US
The US government has officially shutdown. USD and US equity futures are down. If the shutdown is brief, the Fed will ignore it. However, a prolong shutdown (more than two weeks), increases the downside risk to growth and raises the likelihood of a more accommodative Fed. That can further weigh on USD.
The last shutdown lasted 34 days between December 2018 and January 2019. During this period, USD was marginally weaker, S&P500 rallied, and 10-year Treasuries were firm. The Congressional Budget Office estimate the 2018-2019 shutdown to have decreased the level of real GDP in Q1 2019 by 0.2%, which was mostly made up in subsequent quarters (see here for details).
The current shutdown means the release of key economic reports like Friday’s September non-farm payrolls print are on hold. The postponement of labor market data muddies the water for the Fed, depriving it of an important indicator for tracking downside risk to the economy at present.
Yesterday’s August JOLTS data was mixed. Job openings unexpectedly increased to 7227k (consensus: 7200k) vs. 7208k in July (revised up from 7181k). However, the ratio of job openings to unemployed workers slipped 0.02 to 0.98, the lowest since April 2021, consistent with softer wages growth ahead and posing a headwind to consumer spending activity.
There’s no layoff spiral underway, but labor demand is cooling. The layoffs rate was unchanged at 1.1% for a third consecutive month in August while the hiring rate dipped 0.1pts to 3.2%, matching the June 2024 low.
Meanwhile, the September Conference Board report points to an increasingly fragile labor market. The labor differential index (jobs plentiful minus jobs hard to get) dropped 3.3 points to 7.8 in August, the lowest since February 2021 and indicative of a rapid rise in the unemployment rate.
We anticipate the Fed to turn more dovish by the time of the December FOMC meeting because restrictive monetary policy can worsen the employment backdrop and upside risks to inflation are not materializing. Bottom line: USD downtrend intact.
In the absence of the nonfarm payrolls report, today’s private sector ADP employment release will take greater significance (1:15pm London, 8:15am New York). ADP Employment is seen rising by 51k in September vs. 52k in August. The September ISM manufacturing data is the other focus (3:00pm London, 10:00am New York). The headline index is projected at 49.0 vs. 48.7 in August.
USD continues to dominate as a medium of exchange. The BIS 2025 Triennial Survey highlights that daily OTC FX turnover rose to $9.6 trillion in April 2025, up 28% from $7.5 trillion in April 2022 with the US dollar being on one side of 89.2% of all trades, up from 88.4% three years ago. The share of the euro fell to 28.9% (from 30.6%) and that of the Japanese yen was virtually unchanged at 16.8%. The share of sterling declined to 10.2% (from 12.9%). The shares of the Chinese renminbi and the Swiss franc rose to 8.5% and 6.4%, respectively.
Today’s IMF Q2 COFER data will offer an initial look at whether US trade, foreign and fiscal policies are accelerating the dollar’s declining role as the primary reserve currency.
EUROZONE
EUR/USD is directionless within a 1.1720-1.1780 range. The ECB is in a good place to keep rates on hold as Eurozone inflation remains close to the ECB’s 2% target. In September, both headline and core CPI matched consensus. Headline rose 0.2pts to 2.2% y/y, core printed at 2.3% y/y for a fifth consecutive month, and services CPI ticked up 0.1pts to 3.2%. Bottom line: ECB/Fed policy stance continues to underpin the uptrend in EUR/USD.
JAPAN
JPY is outperforming. Japan’s Q3 Tankan business survey was firm. The all industries business conditions index printed at 15 for a fourth consecutive quarter, consistent with an ongoing recovery in real GDP growth. The details were good and in line with consensus. Large manufacturers’ sentiment improved to 14 vs. 13 in Q2, while large non-manufacturers sentiment printed at 34 for a second consecutive quarter. Our base case is for the Bank of Japan to resume raising rates at the October 30 meeting (63% priced-in) which bodes well for JPY.
