Sonali Basak on U.S. Government Shutdown & Impact on Markets

Economic Outlook - The government shutdown is expected to create market volatility, but historically, markets have quickly recouped losses following such events [2][4] - Investors are closely monitoring private data, particularly the ADP report, due to concerns about the timely release of the non-farm payrolls report [3][5] - The ADP data showed a negative reading with fewer jobs reported, especially in smaller and mid-sized businesses, indicating a weak labor market [7][5] Federal Reserve Actions - The upcoming Fed meetings in October and December are considered "live," with expectations for a potential rate cut in October due to ongoing labor market weakness [8][12] - Core PCE inflation is at 2.9%, which is below the Fed's projection of 3.1%, suggesting room for rate cuts [11][12] - The market is currently pricing in two rate cuts by the end of the year, although the actual number may vary depending on economic conditions [12] Market Performance - The financial sector is anticipated to kick off the earnings season positively, supported by a steep yield curve and loan growth [18][19] - Concerns remain about credit quality, particularly for smaller banks exposed to lower-income consumers amid labor market uncertainties [20][21] - The S&P has reached new highs, but there are questions about whether this upward momentum can be sustained given high expectations for earnings [21][22] Interest Rates and Yields - Recent declines in yields are seen as encouraging, with potential positive implications for the mortgage and housing markets [24][26] - The 10-year yield is currently around 4.1%, and if it rises above 4.5%, it could negatively impact the equity market [25][27]