US government shutdown clouds economic outlook

In this podcast, STANLIB’s chief economist, Kevin Lings, discusses the latest developments around the US government shutdown, now the longest in history. While the temporary resolution provides some relief, the shutdown has disrupted the flow of economic data, making policy and market forecasting decisions more challenging. Kevin also shares insights on SA’s upcoming Medium-Term Budget Policy Statement (MTBPS) and discusses the potential for a credit rating improvement, highlighting what this could mean for investors and the broader economic outlook.

The focus areas during the week included

• The S&P 500 index declined by 1.6%, its first weekly contraction in a month. The market’s performance was undermined by increased scrutiny of artificial intelligence (AI) spending and the impact of the ongoing US government shutdown – including the lack of economic information. With 86% of S&P 500 companies having reported their quarterly earnings, results were above expectations: 82% of companies beat analyst estimates by an average upside surprise of 7.3%. Year-to-date the S&P 500 is up 14.4%. It has risen by 35% since the low on 8 April 2025.

• The STOXX Europe 600 ended down 1.2%, hurt by negative sentiment in US markets. Japan’s stock markets also declined, with the Nikkei 225 falling 4.1% and the broader TOPIX Index down 1%. Both indexes reached record highs in late October. The shares of AI-related technology companies drove most of the recent gains, and it appears that some investors have questioned the sustainability of the rally and decided to lock in some of the profits. The South African All-Share Index fell by 0.4% but is up 29.4% year-to-date.

• The US 10-year bond yield ended at 4.11%, essentially unchanged from the prior week, while the yield on two-year bond yields fell from an intra-week high of 3.63% to end the week at 3.55%. This partly reflects market expectations that the Fed will continue its easing cycle to help bolster the softening labour market. Futures markets are pricing in one more interest rate cut this year, followed by another two cuts next year. If correct, this would bring the Fed Funds target interest rate down to a range of 3% to 3.25%.

• The rand ended the week relatively unchanged against the US dollar at R17.33 but is expected to gain some support from the government’s Medium-Term Budget Policy Statement (MTBPS) scheduled for Wednesday, 12 November. The MTBPS is expected to reflect a solid fiscal performance (year-to-date), including a tax revenue overrun.

• The US government shutdown remains in place and has been in effect for the past 40 days (the longest in history). Since 1 October, at least 36 major economic data releases have been delayed – including a wide range of data on the US labour market. The US Senate has voted 14 times to try to end the filibuster and resolve the shutdown, but none of the attempts came close to achieving the 60 votes needed to end the debate. The Senate met on Saturday (8 November) but did not vote and is scheduled to meet again on Monday, 10 November. On Friday, the Democrats offered to re-open the government in exchange for a one-year extension of health care tax credits, but this was quickly rejected by the Republicans. Given the lack of progress in resolving the shutdown, the use of the “nuclear option” has probably become a lot more tempting, but it has very obvious and significant drawbacks. The pressure to resolve the shutdown has increased, given its negative impact on salary payments, social support and flight schedules. Approximately 670 000 federal employees are furloughed, while about 730 000 other government employees deemed essential, such as air traffic controllers, transportation security, medical staff etc, are working without pay. These estimates exclude military/law enforcement personnel, who also continue to work.

• Since the ongoing shutdown is limiting US government data releases, investors focused on several reports from alternative private-sector sources in the week, including ADP’s October employment report. The private payroll processing firm (ADP) reported that private employers added 42 000 jobs in the month, rebounding after two consecutive months of declines and beating market expectations of a gain of 35 000 jobs. However, the report also noted that hiring was not broad-based, as employers in the professional business services, information, and leisure and hospitality industries shed jobs for the third month in a row. The bulk of the job gains were concentrated in large firms, while small- and mid-sized businesses posted modest declines.

• According to the Challenger Report for October 2025, (which is produced by the consulting firm Challenger, Gray & Christmas) US employers announced 153 074 job cuts in October. The technology and warehousing sectors led the cuts, as companies cited cost-cutting and automation through AI as primary drivers. However, the Challenger data series has historically been an outlier relative to other lay-off measures and exhibits many false positives.

• The US Institute for Supply Management (ISM) reported that economic activity in the services sector returned to expansionary territory in October. The ISM Services Purchasing Managers’ Index (PMI) registered a reading of 52.4% from 50% in September, which was above market expectations. New orders in the sector rose to the highest level since October 2024, with an index reading of 56.2%. Eleven industries in the sector reported growth in the month, which is up from 10 in September. The only downside in the  report was the prices subindex, which rose to 70 – the highest since October 2022 – raising concerns about inflation and pushing bond yields higher on the day.

• In contrast, the ISM manufacturing PMI contracted for the eighth consecutive month in October. It was 48.7, which is down from 49.1 in September and slightly below market expectations. Contractions in production and inventories led the month-on-month decline. However, demand-related components, including new orders, backlogs, and new export orders, recorded an improvement.

• The University of Michigan released the November Index of Consumer Sentiment. The index reading dropped by a substantial 3.3 points to 50.3, which is the lowest level since its record low in June 2022. According to the university, the drop was “led by a 17% drop in current personal finances and a 11% decline in year-ahead expected business conditions”. Federal government shutdown worries were cited as a primary reason for the decline. Expectations of inflation over the next year rose to 4.7% from 4.6% in October.

• The Bank of England (BoE) kept its key policy interest rate unchanged at 4%. The Monetary Policy Committee voted five to four in favour of the decision. Comments from Governor Andrew Bailey reinforced market expectations of an interest rate cut in December. In a text explaining the decision, the governor said current market pricing, which implies a terminal rate of around 3.5% in three years’ time, was “a fair description of my position at present”, adding that it gave “a reasonable view of a sensible path”.

• Sweden’s central bank, the Riksbank, kept its policy interest rate unchanged at 1.75%. Governor Erik Thedeen said policymakers are expecting it “to remain at this level for some time to come”. In Norway, Norges Bank also left its key interest rate unchanged at 4%, citing an inflation rate that remains too high. Governor Ida Wolden Bache told Reuters: “It will take some time before it is appropriate to lower the rate”.

• Retail sales in the Eurozone fell by 0.1% month-on-month in September, marking the third consecutive month of contraction. The outcome was also well below market expectations for a gain of 0.3% m/m. Year on year, growth in retail trade slowed to 1% from 1.6% in August, signalling still-tough economic conditions.

• Japan’s new Prime Minister, Sanae Takaichi, emphasised that Japan has still not achieved sustainable and stable price growth backed by solid wage gains. She said that her government will deploy fiscal spending to boost household incomes, consumer sentiment, and the economy. A draft of an economic stimulus package is expected to be released in November.