Markets shrug off US shutdown, hoping for interest rate cuts

Our weekly podcast by Kevin Lings

Kevin Lings focuses on the US government shutdown, and South African government revenue and expenditure for August.

US government shutdown likely to drag on; SA collects more tax than expected

In this podcast, STANLIB’s Chief Economist, Kevin Lings, discusses the reasons for and impacts of the US government shutdown, including on economic activity and business confidence. He suggests that, given current political tensions in the US, it is likely to drag on for a while. He also looks at SA’s government revenue collection in August, which was better than expected.

The focus areas during the week included

Despite some concerns about the impact of the US government shutdown, the S&P 500 gained 1.1% in the week, having reached 10 new highs in September. In recent weeks US equities have been helped by a combination of growing corporate profits and expectations of lower interest rates. Market expectations for another cut in interest rates by the Federal Reserve (Fed) at the next Federal Open Market Committee (FOMC) meeting on 29 October have intensified, and are now around 96%, according to CME FedWatch. Year-to-date the S&P 500 is up 14.2% and at a record high.

The STOXX Europe 600 Index and SA’s All-Share Index both gained an impressive 2.9%, also closing at record highs. Year-to-date the All-Share Index is up an incredible 30.5% in rands and 42.2% in dollars.

US Treasuries generated positive returns as yields decreased along the range of maturities, including the 10-year bond yield, which ended at 4.13% from 4.20% at the end of the previous week. Disappointing ADP employment data on Wednesday and a Conference Board report that showed weaker-than-expected consumer confidence in September may have helped to drive Treasury yields lower.

In the year to date, the rand and emerging markets have gained a robust 8.9% and 8.1% against the US dollar, respectively, largely due to dollar weakness. The rand has received additional support from renewed foreign buying of South African government bonds in recent weeks as well as a robust improvement in its terms of trade. According to data supplied by the South African Reserve Bank, foreign ownership of domestic government bonds rose to 26.85% in September 2025, its highest level in three years.

At midnight on 30 September, the US government officially shut down for the 21st time since 1976. (Shutdowns have been a regular occurrence in recent history but have not lasted long. Since 1976 there have been 20 government shutdowns lasting for a day or more. The most recent one in December 2018 lasted 35 days, setting a record as the longest in US history.)

The shutdown began after the Senate was unable to achieve 60 votes to pass a stopgap measure, known as a continuing resolution, or the necessary appropriation bills to keep federal agencies funded. The key issue causing the shutdown is that the Democrats want an extension of the Affordable Care Act tax credits that are set to expire. They also want cuts to Medicaid enacted by the Trump administration to be reversed. (The shutdown has nothing to do with the debt ceiling.)

The Congressional Budget Office (CBO) estimates that about 750 000 government employees will be furloughed in this shutdown. Essential government services, including social security, Medicare, Medicaid, law enforcement, and air travel safety all continue to operate. A shutdown does not affect the Treasury’s interest payments or government’s ability to pay its debt, but federal employees are not paid during the shutdown. Furloughed workers typically receive backpay once operations resume. (Contractors are not guaranteed compensation, and businesses that rely on government contracts may lose revenue.)

While a shutdown can drive a short-term slowdown in economic growth, the impact is expected to be relatively modest. In the most recent shutdown, the CBO estimated that roughly 0.4% was shaved off quarterly GDP over the five-week period. Other estimates, based on the experience of the last decade, point to a potential loss of 0.1% from quarterly GDP growth for each week of the shutdown. Importantly, if the shutdown continues, other vital economic indicators provided by the government could also be delayed, including the September consumer price index (CPI) report scheduled for release on 15 October.

Key US labour market data for September was delayed due to the government shutdown. The market was expecting an increase of 52 000 jobs in the month, up from a gain of only 22 000 jobs in August. The unemployment rate was expected to remain unchanged at 4.3%, while hourly wage growth was expected to be unchanged at 3.7% y/y. In the absence of the Bureau for Labor Statistics jobs report, markets focused on alternative labour market indicators. These included the September ADP data, which showed that the private sector lost 32 000 jobs in September. Consensus expectations were that ADP would report a gain of 51 000 jobs, so the weakness increased the market’s conviction that there would be another Fed rate cut in October.

US job openings for August held roughly steady at 7.2227 million, ahead of forecasts for a pullback to 7.1 million. In general, job openings have slowed steadily over the past year, falling from 7.649 million in August 2024. The number of job openings has fallen below the number of people unemployed (7.384 million) for the first time since April 2021.

The US ISM services data was lower than expected for September at 50. This is down from 52 and below market expectations for a reading of 51.7. Importantly, the ISM services employment index remained in contraction at 47.2, perhaps underscoring some of the recent softening in the US labour market, while the prices paid component remained elevated at 69.4, signalling ongoing upside risks to inflation.

Austan Goolsbee, president of the Chicago Federal Reserve, expressed concerns about rising services inflation and noted that a delay in September CPI data would be “problematic.” Dallas Federal Reserve President Lorie Logan said that she favoured “a little bit slower of a normalization of the policy path”.

In August 2025, SA’s trade balance showed a surplus of only R3.968 billion, down from R19.563 billion in July. The smaller surplus was mainly due to a 6.8% m/m decline in exports (including a R6.5 billion drop in precious metal exports). In contrast, imports increased by 1.9% m/m. For the year to date (January to August) the trade balance totalled R101.841 billion, down from R121.383 billion in the same period in 2024. This is despite a substantial improvement in SA’s terms of trade in 2025.

SA’s private sector credit grew by 5.9% y/y in August, which was up slightly from 5.8% in July, helped by a further increase in corporate credit (8.3% y/y). In contrast, household credit growth remains subdued, with year-on-year growth steady at 3% in August, unchanged from both June and July. A breakdown of household credit reveals that personal loans declined by 0.2% y/y, while residential mortgages expanded by only 2.3% y/y. The only area of household credit that is growing a little faster is credit card debt, which was up 7% y/y, but it has lost some momentum in recent months.

SA’s National Treasury released the government revenue and expenditure data for August 2025. In general, tax revenue collection is ahead of budget, while government expenditure is behind budget. A detailed breakdown of the tax revenue data reveals that individual income tax has risen by a respectable 8.4% y/y in the first five months of the tax year, while corporate tax collection has increased by 6.9%. Importantly, VAT receipts are up a substantial 11.4% y/y, helped by a drop in VAT refunds.

Headline inflation in the Eurozone increased by a modest 0.1% m/m in September 2025, which pushed the annual rate of increase up from 2% to 2.2%. The outcome was in line with market expectations. The annual rate of increase was largely due to higher services costs and a slightly slower decrease in energy prices. Core inflation remained unchanged at 2.3%, also in line with expectations.

European Central Bank (ECB) President Christine Lagarde said in a keynote speech at a Bank of Finland conference that “as we can model the future, the risks to inflation appear quite contained in both directions”. She added: “with policy rates now at 2%, we are well placed to respond if the risks to inflation shift, or if new shocks emerge that threaten our target”.

The seasonally-adjusted unemployment rate in the Eurozone edged up to 6.3% in August from 6.2% in July, an all-time low. Analysts expected the unemployment rate would be unchanged. Spain, France, and Italy continued to see the highest jobless rates, while Germany and the Netherlands registered the lowest.

China’s official manufacturing Purchasing Managers’ Index (PMI) improved to 49.8 in September from 49.4 in August. In contrast, the official non-manufacturing PMI, a gauge of construction and services activity, fell more than expected to 50 in September from August’s reading of 50.3. Although the manufacturing PMI reading beat economists’ median forecast, it marked the sixth straight month of declines in factory activity. Both PMIs indicated that weakness in China’s economy persisted in the third quarter. China’s Golden Week holiday, which started on 1 October (1 to 8 October), is a period of high consumption in China as millions of people travel, shop, and eat out. The eight-day event is expected to provide important economic stimulus at the start of Q4 2025.