Stateside shutdown shenanigans

Yet another US government shutdown really should be bad for growth. But with short-term rates pricing in multiple Fed cuts, the 'bad news = good news' narrative lives on, but for how long? With results from financials and IT behemoths looming, investors want reassurance that hefty AI spend is on track to deliver returns.

07 October 2025

The US government officially shut down on 1 October, marking the start of the new US fiscal year without a funding bill as politicians on both sides argued over healthcare subsidies. The immediate impact was 900,000 Federal employees furloughed and 700,000 remaining on duty without pay. What does all this mean for markets? Despite expectations that all this should be interpreted as a hit to growth, the US stock market has remained stable since the shutdown and indeed continued its long ascent since the aftermath of Liberation Day in April. The key to understanding this lies in interest rates. Short-term interest rate expectations have softened to price in a Fed Funds rate of 3.6% in December (ie just under three cuts of 25 bps) while longer-bond yields have remained below 4.2%. In the absence of official jobs data (which had been due on Friday), the market placed a premium on the ADP private payrolls numbers, which were found seriously wanting. As implied short-term interest rates accordingly fell and longer-term bond yields remained anchored, stock investors focused more on this lowering of the discount rates by which securities are priced and less on the gloomy reassessment of the growth outlook for the US economy. The result was the apparent restoration of a counter-intuitive dynamic familiar to experienced investors in which bad news = good news. In fact this had been going on since June, with the shutdown simply highlighting the trend.

So does this mean US stock markets are immune to any slowing in the economy from now on? Possibly, but much will hinge on the third quarter earnings season (which doesn’t rely on Federal employees for reporting). If the tech and financials sectors can continue producing strong profits, investors will likely worry less about the state of the real economy. This only raises the stakes on the enormous artificial intelligence spend by the largest tech firms. Any signs that the return on that investment is not likely to come through soon, combined with existing economic weakness, could well be enough for a market reassessment in the coming weeks.

So bad that it’s good – stocks focused on what lower yields implicitly mean for prices rather than for future growth:

From 31 Dec 2024 to 6 Oct 2025