SIFs Slip as Government Shutdown Looms

STOCK INDEX FUTURES

Stock index futures slipped as investors weigh the recent tariff developments from President Trump and the potential of a US government shutdown. President Trump sent out a fresh flurry of tariffs on lumber, timber, and certain types of furniture late Monday, on the heels of a threat of levies on foreign-made movies and last week’s plan to put 100% duties on branded drugs. Markets are bracing for a government shutdown after Trump and Republicans met with Democrats in the Oval Office on Monday but failed to strike a deal to avert a halt to funding. Vice President JD Vance said he believed the government was heading for a shutdown. Lawmakers have until 12:01 a.m. ET Wednesday to reach an agreement.

If the government shuts down, the government’s economic data releases will halt during the stoppage, likely delaying Friday’s nonfarm payrolls report. The jobs report is crucial for the Federal Reserve as it continues to gauge the health of the labor market against a backdrop of elevated inflation and uncertainty due to tariffs amid mixed data readings. JOLTS jobs data will be out later this morning and closely watched for any insights on the labor front.

CURRENCY FUTURES

The USD index held steady ahead of a possible US government shutdown that could pause the release of the September jobs report this week. Investor focus remains on the looming government shutdown, government funding expires at midnight on Tuesday unless lawmakers agree to a temporary spending deal. The US Labor and Commerce departments said their statistics agencies would halt economic data releases in the event of a partial government shutdown, including closely watched employment data for September. Markets will also watch the JOLTS job openings figures due out later this morning for any signs of layoff activity from companies as markets remain cautious about the state of the labor market.

Euro futures are higher following the release of German inflation figures, which showed inflation grew 0.2% in September, higher than expectations of 0.1%. Inflation in France fell 1.1% in September, below estimates of a 0.9% drop. On a yearly basis, the data showed rising prices across the eurozone’s largest four economies. Germany’s inflation jumped to 2.4%, above the 2.3% forecast, while France (1.1%), Spain (3.0%), and Italy (1.8%) also saw an uptick in prices. Elsewhere on the data front, German unemployment climbed by 14,000 in September, higher than expectations of 8,000 although the unemployment rate remained steady at 6.3%. The data will likely have little impact on the European Central Bank or change expectations that interest rates in the eurozone are likely to be kept on hold in the coming months. Looking ahead, final September Spanish, Italian, French, German and eurozone PMI data are released on Wednesday, while final services PMIs follow on Friday along with unemployment data for August on Thursday and producer prices data for August on Friday.

British pound futures are little changed after revised GDP data showed the economy grew 1.4% year-over-year, higher than the 1.2% in the initial estimate. On a quarterly basis, the economy grew 0.3%, in line with preliminary figures. The figures did little to move the sterling during trading, suggesting that investor focus remains on the widely held opinion that finance minister Rachel Reeves will hike taxes later in November. Reeves said on Monday she would not to raise sales tax, known as value added tax (VAT), national insurance contributions or the rates of income tax. On the data front, final purchasing managers’ data for September on manufacturing activity will be released Wednesday, followed by the equivalent survey on services activity on Friday.

Japanese yen futures are higher as the Summary of Opinions from the September meeting showed some policymakers favored further rate hikes if growth and inflation projections hold, while others backed maintaining low rates to cushion the economy from the impact of US tariffs. Markets show traders currently place a 60% chance on a December hike. The central bank’s closely-watched quarterly tankan survey, due later this evening, is expected to show sentiment among large manufacturers improving to +15 from +13 in the previous June survey. BoJ Governor Kazuo Ueda is scheduled to deliver a speech late Thursday, where potentially offering clues on the central bank’s monetary policy trajectory.

Australian dollar futures are higher following the Reserve Bank of Australia’s decision to hold interest rates steady at 3.60% at its policy meeting on Tuesday. The decision was unanimous, with the central bank saying that while domestic economic activity is rebounding, the outlook remains uncertain. The RBA also said the decline in underlying inflation has slowed. Governor Michele Bullock also offered no further guidance on the bank’s next moves. The release of third-quarter consumer inflation data on October 29 will be critical to whether the RBA cuts again the following month. The bank is likely worried that although inflation has hit the top-end of its target band, persistent inflation risks remain after Autgust’s reading of 3% and Q2 GDP growth of 1.8%. The bank said the recent data has suggested that inflation might be higher than forecast in the third quarter and that the economic outlook remains uncertain.

INTEREST RATE MARKET FUTURES

Futures are higher across the board amid uncertainty over a potential US government shutdown. Depending on the length of any shutdown, this could leave policymakers in a tricky spot at the October Federal Reserve meeting as it will delay the release of several important economic data points, including Friday’s jobs report. However, markets appear to anticipate a short-lived shutdown. Economic fallout from a shutdown will likely be limited and Treasurys are unlikely to be hit hard.  Treasury operations remain unaffected, as the debate isn’t linked to the debt ceiling this time. While shutdowns can dent consumer and investor sentiment, bond markets have generally reacted with restraint, unless disruptions are prolonged.

Investor focus remains on Friday’s jobs report, if it is released. Markets are pricing a 92.5% chance that the Fed will move to cut rates at its October meeting. Cautious comments by Fed Chair Powell, followed by a string of stronger-than-expected economic data, including an unexpected sizeable upgrade to Q2 GDP, sparked some doubts about prospects of back-to-back rate cuts. Analysts expect nonfarm payrolls to rise by 51,000 while any revisions to previous data will be scrutinized. Elsewhere on the labor front, JOLTS job openings figures for August are out later this morning, ADP private payrolls numbers for September are out on Wednesday, and weekly jobless claims figures are due on Thursday.

The spread between the two- and 10-year yields rose to 51.9 bps from 51.5 bps on Friday, while the 2-year yield, which reflects interest rate expectations, fell to 3.608%.

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