Fed’s Jefferson Sees Risks to Both Inflation, Jobs Goals

Economic

Central Bank

Summary:

Fed Vice Chair Jefferson flagged rising risks from both inflation and a weakening job market. He backed September’s rate cut citing labor softness but offered no clear guidance, stressing policy depends on incoming data.

Federal Reserve Vice Chair Philip Jefferson on Tuesday warned the US central bank faces a softening labor market at the same time as inflation pressures increase, complicating the outlook for monetary policy.

Jefferson said the level of uncertainty around his outlook for the economy is high, given the breadth of policy changes being rolled out by the White House, though some of that uncertainty will diminish as policies are finalized.

Jefferson said the rise in unemployment to 4.3% suggests the labor market could be at risk of experiencing stress, which spurred him to support September’s rate cut, though he offered little by way of direction for his future policy stance.

“With respect to the path of the policy rate going forward, I will continue to evaluate the appropriate stance of monetary policy based on the incoming data, the evolving outlook and the balance of risks,” Jefferson said. “I will also consider and assess information about government policies and their effects on the economy.”

In questions after his speech, Jefferson was asked why he favored a rate cut this month, and whether he is worried that higher tariffs might hurt employment.

“I was concerned about softening in the labor market,” he said. “We know historically that changes in the labor market on the downside can happen quite quickly.”

Source: Bloomberg

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Michelle

Economic

Commodity

OPEC+ is to discuss fast tracking its latest round of supply hikes in three monthly instalments of about 500,000 barrels a day to recoup market share.

This comes after the cartel announced earlier this month that they were adding a much smaller amount than that - about 137,000 barrels a day - leaving a question mark about how fast the rest will be returned.

So, now, Bloomberg reports that, according to a delegate, Saudi Arabia and its partners will review the expedited return of the remainder of a 1.66 million barrel-a-day supply tranche when they meet on Oct. 5.

The result is further pressure on the price of oil...

...testing the lows of its recent channel (ironically extending losses after similar rumors hit crude prices yesterday).

The IEA already forecast that the oil market is headed for a record supply-demand surplus next year.

Finally, we note that Saudi Crown Prince Mohammed bin Salman is heading to Washington in November to meet with President Donald Trump, who has called for lower oil prices.

Source: Zero Hedge

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Adam

Economic

If Congress can’t come to a budget resolution in the next 24 hours, the government will shut down. Sound familiar? We have become numb to the prospect of a government shutdown because it occurs so frequently.

Most often, continuing resolution bills are agreed upon before a shutdown, thus enabling the government to continue operating. In all but three of the last 47 years, a continuing resolution bill has provided “temporary” funding. 1997 was the last year that Congress actually agreed upon a budget. The graph below, courtesy of Statista, illustrates the 21 instances of government shutdowns that have occurred since 1976.

The media is once again making a big deal about the potential for another government shutdown. While a government shutdown may have negative consequences for government workers and employees working in industries closely tied to the government, the economic impact is likely to be minimal.

This is especially true if the shutdown only lasts a few days. However, as we share in the Tweet of the Day below, the BLS will not release the employment report if the government is closed.

From a stock market perspective, the 21 shutdowns shown below have had a negligible effect. In fact, on average, the S&P 500 has gained 0.5% during shutdowns since 1976. The most recent, in December 2018, was the longest on record. Yet it also had the highest stock market return at 6.9%.

Of the 21 instances, the maximum loss over the shutdown period was 3.4% (October 10, 1976). Moreover, 71% of the cases posted a positive return. If this instance is like the others, investors should not fear a shutdown.

The Government Is Shutting Down Again: Who Cares?_1

Bad Breadth In Context

In yesterday’s Commentary, we noted the market’s bad breadth as follows:

Furthermore, breadth remains weak, with only about 49% of S&P components above their 20-day average and only 56% above their 50-day average. With markets consistently hitting new highs, the breadth should be much stronger. Negative divergences continue in momentum and relative strength oscillators (RSI, MACD), hinting at waning upside pressure.

Further evidence can be found in the relative analysis tool. Note that in the first graphic, the S&P 500 equal-weighted ETF (RSP) is the third most oversold factor. At the same time, the S&P 500 growth, mega-cap growth), and high beta). They are among the most overbought. For context on the relationship over the last year, we have shared two more graphics.

As we highlight, the second graphic shows that the correlation between the excess returns of RSP and the mega-cap and large-cap growth ETFs is running negative and at about half to two-thirds of one standard deviation below normal. In other words, the relationship is not average, but neither is it statistically lopsided.

The third graphic displays a graph illustrating the correlation’s position relative to all other instances over the past year. As we circle, it is in the lowest 25% of instances. This does point to bad breadth, but the market has certainly seen worse over the last year.

The Government Is Shutting Down Again: Who Cares?_2

The Government Is Shutting Down Again: Who Cares?_3

Source: investing

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Warren Takunda

Economic

The Reserve Bank of Australia's (RBA) September decision was as expected: no change to the base rate which stays at 3.6%.

However, the guidance was always going to be interesting owing to the conflicting signals coming from the economy this month: on one hand, we received a surprisingly weak employment report, on the other, a surprisingly strong CPI inflation indicator.

This means the RBA's guidance today will carry more weight than usual as investors seek a guide on the outlook for Aussie monetary policy.

The RBA's statement accompanying the decision makes clear that it is appropriate to remain cautious.

The statement seemed to show that concerns about the inflationary outlook outweigh the poor labour market data. It flagged concerns over a slower decline in underlying inflation and stronger domestic data.

"The RBA's hawkish hold reinforces our bullish view on AUD," says Francesco Pesole, FX Strategist at ING Bank N.V.

RBA's Hawkish Stance Enforces Australian Dollar's Constructive Outlook_1

Above: AUD performance screened over one week.

Australia's 3-year AGB yield rose +6bp to 3.60%, taking it to the highest since May. Given this rise in yields, it's little wonder then that the Aussie is on the march:

The Australian-U.S. Dollar exchange rate is higher by 0.45% at 0.6607, the Euro-Australian dollar rate is lower by 0.20% at 1.7790.

The Pound to Australian dollar exchange rate is down at 2.0357, putting it on a major support line. If the line at 2.0342 breaks, then GBP/AUD could be set to trend lower towards the key 2.0 level.

"We view the rate decision as a hawkish hold. Previous references to further policy easing have been omitted in the policy statement," says Nicholas Chia, FX and Macro Strategist at Standard Chartered. "The optics of further RBA easing are complicated by a salient economic upswing as real wage growth firms up and asset price appreciation induces consumption via the wealth effect."

The RBA indicated the stronger-than-expected data on growth and inflation may indicate that households have become more comfortable consuming as real incomes and wealth rise.

Money markets now assign less than 50% probability of a rate cut in November.

"AUD has been one of our favourite currencies into this RBA meeting, and we think it has some further room to run, also in the crosses against currencies that have unattractive domestic central bank stories," says ING's Pesole.

Source: Poundsterlinglive

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Glendon

Economic

Forex

Federal Reserve Bank of New York President John Williams downplayed the effect of tariffs on the risk of inflation, adding that price rises are less of a headache for policymakers than before.

Central bankers have seen a “re-balancing of the risks, from one where inflation was the big risk to one where employment and inflation — the risks to them — have moved closer together,” Williams said Monday, per Bloomberg. “It made sense to move interest rates down a little bit to take a little bit of the restrictiveness out of there.”

The Federal Reserve cut interest rates for the first time in 2025 earlier in September, as policymakers tried to steady a slowing job market while facing intense political pressure to lower rates from President Donald Trump. The decision brought the federal funds rate down to a range of 4%-4.25%.

Williams didn’t indicate whether he would support another rate cut at the Fed’s October meeting. He said tariffs have only had a “relatively modest or moderate” effect on inflation, pushing up some prices on imports.

“The tariff effects have been smaller than most people thought, and there doesn’t seem to be any signs of inflationary pressures building,” he added.

His comments struck a different tone to those of Cleveland Federal Reserve President Beth Hammack earlier in the day, underlining the split in opinion among central bankers about the best path forward for policy. Hammack said it's a “challenging time” for central bankers as they try to balance fighting inflation with protecting jobs.

“On the inflation side right now, I continue to be worried about where we are from an inflation perspective,” Hammack said in a Monday interview on CNBC, adding that she doesn’t expect prices to retreat to the Fed’s target of 2% inflation until the end of 2027 or early 2028. However, she added that that the labor market looks “reasonably healthy.”

While the number of Americans filing new applications for unemployment benefits tumbled again last week, fears remain over the state of the jobs market. Rising layoffs have been cited by officials as a potential problem area, and Fed Chair Jerome Powell warned that companies are not hiring is “a way of passing on tariff costs.”

Nonetheless, the better-than-expected data prompted investors to pare back expectations for more rate cuts. September’s nonfarm payrolls report is set for Friday, but risks being delayed by an impending federal government shutdown this week.

Source: Yahoo Finance

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Adam

Bond

Treasuries were poised to close out a third straight quarter of gains Tuesday as a pending US government shutdown threatens to slow economic growth, boosting the case to buy bonds.

Bonds were broadly steady on Tuesday, capping off a quarter in which the market has posted a 1.5% return, according to a Bloomberg index. Treasuries have returned more than 5% through the first three quarters of 2025, setting them up for the best year since 2020.

Officials face a midnight deadline to avoid a shutdown that would disrupt US government operations, delay the release of key economic data and potentially drag down economic growth, depending on how long it lasts. Ahead of previous episodes of prolonged stoppages, long-dated Treasuries have rallied.

Treasuries Set for Third Quarter of Gains as Shutdown Looms_1

The 10-year yield was little changed on Tuesday at 4.14%, having closed four basis points lower the previous day. The two-year yield at 3.60% is near some of its lowest levels over the past year.

Scott Buchta, head of fixed-income strategy for Brean Capital, said the moves this week reflect a “small flight to quality trade.”

“More people are becoming constructive on the market amid the possibility that an extended shutdown slows the economy,” he said.

The market has rallied broadly this year on the expectation of interest-rate cuts by the Federal Reserve. Policymakers reduced the rate to a range of 4% to 4.25% at their September meeting, but signaled caution on the path forward as inflation remains persistently above the Fed’s target.

Investors have focused on the pace of hiring, with recent reports showing weakness in the labor market. Job openings data due later Tuesday will offer fresh evidence, ahead of non-farm payrolls on Friday — unless a shutdown delays that release date.

At a time when the economy is “at a crucial juncture” with regards to growth and inflation, any postponement in the collection of economic data would stoke uncertainty, according to Jack Janasiewicz, portfolio strategist at Natixis Investment Managers Solutions.

“And with that increased uncertainty, we often see a pick-up in financial market volatility,” Janasiewicz said. Further muddying the outlook is the White House’s threat to fire federal employees rather than furlough them in the event of a shutdown, raising the possibility of legal challenges, he added.

Interest-rate swaps tied to the dates of upcoming Fed meetings suggest a roughly 80% chance of another quarter-point cut in October, with a reduction of the same size likely in December.

Source: Bloomberg

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Samantha Luan

Economic

Forex

Political

● One opinion said 'time to raise rates again'

● Another opinion called for rate hike at regular intervals

● Some called for caution, wanted to see 'a little more hard data'

● July hawkish split, Noguchi speech raise Oct rate-hike bets

● BOJ tankan, Ueda's speech in focus for clues on rate-hike timing

Bank of Japan board members debated the feasibility of raising interest rates in the near term with some suggesting the time for such a move may be approaching, a summary of opinions at the central bank's September policy meeting showed on Tuesday.Many opinions at the meeting called for vigilance to mounting inflationary pressure, the summary showed, adding to signs of a hawkish shift on the board that heightens the chance of a rate increase in October.

"Judging solely from the perspective of Japan's economic conditions, it may be time to consider raising the policy interest rate again, given that it has been more than six months since the last rate hike," one opinion was quoted as saying.With uncertainty over U.S. tariffs and other external headwinds receding, the BOJ has scope to raise Japan's real interest rate that remains low by global standards, another opinion said, according to the summary.

At the September 18-19 meeting, the BOJ kept interest rates steady at 0.5%, but two of the nine board members dissented and instead unsuccessfully called for a hike to 0.75%.The last time it raised rates was in January. Since then, the BOJ has signalled a pause to scrutinise the impact of U.S. tariffs on Japan's export-reliant economy.The dissent by board members Hajime Takata and Naoki Tamura was seen by markets as a prelude to a near-term increase in borrowing costs. In a speech on Monday, dovish member Asahi Noguchi said the need for a rate hike was increasing "more than ever."

Markets are now pricing in roughly a 60% chance of a rate hike at the BOJ's next meeting on October 29-30. Investors are focusing on the BOJ's "tankan" quarterly business survey, due on Wednesday, and Governor Kazuo Ueda's speech on Friday, for clues on the timing of the next rate hike.If economic and price developments do not deviate much from the anticipated path, the BOJ should raise rates at "somewhat regular intervals," a third opinion said, adding the tankan and corporate first-half earnings reports may help to decide on whether a hike would be appropriate.

Of the opinions on monetary policy, five suggested resuming rate hikes in the foreseeable future in a sign of broadening calls within the board for a near-term increase.Some, however, called for caution. One member said it would not be too late to raise rates after assessing "a little more hard data" as Japan's domestic demand tends to be vulnerable to external shocks, the summary showed."A rate hike at this point, which would come as a surprise to the market, should be avoided," another opinion showed.

On the price outlook, many pointed to inflationary pressure with one saying firms are continuing to increase prices even as rises in import costs dissipate, the summary showed."There seems to be a higher likelihood the cost pass-through to food prices will continue, taking into account data and anecdotal information," another opinion showed.The BOJ's summary, released several market days after each policy meeting, does not identify the names of the members who made the comments.