Market and Economic Overview: Impact of US Government Shutdown and Central Bank Expectations

Conclusion of the Longest US Government Shutdown

Last week marked the end of the longest government shutdown in the history of the United States. Although it caused significant disruptions and unfavorable perceptions, its lasting economic impact is expected to be limited, despite potential drag on fourth-quarter economic activity.

Shifts in Central Bank Rate Expectations

Federal Reserve Outlook

Following remarks from 14 Fed officials over recent days, market-implied probabilities for a Federal Reserve rate cut next month have declined notably—from approximately 66% to just over 40%.

Bank of England Prospects

Conversely, the Bank of England is increasingly expected to reduce rates at its December 18 meeting, driven by a series of disappointing economic data releases.

Reserve Bank of Australia and Bank of Japan

After a stronger-than-anticipated employment report, markets show greater confidence that the Reserve Bank of Australia’s easing cycle has concluded. In Japan, the swaps market has lowered the odds of a Bank of Japan rate hike next month for the sixth consecutive session, with implied chances falling from near 50% to about 33%.

Resume of US Economic Data Releases

With the reopening of the US government, key economic reports are set to return, including the September employment report scheduled for November 20. Though headline volatility is possible, the ADP report has already indicated a contraction of roughly 29,000 private sector jobs. For context, through August, the Bureau of Labor Statistics had estimated an average monthly gain of 74,000 private sector jobs, closely aligned with ADP’s 73,000 estimate.

Currency and Bond Market Developments

British Pound and Gilts

Sterling remained largely unchanged last week despite weak employment and growth statistics. However, UK government bonds (Gilts) experienced a sharp sell-off following an announced fiscal policy shift allowing inflation to push more households into higher tax brackets, leading to a near 14 basis point increase in yields—the largest single-week jump in four months.

Japanese Government Bonds and Yen

The yen weakened, and the 10-year Japanese Government Bond yield rose for the fourth straight week, reaching 1.71%, its highest level since 2008. A recent auction was met with subdued demand, contributing to this upward pressure.

Chinese Monetary Policy

Despite underwhelming economic data from China, the People’s Bank of China set the dollar reference rate to its lowest point this year before the weekend, though no immediate policy response appears forthcoming.

US Dollar Index Dynamics

The Dollar Index declined to around 96.20 on September 17, marking its lowest since February 2022, coinciding with the first Fed rate cut of the year. It then rallied to 100.35 in early November, where gains stalled near the 200-day moving average on November 5 and subsequently declined to 99.00 last week. Correlations between Dollar Index movements and yields on 2- and 10-year US Treasuries have diminished over the past 30 days, currently below 0.45. Notably, the correlation with the S&P 500 has shifted—from negative between late June and early October to approximately 0.30, the highest level in five months. The Dollar Index and gold prices remain inversely correlated, though this relationship has weakened from -0.82 in May to around -0.15 recently.

Upcoming US Economic Data

Despite the government shutdown, a range of economic indicators will continue to provide insights into fourth-quarter dynamics. The Empire and Philadelphia Fed manufacturing surveys are particularly noteworthy, with prevailing expectations of a meaningful slowdown partly attributable to government disruptions. Additionally, the minutes from last month’s FOMC meeting may highlight the broad spectrum of opinions among policymakers.

Weekly initial jobless claims data will remain under scrutiny, complemented by aggregated analytics and the ADP’s weekly private sector employment estimates. Existing home sales figures will also be released, with emerging discussions about a potential sustained increase in average existing home prices exceeding those of new homes.

Price Action: Dollar Index

The Dollar Index found support just above 99.00 in the last two sessions. Key retracement levels from the rally commencing at the year’s multi-year low near 96.20 include the 38.2% retracement close to 98.80 and the 50% retracement near 98.30. The five-day moving average recently crossed below the 20-day moving average for the first time since late September, accompanied by weakening momentum indicators. Resistance is identified around the 99.50-99.60 range.

Eurozone Economic and Market Insights

Euro’s Reduced Sensitivity to US Yields

The euro’s sensitivity to fluctuations in the US two-year Treasury yield has declined, with the 30-day inverse correlation easing from nearly -0.80 in early September (its strongest since late 2016) to around -0.40, levels last observed in July. The correlation between Germany’s two-year yield changes and the euro has shifted from positive last November through early May to negative since then, currently near -0.10 after reaching -0.53 in early October.

The euro remains inversely correlated with the differential between US and German two-year yields. This correlation fluctuated over the past year, peaking at approximately -0.80 at the end of last year, falling to below -0.10 in early June, then rebounding to near -0.77 mid-year, and stabilizing around -0.40 to -0.45 recently.

Key Eurozone Data Releases

Attention will center on the preliminary November Purchasing Managers’ Index (PMI). Manufacturing PMI had been increasing monthly throughout the year until September but declined to 50 in October, the first time hitting this critical expansion-contraction threshold since Russia’s invasion of Ukraine. The composite PMI has improved steadily over the past five months, recording a two-year high of 52.5 in October.

Negotiated wage figures for the third quarter will be published later in the week. Despite some wage moderation, this is unlikely to be sufficient to bring about a reconsideration of further rate cuts at this time. Current market pricing assigns roughly a 20% chance of any rate hike through the end of the first quarter of 2026.

Euro Price Movement

The euro approached the monthly high near $1.1655 on Thursday and held just below this level into the weekend, testing the 38.2% retracement of the downtrend from the year’s multi-year high near $1.1920 on September 17. The 50% retracement is positioned just below $1.1700. The five-day moving average recently crossed above the 20-day moving average for the first time since late September, accompanied by improving momentum indicators. Support between $1.1585 and $1.1600 remains critical; a breakdown in this area would be viewed negatively.

Chinese Yuan and Market Correlations

The 30-day correlation between the dollar’s movements against the offshore yuan and the Dollar Index peaked near 0.80 in early August this year. Since then, it has gradually declined and recently stabilized in the 0.30 to 0.35 range. The correlation between the dollar (against the offshore yuan) and gold has mostly been inverse. After a brief period of positive correlation in February, this relationship shifted to nearly -0.70 by April and has remained mostly negative until late October, although it is now slightly positive.

Summary

The conclusion of the US government shutdown signals a return to more regular economic reporting. Meanwhile, shifting expectations for major central banks reflect evolving assessments of global economic momentum amid influential data releases and market responses to fiscal policy actions. Currency and bond markets continue to respond dynamically to these developments, emphasizing the importance of monitoring both macroeconomic signals and policy signals in the coming weeks.