Markets Shrug Off US Shutdown and Weak Hiring

Economic

Summary:

Markets remain upbeat despite the U.S. shutdown and weak hiring. Investors see it as noise, focusing instead on earnings, liquidity, and policy support, which keep equities at record highs globally.

Another government shutdown, another bout of handwringing in Washington. Yet markets don’t seem to care. Stocks are at record levels, the dollar is firm, and investors are showing once again that political theatre rarely trumps fundamentals.

The prevailing view among traders and asset managers is simple: the shutdown will pass. It always does. Over the years, these episodes have rattled nerves but left little lasting scar on the economy or on markets. Investors are treating this one the same way — as noise rather than signal.

The data flow has been no less mixed. Hiring is clearly slowing, with the pace of new additions to payrolls at the weakest level since the financial crisis. But unemployment is steady at around 4.3%, according to new indicators from the Chicago Fed. That combination suggests an economy cooling, not collapsing.

For investors, this matters: it supports the case for monetary conditions to remain loose enough to keep risk assets buoyant.

Liquidity, earnings power, and expectations around policy are what drive markets. Not temporary shutdowns. Not even patchy hiring numbers. The fundamentals currently favour equities, and that is why benchmarks are scaling new peaks.

Momentum compounds the story. Record highs have a magnetic quality. When investors see indexes climbing, they are reluctant to stand aside for fear of missing out. This feedback loop helps explain why markets can rise even when headlines are dominated by dysfunction in Washington or concerns about slowing job creation.

But it’s not just about the US. The effects are global. European markets are taking their cues from Wall Street, with investors rotating into growth-oriented sectors that benefit from improved sentiment. In Asia, capital is flowing into areas tied to technology, clean energy, and infrastructure — themes that investors expect to dominate for the rest of the decade.

Emerging markets are facing a stronger dollar headwind, but even there, the story isn’t one-sided. Currency pressure is real, yet equity markets in several regions are still drawing long-term capital as funds seek diversification and higher growth rates.

Australia deserves mention in this context. Its equity market has been supported by global demand for resources, particularly from Asia. The Australian dollar has been under pressure from US dollar strength, but foreign investors still see value in exposure to a commodity-rich, advanced economy with a reputation for political and regulatory stability. It is a reminder that global capital allocation isn’t determined by short-term politics in Washington alone.

Of course, risks exist. Inflation remains a wildcard. If price pressures re-emerge, expectations for easier monetary conditions could be upended quickly. Geopolitics is another constant variable.

A sudden flare-up could change risk appetite overnight. And a disorderly downturn in the US labour market would undermine the current confidence that the slowdown is manageable.

But right now, markets are balancing the equation and finding the bullish forces stronger than the bearish ones. Investors see earnings holding up, policy leaning supportive, and global liquidity plentiful. Against that backdrop, political stalemate in Washington or weaker hiring data do not alter the investment case.

What we are witnessing is not complacency but a rational prioritisation of the drivers that actually move asset prices. Traders are discounting the shutdown because history shows it has little lasting bite.

They are discounting weaker hiring because unemployment remains stable and because a softer labour market could keep policymakers accommodative. They are putting their chips on corporate earnings, liquidity, and global capital flows — the variables that matter most.

Looking forward, this pattern is likely to persist. Unless there is a decisive break in earnings momentum or a serious external shock, equities are well positioned to hold their strength. The dollar looks underpinned by relative resilience, and risk assets broadly remain attractive.

For global investors, the lesson is to keep perspective. Short-term political noise in Washington grabs headlines, but it is rarely the real story. The real story is the steady march of earnings, the evolution of monetary policy, and the flows of capital across regions and sectors.

Europe will keep following the US, Asia will remain a magnet for growth-focused capital, emerging markets will balance opportunity with currency volatility, and Australia will continue to draw on its unique position as a resource-rich economy tied to Asian demand.

Shutdowns will fade, labour data will oscillate, but the deeper trend is intact: markets are focusing on fundamentals, and those fundamentals are still supportive. For now, that means investors remain firmly in rally mode.

Source:investing

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Warren Takunda

Economic

It’s not only European tourists traveling in the United States and finding themselves in front of closed museum doors or national park gates.

Because the US is so central to the global economy, European businesses could feel negative effects of a US government shutdown too.

In fact, they should get ready for a rough ride that will only become more painful the longer the gridlock in Washington lasts.

So, why should corporate Europe be worried about public employees on the other side of the Atlantic not being able to work?

Well, the shutdown halts or scales back many federal operations like providing loans or permits and disrupts the work of government agencies that provide oversight, slowing down economic activity.

What makes this more significant is its timing. This year, the US economy is already navigating slower growth, persistent inflation pressures and increasing financial insecurity.

The shutdown is adding to this insecurity and has the potential to trigger a chain reaction of economic consequences.

Take European trade businesses. Already rattled by the tariff chaos, they rely on consistent and predictable market conditions to plan their production, allocate resources and meet their customers’ needs.

Even a slight slowdown in economic activity would lead to lower US imports, which would reduce demand for European companies, whose growth, revenue and profitability would in turn be affected.

European imports arriving in America will meet less government staff in ports and customs who handle administrative and regulatory tasks associated with importing and exporting goods.

As a result, there will be delays which can extend the time it takes for goods to reach their destinations, disrupting delivery schedules.

The delays can have cascading effects on supply chains that rely on precise timing to function efficiently. This may lead to unexpected costs for expedited shipping and penalties for missed delivery deadlines.

A truck drives by shipping containers at the port of New York & New Jersey. (AP Photo/Matt Rourke) AP Photo

In addition, there is the danger from a potential halt in export license approvals.

European companies need these approvals – or their renewals – to conduct their business operations in the US altogether.

“Companies will be frozen, they can’t get anything approved, no permits or licenses, can’t sell corporate debt in the US,” a lawyer in the business of negotiating transatlantic deals for multinational corporate clients told Euronews.

“A government shutdown sends home the people who execute regulations, but the regulations themselves remain – and remain to be complied with.”

This regulatory uncertainty can leave European exporters in a state of limbo, unsure of their ability to continue their activities with the US market in the short-term.

Look especially for sectors that rely on US demand such as machinery, automotive components or chemicals.

Those companies might see downward stock market swings as investors react to uncertainty in the US.

Speaking of financial markets. Prolonged uncertainty in the US could lead to rising interest rates on US government bonds, as investors would consider them to be higher risk.

That would lead to higher rates elsewhere in the world.

In Europe, for example, this could depress stock markets, increase the cost of financing public deficits, and reduce overall demand due to the higher cost of credit.

The rise in rates would increase the risk of default by over-indebted borrowers, and therefore of a financial crisis.

As the lack of a budget agreement in Washington would compromise the financing of US support for certain countries, the risks of geopolitical instability would increase, which would depress business investment and intensify the decline in demand already affected by inflation.

Economists estimate that a two-week US government shutdown would have a negative impact on EU GDP of €4 billion. If the shutdown lasted for 8 weeks, the impact would increase to €16 billion.

Whether it will really come to this is in the hands of politicians in Washington.

What is at stake is nothing less than America’s reputation as a global economic anchor of stability.

Source: Euronews

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Michelle

Economic

Forex

Canadian Dollar remains the weakest major currency this week, pressured by a combination of falling oil prices and dovish stance of the BoC. Canada’s key export driver slumped to a four-month low with WTI crude threatening to break below 60 handle. That decline comes just as the BoC’s own communications reinforced expectations of more easing ahead.

The oil market itself is under heavy pressure from expectations of a large OPEC+ output hike. Reports suggest the group could raise production by as much as 500,000 barrels per day in November—triple the October increase—in a bid to reclaim lost market share. Such a move would come at a time when analysts already warn the market may be tipping into sizeable surplus through Q4 and into 2026.

For the BoC, September summary of deliberations confirmed concerns that the economy is losing momentum. Policymakers noted further softening in the labor market and more convincing signs that core inflation pressures are easing. In addition, the removal of most retaliatory tariffs has reduced the risk of renewed cost-push inflation. Against that backdrop, the decision to cut rates to 2.50% was straightforward, and officials left the door open to additional easing.

Still, not all forecasts are bearish for the Canadian Dollar. A recent Reuters poll of 38 FX analysts showed a median projection for the Loonie to strengthen around 2.8% to 1.36 per U.S. Dollar by the end of 2025. That view rests on the assumption that the Fed will embark on a more aggressive easing path in 2026, while the BoC, having moved earlier, may conclude the cycle sooner.

Canada’s growth backdrop remains fragile but not disastrous. GDP contracted at an annualized pace of -1.6% in Q2, but subsequent monthly data suggest the economy may have avoided slipping into a technical recession.

So far this week, Loonie is at the bottom of the FX performance table, followed by Dollar and Swiss Franc. Yen continues to lead despite today’s mild retreat, with Kiwi and Aussie also among the outperformers. Euro and Sterling remain stuck in the middle of the pack.

In Europe, at the time of writing, FTSE is up 0.54%. DAX is down -0.17%. CAC is down -0.10%. UK 10-year yield is down -0.026 at 4.688. Germany 10-year yield is down -0.008 at 2.696. Earlier in Asia, Nikkei rose 1.85%. Hong Kong HSI fell -0.54%. China was on holiday. Singapore Strait Times rose 0.38%. Japan 10-year JGB yield fell -0.002 to 1.665.

Eurozone PPI down -0.3% mom, -0.6% yoy, energy drag while regional divergence widens

Eurozone producer prices fell by -0.3% mom and -0.6% yoy in August, weaker than expectations of flat monthly growth and a smaller -0.4% yoy decline. The drop underscores the continued disinflationary forces in the pipeline, particularly as energy prices remain soft.

Breaking down the Eurozone data, prices fell -1.3% mom for energy and -0.1% for both intermediate and durable consumer goods. In contrast, modest increases were seen in capital goods (+0.1%) and non-durable consumer goods (+0.1%).

Across the EU as a whole, PPI slipped -0.4% mom and -0.4% yoy. At the country level, the steepest monthly declines were recorded in Denmark (-1.3%), the Netherlands and Romania (both -1.0%), and Austria (-0.8%). Meanwhile, Estonia (+5.4%), Finland (+1.9%) and Slovakia (+1.3%) bucked the trend with notable gains.

Eurozone PMI signals 0.4% Q3 GDP growth, backs ECB hold

Eurozone services activity strengthened in September, with PMI Services finalized at 51.3, up from 50.5 in August and marking an eight-month high. Composite PMI also edged higher to 51.2, the best in 16 months.

Country breakdowns in Composite highlighted broad-based improvement. Spain led with a 53.8 reading, while Germany and Ireland both came in at 52.0, representing multi-month highs. Italy held at 51.7, while France lagged with a decline to 48.1, its weakest in five months.

Cyrus de la Rubia, Chief Economist at Hamburg Commercial Bank, noted that business activity “picked up more strongly” in September, and that the rebound was “broad-based geographically.” The uptick in new business suggests expansion could continue into October, though backlogs have yet to recover.

Crucially, price pressures eased but remained slightly above average. De la Rubia said the data support policymakers who resist further cuts, as inflation in services is still sticky. With the composite PMI holding in expansionary territory throughout Q3, HCOB’s nowcast points to quarterly GDP growth of around 0.4%.

UK PMI suggests summer bounce a flash in the pan, supports BoE dovish shift

UK business activity slowed sharply in September, with the final Services PMI dropping to 50.8 from August’s 16-month high of 54.2, marking a five-month low. The Composite PMI mirrored the downturn, slipping to 50.1 from 53.5, also a five-month trough.

Tim Moore, Economics Director at S&P Global Market Intelligence, said service providers saw a “disappointing end” to Q3 as weak consumer confidence, postponed investment decisions, and falling exports weighed on demand. He warned that the summer’s output surge now looks like a “flash in the pan,” with political and economic uncertainty again restraining the sector. Export orders were particularly weak, as European demand remained subdued.

The report also flagged another month of job losses, extending a year-long trend, alongside weaker business confidence and softer cost pressures. These signs of slackening labor conditions and easing inflation are likely to reinforce the “more dovish shift” in the BoE’s policy debate, with calls growing for further rate cuts into 2025.

BoJ’s Ueda reiterates further hikes if baseline holds, flags three uncertainties

BoJ Governor Kazuo Ueda said in a speech today that Japan’s real interest rates remain “significantly low,” and if the Bank’s baseline scenario holds, policy rates will continue to rise. He highlighted that rising labor shortages and firmer medium- to long-term inflation expectations should eventually push underlying CPI toward 2% in the second half of the Bank’s forecast horizon.

Ueda acknowledged, however, that uncertainties remain significant. Chief among them are US economic developments, tariff impact on Japan, and food price inflation.

He warned that tariffs could hurt US firms’ profits and in turn slow employment and income growth — risks that may already be showing in weaker US job data. If firms pass on costs instead, higher consumer prices could sap private demand.

At home, the Tankan survey suggested resilience in services, where the tariff impact is limited, but profit projections for export-heavy industries such as autos showed steep declines.

Food prices are another area of concern. While much of the recent rise has been driven by temporary factors, Ueda cautioned that wage and distribution cost pass-through is increasingly evident. That raises the possibility of more persistent inflation in food.

Japan unemployment rate rises to 2.6%, highest in over a year

Japan’s unemployment rate rose more than expected in August, climbing to 2.6% from 2.3% a month earlier. That marked the highest reading since July 2024 and exceeded expectations of 2.4%.

Number of unemployed increased by 150k to 1.79 million, a 13-month high, while employment fell by -210k to 68.10 million. The labor force edged down by -40k to 69.89 million, though the participation rate improved to 64.0% from 63.9%. Still, the data underscored growing strain in the labor market as job creation weakens and unemployment rises.

Complementary data from the labor ministry showed the job-to-applicant ratio slipping to 1.20 from 1.22, its lowest since January 2022. The decline points to waning demand for labor.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3938; (P) 1.3962; (R1) 1.3991; More…

Intraday bias in USD/CAD remains on the upside and further rise could be seen. But strong resistance is expected from 1.4014 cluster to complete the corrective rebound from 1.3538. On the downside, break of 1.3895 support will turn bias back to the downside for 1.3725. However, sustained break of 1.4014 will carry larger bullish implications.

In the bigger picture, price actions from 1.4791 medium term top could either be a correction to rise from 1.2005 (2021 low), or trend reversal. In either case, further decline is expected as long as 1.4014 cluster resistance (38.2% retracement of 1.4791 to 1.3538 at 1.4017) holds. Next target is 61.8% retracement of 1.2005 (2021 low) to 1.4791 (2025 high) at 1.3069. However, sustained break of 1.4014 will argue that fall from 1.4791 has completed, and bring stronger rally to 61.8% retracement at 1.4312.

Source: ACTIONFOREX

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Adam

Economic

The long-awaited resumption of the Federal Reserve's rate-cutting cycle is likely to cheapen hedging of dollar exposure for foreign investors and increase their motivation to guard more of their U.S. assets against further currency weakness.

In September, the U.S. central bank lowered interest rates by an expected 25 basis points to 4.00-4.25% on labor market concerns and indicated more cuts would follow later this year.

That cut narrows the interest-rate differential between the U.S. and other developed countries, which helps to lower the hedging costs for foreign pensions, sovereign funds and other institutional investors, managers and analysts said.

The ICE U.S. Dollar Index (.DXY) is down about 10% this year, partially driven by foreign investors increasing hedging activity on worries about the impact of U.S. trade and tariff policies on their U.S. assets, market participants said.

"There are some people that are watching it, that have been waiting for the resumption of the cutting cycle by the Fed," said Van Luu, global head of solutions strategy for fixed income and foreign exchange for Russell Investments in London.

"Now they are inclined to raise the hedge ratio, and they're waiting for the right moment or they're waiting for some kind of catalyst."

Hedging is a way to limit losses on an existing portfolio by using financial instruments such as derivatives to create an offsetting position. Since it often involves selling dollars via forwards or swaps, any rise in hedging activity can spell additional weakness for the beleaguered greenback.

NEW-FOUND NEED TO HEDGE

High hedging costs and a bullish view on the buck were two major factors suppressing FX hedging ratios in recent years, according to a June report from the Bank for International Settlements.

Years of dollar strength meant foreign investors could leave U.S. assets unhedged since it boosted their overall returns and was a source of diversification. Now that's set to change.

With the greenback down significantly this year and with more potential weakness on the horizon, hedging could help blunt the hurt from unfavorable FX moves.

Markets are pricing in about two more quarter-point rate cuts this year, which could incentivize investors who want to ramp up their hedges but have found the cost to do so a deterrent.

GUARDING MORE BUSINESS AGAINST CURRENCY SWINGS

Foreigners currently have more than $30 trillion invested in U.S. stocks and bonds, according to Morgan Stanley, $8 trillion of which is held by European investors.

Rising concerns over Fed leadership, its independence, and U.S. policy uncertainty have helped keep pressure on the dollar, even as U.S. stocks have rallied. The S&P 500 is up about 14% for the year, near a record high.

"The strong gains in U.S. (stock) market and the very sharp U.S. dollar falls are unusual but they’re not unheard of – we think an increase in hedging is part of the reason for this divergence," said Steve Dooley, head of market insights at Convera in Melbourne.

A July research note from Deutsche Bank showed that equity investors in Germany and Austria have increased their hedge ratios to 60-70% from 20-30% at the start of the year.

A new report from the Danish central bank showed that insurance companies and pension funds are shielding more than three quarters of their dollar investments from currency swings. The Deutsche note stated that some high-profile pension funds plan to top up those ratios after the summer.

"I think foreign investors are still inclined to hedge away their dollar exposure," Thierry Wizman, global FX and rates strategist at Macquarie in New York, said.

"So they will come out again at some point in the next few weeks ... you're going to see another round of dollar hedging by foreign institutions," he said.

Research from MillTechFX also shows that 86% of European corporates are currently hedging their forecastable currency risk, up from 67% in 2023, with their mean hedge ratio rising to 49% from 43%.

Joseph Hoffman, chief executive officer at Mesirow Currency Management, said the shift among international investors is not mainly about short-term interest-rate advantages, but is driven "more by a bearish structural view on the dollar rooted in the Fed’s policy, heightened political uncertainty, and persistent fiscal deficits."

WHAT'S MY COST?

Still, a lower cost of hedging will likely draw those investors who may have held off boosting hedges due to price considerations.

For instance, the 4% annual hedging cost for investors in Japan and Switzerland, based on current interest rates, remains a big hurdle. It costs other euro-based investors around 2% annually.

"I think there's like a psychological level that if the hedge cost goes to 1% or below, which is on the horizon for EUR investors over the next 12 months, people wouldn't worry about it as such," said Russell's Luu.

Source: reuters

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Warren Takunda

Stocks

Wall Street nudged past yesterday’s record highs in early trading Friday as investors continue to shrug off the U.S. government shutdown, now in its third day.

Futures for S&P 500, Nasdaq and the Dow Jones Industrial Average all added 0.2% before the bell. All three closed at record levels on Thursday, boosted by gains of chipmakers and artificial intelligence companies.

Markets have largely ignored the shutdown of the U.S. government after Democrat and Republican lawmakers failed to reach agreement on funding.

U.S. President Donald Trump and congressional leaders were not expected to meet again soon and the Democrats have held fast to their demands to preserve health care funding, warning of price spikes for millions of Americans nationwide.

The government shutdown means this week’s usual report on jobless claims was delayed. An even more consequential report, the monthly tally of jobs gains and losses that usually comes out the first Friday of every month, will also not arrive as scheduled.

That increases uncertainty when much on Wall Street is riding on investors’ expectation that the job market is slowing by enough to convince the Federal Reserve to keep cutting interest rates, but not by so much that it leads to a recession.

So far, the U.S. stock market has looked past the delays of such data. Shutdowns of the U.S. government have tended not to hurt the economy or stock market much, and the thinking is that this one could be similar, even if Trump has threatened large-scale firings of federal workers this time around.

Excitement around AI and the massive spending underway because of it are a major reason the U.S. stock market has hit record after record, along with hopes for easier interest rates. But AI stocks have become so dominant, and so much money has poured into the industry that worries are rising about a potential bubble that could eventually lead to disappointment for investors.

At midday in Europe, Germany’s DAX ticked down 0.2% and the CAC 40 in Paris fell back 0.1%. Britain’s FTSE 100 rose 0.6%.

In Asia, Japan’s Nikkei 225 closed nearly 1.9% higher at 45,769.50 as tech stocks gained despite data showing Japan’s unemployment rate rose 2.6% in August, the highest in 13 months and above the expected 2.4%.

Shares in Hitachi jumped 10.3% after it signed a memorandum of understanding with OpenAI to provide cooling systems for its data centers.

Stock exchanges in China and South Korea were closed Friday for holidays.

Hong Kong’s Hang Seng won back some earlier losses, ending 0.5% down to 27,140.92 as traders sold to lock in profits from Thursday’s gains.

Australia’s S&P/ASX 200 added nearly 0.5% to 8,987.40. India’s BSE Sensex rose less than 0.1%, while Taiwan’s Taiex edged 0.9% higher.

In energy markets, benchmark U.S. crude added 17 cents to $60.65 per barrel. Brent crude, the international standard, rose 21 cents to $64.32 per barrel.

Source: AP

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Adam

Commodity

Market Overview

Gold came under renewed pressure Friday as the U.S. dollar gained ground and equity markets extended their rally. Despite a partial U.S. government shutdown stretching into its third day, investors turned toward risk assets, diminishing demand for traditional safe havens.

The move followed Wall Street’s fresh record closes and upbeat sentiment across Asian markets, where strong earnings and resilient consumer data helped sustain risk-on momentum.

“Markets are looking past the shutdown and focusing on growth indicators,” said a commodities strategist at a London-based investment firm. “That shift has capped near-term demand for gold.”

Fed Rate Cut Bets Provide Support

Even with weaker safe-haven flows, expectations of monetary easing by the Federal Reserve continue to underpin the gold market. The ADP employment report showed private payrolls fell by 32,000 in September, the sharpest decline since March 2023, while August figures were revised to show a contraction rather than growth.

Traders are now pricing in two additional rate cuts before the end of the year, according to CME FedWatch data.

Lower borrowing costs typically weigh on the dollar and enhance the appeal of non-yielding assets such as gold. With the shutdown threatening to delay critical data releases—including the Nonfarm Payrolls report—investors are increasingly relying on Fed commentary for direction.

Silver Holds Firm Amid Dovish Outlook

Silver traded modestly higher, supported by the exact dovish Fed expectations and broader geopolitical risks that have limited downside pressure across the precious metals sector. However, gains remain constrained by the strength of the equity market and the dollar’s rebound.

Analysts highlight silver’s dual role: industrial demand remains vulnerable to slowing global activity, while safe-haven buying is providing balance.

“Silver is more sensitive to manufacturing cycles, but right now, monetary policy and geopolitical dynamics are doing most of the heavy lifting,” noted a senior market analyst at a New York-based fund.

Outlook

Gold remains on track for a seventh consecutive weekly gain, with pullbacks seen as opportunities to accumulate. Yet the interplay between stronger equities, Fed policy bets, and ongoing geopolitical risks will dictate whether momentum can carry further. Silver is likely to mirror these trends, trading within a narrow range until clearer policy signals or economic data emerge.

Short-Term Forecast

Gold holds near $3,860 with resistance at $3,895, while silver trades around $47.28, supported at $46.69. Momentum signals consolidation, with upside bias if key resistance levels break.

Gold Prices Forecast: Technical Analysis

Gold – Chart

Gold is trading near $3,860, showing resilience after bouncing from support at $3,844 and holding above its ascending trendline. The 50-EMA ($3,841) is providing a key floor, keeping the bullish structure intact. Price action, however, faces strong resistance at $3,895, where repeated rejections signal heavy supply.

A decisive close above this barrier could open the path toward $3,916 and $3,944, while a breakdown below $3,844 risks a move toward $3,821 and $3,793.Momentum remains neutral with the RSI at 51, suggesting consolidation before the next breakout.

For traders, the key lies in whether gold can sustain above its trendline, with a bullish bias favored on a confirmed close above $3,895.

Silver (XAG/USD) Price Forecast: Technical Outlook

Silver – Chart

Silver is trading near $47.28, showing signs of recovery after bouncing from support at $46.69, which aligns with both the ascending trendline and the 50-EMA. This confluence zone has acted as a strong base, keeping the bullish bias intact. Resistance is now seen at $47.84, with a break above exposing the higher barrier at $48.08.

Candlestick action shows buyers stepping back in after a brief dip, supported by the RSI at 55, which indicates that momentum is tilting bullish without being overextended.

As long as silver holds above $46.69, the path of least resistance remains upward. A close below this level, however, could drag prices back toward $45.91 and $45.26.

Source: fxempire

Risk Warnings and Disclaimers

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Glendon

Economic

Forex

German Chancellor Friedrich Merz on Friday implored Germans to either embrace uncomfortable reforms or watch their economy fade.

“Our nation is in the midst of an important, perhaps decisive phase in its modern history,” Merz said in a speech in Saarbruecken marking 35 years since German reunification. “Many things must change if they are to remain as good as they are, or even to improve.”

Merz’s plea reflects Germany’s deep-rooted fear that its once-powerful business model is eroding, with high energy prices, cheap Chinese electric vehicles and spiraling defense costs all battering the country’s industries.

Despite this, the chancellor has struggled to unite his coalition on a solution, as his conservative camp butts heads with its center-left partners.

The remarks were unusual given the setting — an event to celebrate German reunification. German chancellors typically use the anniversary — which this year featured French President Emmanuel Macron — to discuss the still-difficult relationship between the former West Germany and the ex-communist eastern states.

Merz nodded at the history, encouraging Germans to come together once again in the present.

“After 35 years of German unity — and in a difficult time for our country — we should regroup and look forward with confidence and energy,” Merz said. “Let us make a joint effort for new unity in our country.”

But he also used the speech to sell some political priorities, including rebuilding Germany’s military.

“We must learn to defend ourselves again,” Merz said, following a series of drone sightings near critical infrastructure sites that have alarmed German authorities. European leaders discussed similar airspace violations during two summits in Copenhagen this week, calling the incidents part of Russia’s hybrid war on western allies.

Merz’s latest pitch for reform, which the chancellery carefully orchestrated, reveals the deepening anxiety in Berlin about the country’s economic weakness and divisive mood.

Germany’s struggling economy has faced repeated setbacks of late, complicating Merz’s promise to reignite growth. After a strong start to 2025, output shrank 0.3% in the second quarter and is only likely to edge up slightly over the year as a whole.

The Bundesbank sees gross domestic product rising slightly between July and September as drags from trade with the US fade. With a US-European Union tariff accord reducing uncertainty, the outlook for Germany’s economy among firms has been improving.

Still, Merz’s coalition is mired in divisions, especially over potential reforms to Germany’s welfare state. The chancellor’s Christian Democratic Union and its sister party, the Christian Social Union, are pushing for revisions, while the Social Democratic Party remains reluctant.

A two-day coalition retreat this week failed to produce any decisions on basic reforms.

The ruling alliance has also failed to stall the rise of the Alternative for Germany (AfD), the far-right party that has successfully tapped into voters’ migration concerns.

A Forsa survey published Tuesday showed the AfD had stretched its lead over Merz’s bloc to three percentage points for the first time, with 27% backing to the CDU/CSU’s 24%.

The SPD trailed in third at 13%, just ahead of the Greens and the Left party.

Additionally, Merz’s personal ratings have been consistently poor, even before the government took office in early May. In the Forsa poll, only 26% of respondents said they were satisfied with his performance as chancellor.