Fixed Income & Equities Markets Week in Review

Market action was volatile this week as investors struggled to interpret some challenging topics:

Reopening of the government.
This was a driver of market gains at the beginning of the week, as the longest-ever 43-day US government shutdown came to an end. On Monday night, the Senate passed a bill to reopen the government after a group of eight Democrats backed a package that does not include an extension of the Affordable Care Act (ACA) subsidies. The bill then went to the House, which passed it with a vote of 222 to 209. President Trump signed the bill on Wednesday, effectively reopening the government. This package will fund the government through January. It includes provisions to restore SNAP and provides retroactive pay for furloughed federal workers, effectively reversing the shutdown layoffs. However, it did not include an extension of ACA subsidies set to expire at year-end and leaves decisions outstanding on discretionary spending items. As such, it sets up for another possible shutdown in January. Congress essentially kicked the can down the road this week.

Ongoing data “blackout.”
With the reopening of the government, data flow will get re-started. The September jobs report could be released next week, as the data had already been collected before the shutdown. White House officials also noted that some data reports delayed by the closure may be permanently impaired or may never be released. This data vacuum remains an overhang, particularly with the Federal Reserve (Fed) working with incomplete information leading into its December policy meeting.

The ”Data Dependent” Fed and Interest rate decisions.
Mixed “Fedspeak” this week cast concern on the prospects for an interest rate cut in December. Various comments from Fed members showed that there is a divide within the Fed regarding the path for rates. There were hawkish and dovish statements made, with some calling for a December rate cut due to labor market weakness. Others noted that the labor market is near full employment but cooling in orderly manner, while inflation, gradually decelerating, remains elevated near 3%. The lack of recent data has the Fed flying somewhat blind in regard to their “data dependence.” It is unclear how quickly data will begin flowing following the government reopening, but in the meantime expectations for a rate cut in December declined notably during the week.

Artificial intelligence (AI) momentum unwind.
The AI story came under pressure last week when eight of the most valuable AI-related stocks lost ~$800B in value. Concern rose about the magnitude of cap ex spending (3rd quarter capex spending from Microsoft, Google, Meta and Amazon totaled approx. $112 billion, up about 80% y/y, with expectations for outsized growth to continue, perhaps approaching $550-600 billion in 2026 from ~$380B this year). The market has increased its questioning about whether this significant spending level will be successfully monetized in the future. NVIDIA’s earnings release next week may help bring some updated perspective to this week’s increased concerns.