Trading is set to open under an unusual combination of policy uncertainty and sparse official data that could make market moves more reactive than usual. The lapse in U.S. government funding has forced furloughs across agencies and is likely to push key releases, including the nonfarm payrolls report, off the calendar. With official monthly labour statistics at risk, investors are increasingly dependent on private and survey measures to set near term expectations for growth and Federal Reserve policy.
Equity markets showed surprising composure on Tuesday as the shutdown deadline approached, with major U.S. indexes finishing marginally higher and flirting with record territory. That composure carries reservations. Volatility has inched up, with the VIX trading closer to 17 early on Wednesday, and futures gave back some of the recent gains. The dollar has softened and gold continued to rally, striking new highs as traders look for safe value in the absence of a steady feed of macro data.
The practical effect of the funding lapse is to hand more influence to private sector gauges. Job openings from JOLTS indicated a marginal rise in August while hiring slowed and consumer confidence fell more than expected. In that context the monthly ADP private payrolls reading takes on outsized importance for near term Federal Reserve expectations. A strong private payrolls print could reinforce rate cut odds being pushed out, while a weak reading would give markets another reason to price in easier policy. If the shutdown persists it could also complicate mid October inflation data collection, adding another layer of uncertainty to an already data thin period.
Across the Atlantic, the euro gained some ground after core euro zone inflation for September surprised slightly to the upside. That reading encouraged market bets that the European Central Bank may be done easing for this cycle, reducing rate cut risk in the near term. Currency and rates markets may therefore show divergent moves between the United States and Europe as investors weigh a scarcity of U.S. prints against firmer euro area inflation metrics.
In Asia, liquidity dynamics are also unusual. Chinese markets began Golden Week holiday on Wednesday, removing a significant portion of trading activity from the global mix for several days. Tokyo’s Nikkei slipped about 1 percent after an 11 percent jump in the previous quarter. The stronger Tankan survey for Japan and recent hawkish signals have kept the possibility of a Bank of Japan rate rise in focus. The yen has firmed modestly as the dollar eased, and market participants are watching the Japanese ruling party leadership contest for any clues on policy continuity ahead of the likely BOJ move later this month.
One of the more structural themes that continues to influence sentiment is the concentration of market gains in a handful of tech giants. The so called Magnificent Seven now account for roughly 36 percent of the S&P 500 by market value. Their share prices have more than doubled over the past two years and have rebounded strongly this year. Investment in artificial intelligence led by these firms has produced an outsized contribution to growth. While AI related capital expenditure may represent only about 1 percent of U.S. GDP, some estimates cited suggest it could explain a substantial portion of the near 4 percent annualised expansion recorded over the last two quarters.
Revisions to national accounts added further fuel to the thesis that business spending has been robust. Last week’s figures showed business spending on intellectual property products grew 15 percent compared with a prior estimate of 12.8 percent, and equipment investment accelerated at an 8.5 percent pace instead of the previously reported 7.4 percent. Investment in data centres and related infrastructure has risen sharply, reportedly up fourfold since 2020, supporting construction and industrial activity beyond the tech sector.
That linkage between a concentrated market bet and the broader economy creates a two way risk. If AI spending continues to underpin a meaningful slice of growth then the real economy may be more tightly coupled to the fortunes of a narrow set of companies than in past cycles. If that trade becomes crowded and sentiment changes abruptly, the fallout could be larger than in episodes where equity performance was more dispersed. This concentration therefore deserves attention from both equity and macro investors as they set exposure and policy expectations.
Other developments to factor into positioning include a severe drawdown in London Metal Exchange zinc inventories, which are reported to cover less than one day of global consumption. That condition highlights potential supply stress in industrial metals and the risk that commodity markets could require demand support from large consumers, notably China. Corporate and policy news will also matter. A deal between a major pharmaceutical company and the U.S. administration was announced that ties Medicaid prices to those charged in other developed countries in exchange for tariff relief. Separately, high profile political commentary on defence policy added a domestic political undercurrent to market sentiment.
For the coming session the calendar is concentrated on private sector and survey data. The ADP private payrolls release will likely set the tone for rate cut pricing. S&P Global and ISM manufacturing surveys will provide complementary views on activity and could influence risk appetite for cyclicals. Construction spending and regional Fed commentary remain relevant for the bond market. With official government releases likely delayed, traders should expect greater sensitivity to each datapoint and a higher propensity for swings in rates, currencies and equities.
In short, markets will be operating with a thinner set of official signals and a heavier dependence on private measures and narrative drivers. That combination rewards careful reading of the incoming private data and attention to where growth news is concentrated. Equity concentration, supply stresses in key commodities, and policy uncertainty together make for a session where selective risk taking will be tested and correlations between tech led gains and broader economic indicators will be watched closely.
