
Markets and Economy Stocks pause, but rate cuts, economic growth may provide support
The market environment is challenging, but growth and earnings data remained resilient. We expect markets to resume their climb of the “wall of worry.”
While betting markets suggest this impasse could last a few weeks, we believe the economic impact should be limited.
Several European markets made new highs, which may be partly driven by increased confidence in Germany’s fiscal plans.
BOJ Governor Kazuo Ueda’s somewhat dovish message last week helped Japanese stock markets make further gains.
As expected, the US government is shut down and, true to history, the markets have largely shrugged it off. This marks the 22nd shutdown since 1976. During more than half of the previous 21 shutdowns, US stocks posted gains.1 While betting markets suggest this impasse could last a few weeks, we believe the economic impact should be limited. Non-essential government spending is a relatively small portion of US gross domestic product (GDP), and while the temporary loss of income for federal workers could dampen demand, backpay typically mitigates the longer-term effects. A more meaningful drag could emerge if the shutdown leads to permanent workforce reductions or deeper spending cuts, which have been threatened by the administration.
Elsewhere in the world, there’s growing evidence that governments will spend more than they have in previous years. This lends further support to a more inflationary environment but indicates a positive environment for stocks, in our view.
The government shutdown means that the nonfarm payroll data, due to be released last Friday, was delayed. That removes, for a time, a key piece of data that the Federal Reserve (Fed) will be relying on to help guide its October decision. Other sources of labor data, however, are available from private sources. Data from ADP and Challenger last week suggested the labor market across the US took a further step down in hiring.2
The coming month is likely to see more federal workers enter the unemployment statistics for two reasons. First, the end of September marked the final day for workers who had volunteered for deferred resignation, the program in which federal workers were paid to leave their roles. Second, President Trump has proposed further layoffs and cuts in response to the government shutdown.
Given all of this, it was a little surprising to us that the US dollar ended the week largely flat.3 More intuitively, US Treasuries rallied (yields fell),4 reflecting concerns about weaker growth rather than credit risk. It’s a reminder that Treasuries trade on macro conditions, unlike corporate bonds. Manufacturing data continues to point to a soft patch, but signs of reacceleration are emerging, even as labor demand remains subdued.
BOJ Governor Kazuo Ueda delivered a somewhat dovish message last week, which helped Japanese stock markets make further gains. The MSCI Japan Index gained more than a third since its low on April 7.5 The BOJ remains the only major central bank in a hiking cycle, but it increasingly looks as if the hikes will be a little slower than many had expected. The Japanese yen weakened a little against the US dollar last week.
Over the weekend, Japan’s Liberal Democratic Party (LDP) chose Sanae Takaichi as its new leader, which came as somewhat of a surprise. At the start of last week, Polymarket pointed to a roughly 23% probability of her winning the election.6 She’s the fifth leader in as many years, and Japan’s first female prime minister. Regardless of who won, the outcome was always expected to lead to more fiscal spending, which should, at the margin, help support further gains in Japanese stocks. Takaichi is expected to engage in fiscally expansionary policies and embrace some Abenomics policies. (Abenomics is the nickname for the economic policies set in 2012 when Prime Minister Shinzo Abe was elected for a second time. It involved increasing the nation's money supply, boosting government spending, and enacting reforms to make the Japanese economy more competitive.)
This comes against the backdrop of the BOJ reducing its holdings of Japanese exchange-traded funds (ETFs) at a glacial pace. It’ll take more than a century to reduce those holdings. More than offsetting that is the strong demand from domestic investors who have, for many years, kept a large amount of cash. They’re now deploying it into stocks.7
Several European markets made new highs last week with strong gains in France and Germany.8 These gains may be partly explained by increased confidence that policymakers will follow through on Germany’s fiscal plans. Germany approved a budget that will unleash more than 1 trillion euros of spending. Some of that money will go towards consumption instead of an investment in defense and infrastructure, which had been planned earlier this year. But the scale of the spending is greater than that spent during reunification and the Marshall Plan, as measured by a proportion of GDP. We expect this spending to have a significantly positive impact on the European economy. These government expenditures should lead to both greater capital spending by companies and consumer spending over the coming months and years. If that proves correct, that could be a strong support for further gains in European stocks.
Date |
Region |
Event |
Why it matters |
---|---|---|---|
Oct. 7 |
US |
Trade balance (Aug.) |
Reflects net exports; impacts gross domestic product (GDP) and currency valuation |
|
US |
Consumer credit (Aug.) |
Indicates consumer borrowing trends and confidence |
Oct. 8 |
US |
Federal Open Market Committee (FOMC) Meeting Minutes |
Offers insight into Fed’s policy stance and future rate decisions |
Oct. 9 |
US |
Initial jobless claims (Oct. 4) |
Weekly labor market indicator helps assess employment trends |
Oct. 10 |
US |
Consumer Price Index (CPI) and Core CPI (Sept.) |
Key inflation metrics critical for Fed interest rate decisions |
|
US |
Treasury bond auctions (10-year and 30-year) |
Reflects investor demand and influences long-term interest rates |
Oct. 11 |
US |
Producer Price Index (PPI) and Core PPI |
Measures wholesale inflation, a leading indicator for consumer prices |
|
US |
University of Michigan Consumer Sentiment (Prelim Oct.) |
Gauges consumer confidence and inflation expectations |
|
UK |
GDP month-over-month (Sept.) |
Monthly growth indicator reflects short-term economic momentum |
|
Eurozone |
ECOFIN meetings |
Key discussions on European Union (EU) fiscal and economic policy coordination |
|
Japan |
Household spending (Aug.) |
Indicates consumer behavior and domestic demand trends |
The market environment is challenging, but growth and earnings data remained resilient. We expect markets to resume their climb of the “wall of worry.”
How do stocks respond to rate cuts? Get my answer plus insight on corporate productivity, surging gold prices, and the US dollar.
With the Federal Reserve cutting rates and recent US economic data showing resiliency, the environment may be conducive to an end-of-year rally.
Important information
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Image: Jeremy Poland / Getty
Some references are US-specific and may not apply to Canada.
All figures are in US dollars unless otherwise stated.
All investing involves risk, including the risk of loss.
Past performance does not guarantee future results.
Investments cannot be made directly in an index.
This does not constitute a recommendation of any investment strategy or product for a particular investor. Investors should consult a financial professional before making any investment decisions.
Fixed income investments are subject to credit risk of the issuer and the effects of changing interest rates. Interest rate risk refers to the risk that bond prices generally fall as interest rates rise and vice versa. An issuer may be unable to meet interest and/or principal payments, thereby causing its instruments to decrease in value and lowering the issuer’s credit rating.
The CAC 40 is the French stock market index that tracks the 40 largest French stocks based on the Euronext Paris market capitalization.
The Consumer Price Index (CPI) measures the change in consumer prices and is a commonly cited measure of inflation.
Credit risk is the risk of default on a debt that may arise from a borrower or issuer of bonds failing to make required payments.
The Deutscher Aktienindex ( DAX) tracks the performance of the 40 largest and most liquid companies traded on the Frankfurt Stock Exchange and is widely viewed as a barometer for the German economy's health.
Dovish refers to an economic outlook that generally supports low interest rates as a means of encouraging growth within the economy.
Monetary easing refers to the lowering of interest rates and deposit ratios by central banks.
The Federal Open Market Committee (FOMC) is a committee of the Federal Reserve Board that meets regularly to set monetary policy, including the interest rates that are charged to banks.
Gross domestic product (GDP) is a broad indicator of a region’s economic activity, measuring the monetary value of all the finished goods and services produced in that region over a specified time period.
Inflation is the rate at which the general price level for goods and services is increasing.
The Marshall Plan was a US-sponsored program designed to rehabilitate the economies of 17 Western and Southern European countries in order to create stable conditions in which democratic institutions could survive in the aftermath of World War II. It was formally called the European Recovery Program.
The MSCI Japan Index measures the performance of the large- and mid-cap segments of the Japanese market.
The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.
The risks of investing in securities of foreign issuers can include fluctuations in foreign currencies, political and economic instability, and foreign taxation issues.
The S&P 500® Index is an unmanaged index considered representative of the US stock market.
In general, stock values fluctuate, sometimes widely, in response to activities specific to the company as well as general market, economic, and political conditions.
The opinions referenced above are those of the author as of Oct. 6, 2025. These comments should not be construed as recommendations, but as an illustration of broader themes. Forward-looking statements are not guarantees of future results. They involve risks, uncertainties, and assumptions; there can be no assurance that actual results will not differ materially from expectations.
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