Jason Daw:
Hello and welcome to Macro Minutes. During each episode, we'll be joined by RBC Capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important disclosures.
Hello everyone, and welcome to this edition of Macro Minutes called Shutdown that we're recording at 9:00 AM Eastern Time on October 2nd. I'm Jason Daw, your co-host for today's call, and I'm being joined by my colleagues Izaac Brook in US Rate Strategy and Michael Reid in US Economics. Now, the US government shutdown is the latest in a long list of developments in 2025 that has injected heightened uncertainty into macro and markets.
There are some known unknowns. About how this will impact the economic data, but there's lots of unknown unknowns also. And in this episode, we're gonna try to shed light on what it means for the economy and provide some early speculation on how the bond market and Fed might react. Let's start with some of the nuts and bolts of the current situation.
And Michael, welcome to today's call. Could you tell our listeners how long have shutdowns lasted in the past? How this one is potentially different than the last one under Trump in 2018? How we can get out of the current situation.
Michael Reid:
When you're thinking about a government shutdown, there's really no rhyme or reason to the duration, so that is to say there's no real pattern when you look at history. There are a few that have lasted just a day or two, but notably in the past 20 years or so, the duration. Shutdowns have increased, notably. In fact, the last one that we did see back in 2018 to 2019 lasted for 34 days.
Jason Daw:
Now, if the shutdown keeps going, what will happen with some of the key data releases such as employment and CPI? Will they get published later? Or could there be a situation where the data never gets published? And in this situation, what other data can we rely on during the shutdown period?
Michael Reid:
What we have here is a situation where we're already facing a very uncertain and really cloudy environment in terms of the economic data.
We've had some disruptions due to the pull forward of imports and inventory buildup, and that's already making it very difficult to find some underlying trends within the data. Now we're facing this period where we risk not getting a lot of the headline data that we rely on as forecasters. In fact, Friday, October 3rd, the employment report is due to be released.
We think that will be delayed, obviously, as the shutdown continues here. So in the meantime, what we do have to do is rely on alternative data coming from private providers, as a good example, as an alternative to the payroll report that is due out tomorrow will focus a bit more on things like the a DP employment report, as well as other indicators that come from labor market, job posting boards, such as Indeed, as well as things like challenger job cuts. So these are ways in which we can get a sense of the underlying momentum in the labor market without necessarily relying on that employment report that will be delayed tomorrow on October 3rd.
Jason Daw:
And I guess just as a follow up, what happens if the shutdown extends for, let's say a month? Is it possible that we never get the employment report for the period that overlaid the shutdown, or would that just be released with a very long delay?
Michael Reid:
We do expect the data ultimately will be released. Right now, the risk is more so not to the employment report being impacted in terms of its release, but the data that's released mid-month, where the data collection process starts in October.
So if you think about something like CPI or retail sales, all of that data is collected by government employees starting in October. Obviously during the shutdown, those workers are going to be furloughed and will not be conducting that data collection, so that really delays that process. That being said, it would be very likely that once the shutdown ends, that process would be streamlined and the various agencies that are responsible for these data releases would make announcements as to when those would be released to the public.
Jason Daw:
Okay. And lastly, Michael, what would the impact on GDP employment unemployment rate be? Do all the distortions get reversed once the government comes back, or are there some permanent ones possibly.
Michael Reid:
It depends on the various measures that you're looking at. And I'll start with GDP as an example. Various studies have shown a slight drag on GDP growth anywhere from a tenth to three tenths, depending on the duration.
There are two ways in which you can measure that. One is just mechanical and that's due to the way in which the data is collected and reported by BEA. The second way in which you can estimate an impact is due to the spending that may be pulled back by consumers that would've been done otherwise as a result of not having paychecks.
So the real risk is that there's a more meaningful pullback the longer that this shutdown goes on, because remember, the furloughed workers are not getting paid during this period. That being said, they will receive back pay, and that's that distinction I made earlier wherein BEA does measure and capture that as part of their national accounts, but they are not receiving that pay in the current period that gets captured once the shutdown ends.
Now as far as the unemployment rate, I think that's an important measure to look at as well. There we estimate that if the shutdown were to go on through October 17th, and that's an important date because that is the end of the week that contains the 12th of the month. If the shutdown persists for that long, we could see the unemployment rate spike in the October employment report as high as 4.8%, and that would be on furloughed workers alone.
Now, if the shutdown goes on, say for something like we saw back in 2019 for 34 days, there's a real risk that federal contractors start to furlough their workers and that could push the unemployment rate closer to say 5%. And it's worth noting there too, those workers in the past don’t necessarily receive back pay, it's not guaranteed for them. So that adds a greater risk to, it drags on things like consumption as well as business investment. So the longer the duration, we do see a greater risk of GDP growth slowing as a result.
Jason Daw:
Thanks a lot, Michael, for those insights. Now moving over to the market side, Izaac, how have the rates markets responded to the shutdown in the past and any notable developments in the current situation, and do you expect any future impacts to unfold?
Izaac Brook:
So in the past rates, market response to shutdown was pretty limited and also not super clear in one direction or the other. We've seen rallies, we've seen sell offs. I think that just highlights the same point that we've made around this shutdown that rates shutdown related trades are pretty limited.
Instead, rates are gonna continue to trade with the incoming economic data and the headlines, and that's been true with this shutdown so far as well. The market impact has been pretty muted, and the moves we've seen yesterday and today are mostly coming on the back of data releases and headlines. Are not related to the shutdown.
One thing that we've been trying to make clear in this whole discussion is that it's important to remember that a shutdown is not the same thing as a debt limit. Debt limits are extremely disruptive to markets. There's a real risk of technical default if the government runs out of funds. That's not what the concern is here.
Shutdowns are really just about a lack of agreement on how the government can allocate funds out to different branches. So it's not a market risk, it's not a risk of technical default, and again, that highlights that usually rates, markets are relatively unimpacted by this stuff. The impacts are mostly gonna stem from the fact that economic data is being delayed, that there could be potential distortions in the data when it is released. But overall, that's a relatively marginal impact for the market.
Jason Daw:
How are we thinking about the Fed going forward, and does this government shutdown mean anything for the Fed? And what happens if we go into the October meeting blind with none of the key data, such as employment and CPI being released?
Izaac Brook:
Sure. So let me hit on the shutdown impacts for the Fed first, and then I can talk a little bit about our outlook. The shutdown obviously is impacting them because they're not getting some of these key economic data releases that drive their decision making. But the Fed doesn't shut down their independent, they continue to operate as they would otherwise.
Same with policy making, right? Without NFP, without CPI, they're just gonna have to look at other data sources, secondary data sources, private data sources, and then they probably also put more weight on the anecdotal color that they get from business contacts. That stuff shows up in the Fed's beige book release in the past year or so, if not longer, the Fed has put a lot of weight on what they're hearing from business contacts because of volatility in the economic data.
As far as our outlook goes, our base case had long been that the Fed would probably skip the October meeting ahead of yesterday's ADP release. We were feeling pretty okay with that call. The data that we have gotten since the September FOMC, excluding ADP did skew pretty hawkish. You saw the fed's favorite GDP metric was revised up yet again.
Initial estimates had been met at quite a weak level, but now we're looking at something that's much more healthy. Jobless claims have been running near multi-month lows, and then Friday's PC report while the headline numbers were in line. If you look at Super Core, which is a metric that the Fed likes. Super core services showed that services inflation was running at the highest level in months, and that there was a broadening of price pressures and the services components, which again, you know, one of the more optimistic takes around inflation in the past couple months has been that a reduction in services price pressure would offset some pressure on the good side.
And we're just not seeing that. However, you know with that very weak ADP number we got yesterday, the labor market picture is still one that's definitely gonna be of the utmost concern for them. Markets are now pricing a basically a 100% chance of a 25-basis-point cut in October, and that certainly seems like that's gonna be the path of least resistance from here on out without getting NFP or other top tier data, what we're left with is a picture of a pretty rough looking labor market. At least based on hiring trends.
What I would just highlight though is that none of the FMC officials that we've heard from since the FMC meeting have sounded very convicted about where to go from here. I think that given the shutdown, given what we do see in the economic data, the doves are gonna win out the argument in October that continuing to do these risk management cuts make sense for now, but if we do get a rebound in data between now and December or into next year, then I think the hawks, which you have to remember, make up just about half of the total committee are probably gonna start winning more of the debate. For that reason, we see risks around our 3% terminal call, which we currently see in mid-26, and we see risks around that as skewed to the upside.
Jason Daw:
Okay, and lastly, Izaac, with top tier economic data at least delayed for now, what else are rates markets focused on?
Izaac Brook:
There's three things that I'd really like to highlight here. First is the Lisa Cook case Fed independence has been a hot topic for the past several months. Well, yesterday the Supreme Court noted that they weren't gonna enforce Trump's decision to remove Lisa Cook and that she'll be able to stay in her role on the board.
Furthermore, they also noted that they won't be hearing any oral arguments in the case until January and doing some background research on Supreme Court timelines. Usually there is a month or more between hearing an or oral argument and making a decision on a case. So that means that Cook could safely be in that seat into the spring, if not throughout the rest of term.
One other topic that's come up a lot has been funding markets. That's especially been a hot topic in early September as we saw repo rates rise pretty notably. Last week's comments from Lorie Logan suggested that the Fed should replace the effective Fed funds rate with a repo rate based target. I'm not gonna get into the details of that discussion here. But we wrote on that topic last week, and we'd invite listeners to reach out to their RBC coverage for access to those reports or to check them out on Insight.
And then lastly, I would just say that one theme that we've heard a lot of in the past few days is just typical seasonal patterns in the past 10 years, every year since 2015, we've seen higher long end yields in October.
So we've seen and heard interest from clients and positioning for a replay of those type of dynamics this year. But overall, I would just say that. Rates markets over the past few years have really been most sensitive and most driven by developments in the economic data, and particularly the economic data that is currently being delayed due to the shutdown.
Given that we're probably not getting data in the near term, we might be in for an even quieter than normal range bound rates market in the near term.
Jason Daw:
Okay, and that's a wrap. And thank you to our listeners for joining this edition of Macro Minutes. Similar to what we have seen through 2025, the government shutdown injects another layer of uncertainty into the economic outlook and financial markets.
The situation is fluid, and please reach out to us directly, or your RBC sales representatives for additional insights.
Speaker 4:
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