Government Shutdown in Focus With Payrolls Delayed

0:05Welcome to the Schwab Market Update Podcast, where we prepare you for each trading day with a recap of recent news and a look at what's ahead.

0:18I'm Colette O 'Claire, and here is Schwab's early look at the markets for Friday, October 3rd. Ordinarily, investors would be eagerly awaiting the September non-farm payrolls report this morning, but with the government shutdown stretching into its third day, the Bureau of Labor Statistics, or BLS, has postponed its release. Investors, and more importantly, the Federal Reserve, will have to wait for government jobs data and rely on private surveys to gauge the health of the labor market in the meantime. Despite the delay of key economic data and the furlough of hundreds of thousands of government workers, markets have largely brushed off the government shutdown.

0:59All three major market indices ended Thursday in the green. However, the longer the shutdown lasts, the more risks to markets and the economy could intensify. The potential for increased market volatility ahead was reflected in the 2.33 percent rise in the SIBO Volatility Index, or VIX, on Thursday. The likely impact to the 750 ,000 workers furloughed or unpaid could mean short-term household finances will be squeezed, reducing discretionary spending and retail sales in the fourth quarter, said Jill Mazzola, head trading and derivatives strategist at Schwab. If the shutdown persists, the cumulative effect of lost wages, delayed projects, and weakened consumer demand could show up in the GDP data.

1:47Top Democrats and Republicans failed to reach a short-term deal to extend government funding on Tuesday, with Democrats pushing for an extension of health care tax credits in exchange for their support. In a bid to pressure lawmakers into funding a deal on Thursday, President Trump announced that he would meet with the Office of Management and Budget Director Russ Vogt to discuss potentially permanent spending cuts and federal worker layoffs. This followed the administration's Wednesday decision to slash$18 billion in federal funding for infrastructure projects in New York and$8 billion in federal funding for climate-related projects across multiple states.

2:28Beyond the spending cuts, the government shutdown could continue to impact the flow of economic data the Fed depends on. The U.S. Department of Labor already postponed the release of initial jobless claims data Thursday. Now, the delay of the September non-farm payrolls report could leave the Fed in a tough spot ahead of its October 28th to 29th meeting. Fed officials have leaned on jobs reports when making interest rate decisions this year as they weigh weakening labor market conditions against persistent inflation. The government shutdown makes the Fed's job harder, said Cooper Howard, director of fixed income strategy at the Schwab Center for Financial Research.

3:09The Fed will likely have to gather information from private surveys, like Wednesday's ADP report, which showed some softness in the labor market. With private labor market reports now in focus, investors have received a mixed bag of data this week. On Wednesday, ADP's jobs report revealed the private sector shed 32 ,000 jobs in September. But Thursday's Challenger job cuts report showed just 54 ,064 job cuts last month, down from 85 ,979 in August and 72 ,821 in September 2024. The figure was also well below the consensus expectation for 150 ,000 cuts. However, year-to-date hiring plans through September in Challenger's report were the weakest they've been since 2009, providing evidence that the low-hire, low-fire environment that has persisted through much of the year remains in vogue.

4:12With labor market data still soft, futures markets priced in nearly 100 % odds of a 25-basis-point rate cut at the Fed's late October meeting as of Thursday afternoon, according to the CME FedWatch tool. The odds of an additional rate cut in December also rose to 89.4%, well above the 70 % level seen late last week. In what could be a brief reprieve from the recent trend of yield curve steepening, Short-term Treasury yields mostly inched up on Thursday, while long-term yields fell slightly. One-month and three-month Treasury bill yields rose modestly to 4.11 percent and 3.95 percent respectively, while the 10-year bond yield dipped to 4.1 percent and the 30-year bond yield dropped to 4.7 percent.

5:01We expect the curve to steepen, led by lower short-term rates. Longer-term rates are likely to remain range-bound, said Howard. August factory orders were another casualty of the government shutdown on Thursday, with the Census Bureau delaying the data release. Consensus had expected a 1.4 % month-over-month jump in August factory orders compared to the 1.3 % drop seen in July. While investors won't get jobs data today, they will be monitoring the ISM Services Purchasing Managers Index at 10 a.m. ET. time. The services sector grew for three consecutive months through August, with consumers continuing to spend despite a soft labor market and pressure from inflation.

5:47Consensus expects ISM services in September to be in line with the prior month remaining in expansion territory at 52 percent. Bitcoin continued its climb on Thursday, rising 1.84 percent to top$120 ,000 by 4 p.m. ET. Investors could be looking to alternative, largely uncorrelated assets like Bitcoin as a safe haven amid the government shutdown. On the other hand, gold paused its rally Thursday, falling 0.4 percent to$3 ,855.37 as of market close. The safe haven asset has surged more than 45 percent year-to-date, reaching record highs with the prospect of an ongoing drop in interest rates boosting prices.

6:35But comments from Dallas Fed President Lori Logan on Thursday threw some cold water on the precious metal. Logan urged caution on further interest rate cuts, arguing that the Fed can't ease financial conditions too significantly without risking a resurgence of inflation that would force a painful course reversal. Investors will be watching another speech from Logan this afternoon and comments from Fed Vice Chair Philip Jefferson shortly after for more insights into the Fed's thinking. In corporate news Thursday, Tesla reported strong vehicle delivery figures. Total deliveries rose 7 percent from a year ago to $497 ,099 in the third quarter, well above Wall Street's consensus estimate for$447 ,600.

7:28The pending expiration of key federal EV tax credit for buyers, which finally went into effect Tuesday, helped drive sales at the company during the period marking a turnaround after a 14 % year-over-year drop in deliveries in the second quarter. Despite the strong delivery figures, Tesla stock fell 5.1 percent on Thursday. Shares are still up roughly 15 percent year-to-date. Warren Buffett's Berkshire Hathaway announced Thursday that it has agreed to buy Occidental Petroleum's petrochemical unit OxyChem in a$9.7 billion cash deal. Berkshire is already one of Occidental Petroleum's largest shareholders, holding a 28.2 percent stake in the oil and gas giant as of the end of June.

8:13The deal is Berkshire's largest since its$11.6 billion takeover of the insurance company Allegheny in 2022. Berkshire shares fell 0.45 percent on Thursday after the deal's announcement, while Occidental stock plummeted 7.31 percent. Meanwhile, Fair Isaac Corporation's stock surged 17.94 percent after announcing the launch of its FICO Mortgage Direct License Program late Wednesday. The program will allow mortgage lenders to calculate and distribute FICO credit scores directly to borrowers, eliminating the reliance on credit bureaus. Shares of major credit reporting agencies, including Equifax, Experian and TransUnion all plunged on Thursday in the wake of the announcement.

9:02Seven out of 11 S &P 500 sectors fell on Thursday. Energy and consumer discretionary were the biggest losers, while materials, information technology, and industrials helped bolster broader market indexes. The Dow Jones Industrial Average rose 78.62 points Thursday, or 0.17 percent, to 46 ,519.72. The S &P 500 index advanced 4.15 points or 0.06 percent to 6 ,715.35. And the Nasdaq Composite jumped 88.89 points or 0.39 percent to 22 ,844.05. This has been the Schwab Market Update Podcast. To stay informed, visit schwab.com slash market update or follow for free in your favorite podcasting app. And if you like what you've heard, please consider leaving us a rating or review.

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