The shutdown didn’t just stop paychecks—it stopped the numbers that move markets.
KEY TAKEAWAYS
The government shutdown halted critical economic data releases
BLS and BEA data blackouts create uncertainty for markets and the Fed
Private indicators like ADP Jobs, PMIs, and sentiment surveys are now the only signals
Markets are cheering bad news, betting on faster Fed cuts–and there is enough of that to keep markets on the climb
Fed speech trends suggest growing dovish sentiment despite mixed data
MY HOT TAKES
The shutdown has made the U.S. economy’s dashboard go dark
Markets are betting on fantasy because the facts are missing
Powell’s “maybe” is code for “don’t count on it”
Private data has never mattered more–but it’s not gospel
The real insight lies in language, not numbers–when they are absent
You can quote me: “We are quite literally in a blackout period on two of the most important pieces of data that will affect the Fed’s policy decisions this month and beyond.”
Word up. Last Friday was the big day that never was. It was supposed to be a big day because it was the first Friday of the month. You know, the one reserved for the monthly jobs situation release from the beleaguered Bureau of Labor Statistics (BLS). BLS operates in a bit of a mysterious fog and that has lots of people up in arms. Now, I am not saying that there is any hanky panky going on over there, because no one really knows. However, let’s just assume that there is as much silent string pulling as in any government agency under any given administration. In truth, that fog looks foggier than it should to most Americans, investors, and politicians, because BLS relies on complicated statistical methods to come up with numbers that… well, have a really significant impact on our portfolios.
I posted some in-depth descriptions of how BLS comes up with its numbers last month, and while they make perfect sense to me as a person who has taken what seems like thousands of hours of PhD level statistics classes and have relied on statistics, daily, for the better part of my career, I can understand how most normies would find its methods suspect.
At the moment, when the agency's output is most critical–it is responsible for jobs and CPI data–many are questioning the validity of its releases. The current government shutdown has, perhaps, made that fog a bit denser yet. We are quite literally in a blackout period on two of the most important pieces of data that will affect the Fed’s policy decisions this month and beyond. Traders are now left to their own devices to guess at what the Fed might do next.
The current feeling is that the economy may be on shaky legs as evidenced by a pretty steady stream of worsening labor market numbers. On the economy, however, the most recent numbers suggest that the economy is strong. A little over a week ago, the Bureau of Economic Analysis (BEA) revised its final print of Q2 GDP to 3.8%, far better than expected. That is great news… for what happened months ago in Q2. We are currently in Q4 for the record. As we just ended Q3, we will have to wait until the end of this month to get BEA’s first estimate of it. But guess what, if the shutdown is still going on when that release is due, it's more darkness for traders to contend with. Come to think of it, if the shutdown lasts that long, we will miss next week’s CPI/PPI releases, as well as Retail Sales (US Census Bureau). Will Q3 GDP show continued growth from Q2’s strong showing? Will inflation remain slightly but not dangerously elevated? Will retail sales and consumption remain strong? Will weekly jobless claims continue their slow burn upward? Neither we nor the Fed will know, if the government remains shut down over an extended period of time.
That leaves us with privately funded economic releases to extrapolate where the “official” policy-driving numbers might be. Those include sentiment indicators, purchasing manager indexes (PMIs), and private payrolls data. On the latter, last week’s ADP jobs data threw us a curveball showing not only weak payrolls growth, but a decline for 2 straight months. While we know that the official Nonfarm Payrolls number is not directly correlated to the ADP number, we do know that they trend together. For example, just because ADP reflected a loss, it doesn’t mean that the BLS release would show a loss, but the continued downward trend is likely to show up.
We are now in a regime where traders are treating bad economic data as good because it increases the chances of more and earlier Fed rate cuts. That bad news has somewhat fueled the rate-cut thirsty equity markets recently. More bad news has been coming from consumer sentiment indicators (Conference Board and University of Michigan) which show decaying confidence. While those don’t always translate into diminished consumption, their downward trend is clear, and it certainly can’t be positive. You know my famous line “confident consumers consume!” In a similar vein, purchasing managers indexes / PMIs (S&P Global and Institute for Supply Chain Management / ISM), serve as an indicator of corporate sentiment, and those numbers, too, show decaying confidence. You know what I say there: “confident corporations employ!”
That begs the ultimate question on everyone’s mind these days: is the Fed going to keep cutting rates through the end of the year? Well, the FOMC’s last forecast and dotplot release certainly suggests so, though–AND HERE IT COMES AGAIN–those medians tend to skew the numbers in favor of the doves. It’s just math… er, statistics, silly. Fed Boss Powell made it clear in his last 2 appearances that 2 more cuts are not guaranteed and enough FOMC members have said as much to add a bit of mystery around the future. You know, like when your kids or grandkids ask if they can have ice cream for dessert and you answer “maybe,” knowing that you are not committing but also not letting them down and causing a tantrum. So what are they going to do? And how will we even know in this unplanned, government-caused blackout?
Perhaps we can go straight to the source and determine what those FOMC voting members are thinking in real time. Well, I am sure that you have noticed that I almost always include Fed speakers in my NEXT UP section. 👇 I know you have better things to do than to listen to grey-suit wearing, quasi-academic bankers talk about this and that when all you want to know is whether they are going to cut rates or not, but don’t worry, we are listening for you. What’s more, there are some really cool AI-based tools for professionals to track what those talkative FOMC voters are saying. I check these from time to time to see if I can pick out any trends, and this morning, of all mornings, I tripped right over one that I like to use from Bloomberg. Have a look at this screenshot and follow me to the finish.
This screenshot from Bloomberg’s DS <GO> function shows us how many mentions of a topic appeared in all Fed speeches and official releases. I sorted them most-to-least in Q3, and this ranking shows us, foremost, the topics that the Fed is most “passionate” about. Those would be, as suspected: Inflation, Unemployment, Interest Rates, Headwinds, Consumer Spending, Tariffs, Economic Slowdown, GDP Growth, and Job Cuts. Now, I am sure that I don’t have to say this, but I will for good measure. If you care about what the Fed is going to do next, well, you better stay current on those topics–just sayin’.
If you look closely at the number of mentions per quarter, you can tease out some trends. You can see that some are just elevated and bounce around the high ends of their ranges. You can also see how some are clearly trending higher throughout the past year, and the trend is even more pronounced when you look back further. Here’s a little trick with this table, you can use the little sparkline graph next to the topic to see if you recognize a pattern. You know what I see? I see that in the last quarter only 2 of the top 9 trending topics, only Headwinds and Job Cuts, increased from the prior quarter. The rest seem to have gotten less airtime; those would include Inflation and Tariffs. Now, I know that this is really rough, heuristic trendspotting, but all information is good information, especially when we are in a government data blackout. And this data hints that FOMC members are increasingly talking about things which would make them lower interest rates, and less about things that would keep them from lowering rates.
These are challenging times for a world in which we rely on data to make critical investment decisions. Data is ambiguous at times and completely absent in others. Despite this, the burden remains on us to collect as much data of all types to be ahead of the crowd. Keep searching and don’t worry, I got you covered.
FRIDAY’S MARKETS
Markets continue to melt up as the lawmakers bicker in public and keep the government on ice. Stocks had a winning week which included a government shutdown–that’s a data point. The bad labor print earlier in the week increased chances of a benevolent Fed and traders are increasingly positive about the upcoming earnings season.
NEXT UP
No major releases today, but later in the week we will get FOMC minutes from the Fed’s September 17th meeting as well as University of Michigan Sentiment. Some of the weekly regulars like Initial Jobless Claims will be absent. Check out the attached economics calendar for the unintentionally abridged but still really important economic calendar so you can claim the title of “smarty pants!”
Kansas City Fed President Jeff Schmid will speak today. Oh, and his FOMC friends will be out speaking a lot in this upcoming week–adding data to the chart above. 😉