut is slightly higher, near $0.6635, with the next technical resistance around $0.6665. The yearly high recorded on September 17 was slightly above $0.6705.

Australia’s September manufacturing PMI eased to 51.4 from 51.6 in the initial estimate and down from 53.0 in August, remaining one of the few G10 PMIs above the 50 expansion benchmark. Tomorrow, data releases will include August goods trade and household spending. The goods trade surplus this year has averaged A$4.67 billion monthly, about 25% smaller than in the first seven months of 2023. Household spending is expected to rise by 0.3% in August, slightly below the year’s average to date.

Mexican Peso (MXN)

The US dollar traded narrowly against the Mexican peso yesterday, remaining within Monday’s range (~MXN18.2955–18.4000). It has recently declined toward MXN18.2655, nearing the year’s low of approximately MXN18.20 set on September 17.

Today’s Mexican economic calendar includes the manufacturing PMI, which rose above 50 in August (50.2) for the first time since June 2023. The Mexico Institute for Economy and Finance’s (IMEF) manufacturing and non-manufacturing indices remained below 50 in August.

Remittances, a vital source of hard currency for Mexico, have decreased this year. Through August, workers—mostly in the US—have sent approximately $35.1 billion, down from $37.1 billion in the same period of 2023. The January to July trade surplus was about $1.41 billion.

Disclaimer

This report is intended for informational purposes and does not constitute investment advice.