The Shutdown Rally: Markets Ignore Missing Data
Market and Economic Update
The S&P 500 finished the week up 1.23% as investors discounted the need for a fully functioning government and looked through weakening economic data in anticipation of the Fed's perfect timing in cushioning any economic weakness.
Nothing says "rational market" quite like hitting fresh records while 750,000 federal workers sit at home unpaid and the Bureau of Labor Statistics goes dark.
Friday's jobs report? Delayed indefinitely.
September's benchmark revision? A record 911,000 fewer jobs than initially reported.
Wednesday's ADP report? Private payrolls fell 32,000—the biggest drop since March 2023.
The market's response? Another leg higher, because apparently deteriorating labor data is bullish when it keeps the Fed cutting rates. And missing data is even better—we can just imagine whatever we want.
U.S. Economic Outlook
The U.S. economy faces a challenging 12-month period as labor market weakness collides with persistent inflation pressures.
Employment deterioration represents the most significant shift. Unemployment reached 4.3% in August 2025—the highest level since October 2021—while the BLS preliminary benchmark indicates employment was overestimated by roughly 900,000 jobs through March 2025. Private payrolls declined 32,000 in September (ADP), with the hiring rate at 3.2%, matching the lowest level since 2013 outside recessions. Forecasts show unemployment rising to 4.5% by mid-2026, with monthly job gains averaging just 25,000-87,000.
Inflation remains sticky. Core CPI (the Consumer Price Index excluding food and energy prices, which the Fed watches closely) stands at 3.1% and core PCE (Personal Consumption Expenditures, the Fed's preferred inflation gauge) at 2.9%—both well above the Fed's 2% target. The Cleveland Fed's Inflation Nowcasting model—which provides real-time daily estimates using oil prices, gasoline prices, and other current data—indicated in late September and early October that core CPI was running near 3.0% and core PCE near 2.9% on a year-over-year basis. Tariffs are expected to add upward pressure to prices in late 2025 and early 2026. The Fed's projections show inflation not reaching 2% until 2028, with 56% of economists believing it won't hit target before 2027.
GDP growth expected to moderate. The Atlanta Fed's GDPNow model—a real-time running estimate of quarterly economic growth based on available data—projects Q3 2025 GDP growth at 3.8% as of October 1. However, forward-looking forecasts show growth slowing to 1.5-2% through 2026 from 2024's 3% pace, with recession risk at 15-35%. The Fed cut rates 25 basis points in September to 4.00-4.25%, with markets pricing 75-100 basis points of additional cuts through October 2026, reaching a terminal rate of 3.25-3.75%.
Fiscal crisis deepening. The government shutdown has suspended critical economic data releases. The federal deficit stands at $1.9 trillion (6.2% of GDP) with gross federal debt at approximately 120% of GDP—already exceeding post-World War II levels and projected to reach 156% by 2055. Net interest costs are approaching $1 trillion in 2025 and projected to exceed $1 trillion in 2026.
Markets betting on the Fed. Equity investors are looking past economic weakness to price in 18-24 months of rate cuts, which mechanically boost valuations. The optimism assumes the Fed engineers a soft landing, tariff inflation proves temporary, and corporate earnings hold despite consumer pressure—a narrow path that leaves little room for disappointment.
Government Shutdown
The federal government shut down on October 1 after Senate votes on competing short-term funding bills failed, amid disputes including ACA subsidy policy. Congress is supposed to pass 12 separate spending bills annually to fund different government operations, but lawmakers rarely meet this deadline. When negotiations stall, they typically pass a continuing resolution—a temporary measure that maintains current funding levels while talks continue.
Despite Republicans controlling both congressional chambers and the White House, partisan divisions prevented passage of either full appropriations or a stopgap funding measure before the October 1 fiscal year deadline.
Impacts
- Approximately 750,000 federal employees furloughed
- Approximately 1.6 million "excepted" workers (military, law enforcement, TSA, air traffic control, border patrol) continue working without pay
- Services continuing: Social Security, Medicare, Veterans benefits, and USPS operations continue due to mandatory funding or advance appropriations
- Services disrupted: Economic data releases suspended (jobs report, CPI inflation data), national parks operating with limited services, FDA routine food inspections paused, new small business loans halted, immigration court hearings postponed
- Congressional pay: Members of Congress and the President continue receiving full salaries ($174,000-$400,000) due to constitutional protections
Market Reaction
- Shutdowns have historically had limited, mixed impacts on equities during the event itself, with average moves relatively small
- 10-year Treasury yields typically decline modestly as bond demand rises
Economic Impact
- Each week of shutdown reduces quarterly GDP by roughly 0.1-0.2 percentage points
- Most economic activity recovers post-reopening due to back pay and delayed spending catch-up
- Some losses prove permanent due to reduced efficiency and contractor income that's never recovered
Near-Term Concerns
- Data blackout: September jobs report and October CPI data delayed, potentially blinding the Federal Reserve before its October 28-29 meeting
- Contractor exposure: Small businesses and federal contractors face immediate cash flow stress with no guaranteed back pay
- Service degradation: If prolonged, TSA sick-outs could disrupt air travel (as occurred in 2019), and courts may run out of operating funds within 2-3 weeks
Bottom Line: While markets have historically shrugged off short shutdowns as political theater, the economic costs are real—lost productivity, delayed services, and contractor hardship. The longer the shutdown persists, the greater the risk of secondary effects: eroded confidence, missing economic data, and accumulated backlogs across government services.
CME FedWatch Tool - Federal Reserve Rate Probabilities
Current Rate Range
4.00-4.25%
Oct 29 Meeting
96.7%
Cut to 3.75-4.00%
Dec 10 Meeting
84.9%
Cut to 3.50-3.75%
Market-Implied Rate Probabilities by Meeting
| Meeting Date | Most Likely Range | Probability | Implied Cuts |
|---|---|---|---|
| Oct 29, 2025 | 3.75-4.00% | 96.7% | 25 bps |
| Dec 10, 2025 | 3.50-3.75% | 84.9% | 50 bps |
| Jan 28, 2026 | 3.50-3.75% | 53.8% | 50 bps |
| Mar 18, 2026 | 3.25-3.50% | 44.9% | 75 bps |
| Jun 17, 2026 | 3.00-3.25% | 34.1% | 100 bps |
Financial markets overwhelmingly expect the Federal Reserve to cut interest rates by 25 basis points at its October 28-29 meeting, with market probabilities exceeding 95%. The Fed Funds rate currently sits at 4.00-4.25%—one basis point equals 0.01%, so this is also expressed as 400-425 basis points.
Markets are pricing in a cut to 3.75-4.00% at the October meeting, followed by another 25 basis point reduction in December that would bring rates to 3.50-3.75%. The December cut carries roughly 85-90% probability, depending on when you check the data.
Looking into 2026, traders anticipate gradual cuts totaling 75-100 basis points through mid-year, which would put the Fed Funds rate around 3.00-3.25%.
Source: CME Group FedWatch Tool
Data Extracted: October 3, 2025 at 03:18 PM
Note: Data is subject to market conditions and changes continuously. Please verify current probabilities at CME Group's website.
S&P Case-Shiller Home Price Index
Year-over-Year
+1.7%
Month-over-Month (SA)
-0.1%
Top and Bottom Metro Performers (July 2025)
| Metro Area | YoY Change | Index Level |
|---|---|---|
| New York | +6.4% | 335.30 |
| Chicago | +6.2% | 223.70 |
| Cleveland | +4.5% | 204.05 |
| San Diego | -0.7% | 443.04 |
| Miami | -1.3% | 438.23 |
| San Francisco | -1.9% | 356.49 |
| Tampa | -2.8% | 376.94 |
Home prices rose 1.7% year-over-year in July 2025, marking the sixth consecutive month of slowing growth. On a monthly basis, prices declined 0.1%—the fifth straight monthly drop. With overall inflation running at 2.9%, housing values are effectively losing purchasing power, meaning your home's nominal value buys less than it did three months ago. The geographic story has completely flipped from the pandemic era. Markets that lagged during the work-from-home surge are now leading. Fifteen of the twenty major metro areas tracked experienced monthly price declines during what's typically the strongest buying season of the year.
S&P Dow Jones Indices (2025) S&P Corelogic Case-Shiller Index Records Annual Gain in July 2025. Available at: https://www.spglobal.com/spdji/en/index-announcements/article/sp-corelogic-case-shiller-index-records-annual-gain-in-july-2025/ (Accessed: 2 October 2025)
NAR Pending Home Sales Index
Index Value
74.7
Month-over-Month
+4.0%
Year-over-Year
+3.8%
| Region | Month-over-Month | Year-over-Year |
|---|---|---|
| Northeast | -1.1% | +2.6% |
| Midwest | +8.7% | +6.7% |
| South | +3.1% | +4.2% |
| West | +5.0% | +0.2% |
Pending home sales—signed contracts that haven't closed yet—rose 4.0% in August, marking the highest level in five months. The uptick was driven by mortgage rates easing slightly from their elevated levels: the 30-year fixed rate averaged around 6.6% in August, then drifted closer to 6.3% by mid-to-late September, bringing monthly payments back within reach for some buyers who'd been priced out. Regional differences were significant. The Midwest led monthly growth, supported by more affordable price points. The Northeast declined as high costs continued to limit activity. Pending home sales typically close within one to two months, so we should see existing home sales tick up when September-October data gets reported.
National Association of Realtors (2025) NAR Pending Home Sales Report Shows 4.0% Increase in August. Available at: https://www.nar.realtor/newsroom/nar-pending-home-sales-report-shows-4-0-increase-in-august (Accessed: 2 October 2025)
Job Openings and Labor Turnover Survey (JOLTS)
Job Openings
7.2M
Openings Rate
4.3%
Hires
5.1M
Quits Rate
1.9%
Labor Market Turnover (August 2025)
| Metric | Level (000s) | Rate |
|---|---|---|
| Hires | 5,100 | 3.2% |
| Total Separations | 5,100 | 3.2% |
| Quits | 3,100 | 1.9% |
| Layoffs & Discharges | 1,700 | 1.1% |
Job openings remained flat at 7.2 million in August. With 7.4 million unemployed Americans, the labor market now shows roughly 1.03 unemployed persons per job opening—slightly more job seekers than available positions. The hiring rate held at 3.2%, near cycle lows outside the pandemic. That means employers are filling fewer positions than at nearly any point in the past decade. The quits rate—employees voluntarily leaving their jobs—came in at 1.9%, showing worker confidence remains intact even as job-switching has declined. Layoffs held steady at 1.7 million with no significant uptick. Construction saw openings drop by 115,000. As I've shared before, we're in a no-hire, no-fire labor market. Companies are holding onto their current workers but avoiding new hiring, which limits opportunities for anyone looking to change jobs or enter the workforce.
U.S. Bureau of Labor Statistics (2025) Job Openings and Labor Turnover - August 2025. Available at: https://www.bls.gov/news.release/jolts.nr0.htm (Accessed: 2 October 2025)
ADP National Employment Report
September Jobs
-32,000
August (Revised)
-3,000
Pay Growth (YoY)
+4.5%
Employment Change by Sector and Firm Size
| Category | Change |
|---|---|
| By Sector | |
| Goods-Producing | -3,000 |
| Service-Providing | -29,000 |
| By Firm Size | |
| Small (1-49 employees) | -40,000 |
| Medium (50-499 employees) | -20,000 |
| Large (500+ employees) | +33,000 |
Private sector employment contracted by 32,000 jobs in September, falling well short of the 50,000 gain economists expected. This marked the steepest decline since March 2023 and followed a revised loss of 3,000 jobs in August—originally reported as a gain of 54,000. Small businesses shed 40,000 positions, while large companies added 33,000. Service sectors lost 29,000 jobs, with professional and business services down 13,000 and leisure and hospitality down 19,000. Education and health services added 33,000 jobs. Annual pay growth held at 4.5%, but job-changers saw their pay premium shrink to 6.6% from 7.1% in August, signaling reduced bargaining power as fewer companies compete for talent.
ADP Research Institute (2025) ADP National Employment Report: Private Sector Employment Shed 32,000 Jobs in September; Annual Pay was Up 4.5%. Available at: https://mediacenter.adp.com/2025-10-01-ADP-National-Employment-Report (Accessed: 2 October 2025)
ISM Manufacturing PMI
Manufacturing PMI
49.1
New Orders
48.9
Production
51.0
Prices Paid
61.9
Key PMI Components (September 2025)
| Component | Level | Change |
|---|---|---|
| New Orders | 48.9 | -2.5 |
| Production | 51.0 | +3.2 |
| Employment | 45.3 | +1.5 |
| Prices Paid | 61.9 | -1.8 |
| New Export Orders | 43.0 | -4.6 |
| Inventories | 47.7 | -1.7 |
Manufacturing contracted for the seventh straight month in September. The PMI—a measure of factory activity—ticked up to 49.1 from 48.7, but anything below 50 means contraction. The slight improvement hides a weaker story. New orders fell back into contraction after a brief uptick in August, while export orders dropped sharply. Production rebounded, but that likely reflects older orders working through the system rather than new demand. Employment remains in contraction for the eighth month as companies manage headcount cautiously. Input costs stayed elevated for the twelfth straight month, driven by tariffs on steel, aluminum, and other materials. Only five of eighteen industries reported growth, down from seven in August.
Institute for Supply Management (2025) Manufacturing PMI at 49.1%; September 2025 ISM Manufacturing PMI Report. Available at: https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/pmi/september/ (Accessed: 2 October 2025)
ISM Services PMI
Services PMI
50.0
Business Activity
49.9
New Orders
50.4
Prices Paid
69.4
Key PMI Components (September 2025)
| Component | Level | Change |
|---|---|---|
| Business Activity | 49.9 | -5.1 |
| New Orders | 50.4 | -5.6 |
| Employment | 47.2 | +0.7 |
| Prices Paid | 69.4 | +0.2 |
| Supplier Deliveries | 52.6 | +2.3 |
| Inventories | 47.8 | -5.4 |
The services sector hit a critical inflection point in September. The ISM Services PMI landed at exactly 50.0—the breakeven mark where activity neither expands nor contracts—for the first time since January 2010. That matters because services make up roughly 70% of U.S. economic activity and employ the majority of American workers.
The underlying components tell a more concerning story. Business Activity dropped to 49.9, slipping into contraction for the first time since May 2020. New Orders managed to stay above water at 50.4, but just barely. Employment has now contracted for four consecutive months, registering 47.2 in September. Meanwhile, Prices Paid surged to 69.4—the tenth straight month above 60—showing that cost pressures remain stubbornly elevated even as demand weakens.
The breadth of growth narrowed noticeably. Only ten industries reported expansion in September, down from twelve in August. Seven industries contracted, up from four the previous month. That shift in the composition signals that weakness is spreading rather than concentrating in isolated sectors.
What this means: We're seeing demand softening while businesses still face elevated costs—a squeeze that typically pressures profit margins and eventually forces harder decisions about staffing and investment. The employment component staying below 50 for four months suggests those decisions may already be underway.
Institute for Supply Management (2025) Services PMI at 50%; September 2025 ISM Services PMI Report. Available at: https://www.ismworld.org/supply-management-news-and-reports/reports/ism-pmi-reports/services/september/ (Accessed: 3 October 2025)
Challenger Job Cuts Report
September Cuts
54,064
Year-to-Date Cuts
946,426
YTD Hiring Plans
204,939
Leading Sectors for Job Cuts (Year-to-Date)
| Sector | YTD Cuts | YoY Change |
|---|---|---|
| Government | 299,755 | +694% |
| Technology | 107,878 | -8% |
| Retail | 86,233 | +203% |
| Services | 61,590 | — |
U.S. employers announced 54,064 job cuts in September, down 37% from August but signaling continued labor market stress. Through September, announced cuts hit 946,426—up 55% from last year and the highest since 2020. This year's total already exceeds all of 2024 by 24%, and will likely surpass one million by year-end. Government led all sectors with nearly 300,000 cuts year-to-date, driven by government workforce reductions. Retail cuts surged 203% as companies approach the holiday season cautiously. Technology announced roughly 108,000 cuts, with 17,375 explicitly attributed to artificial intelligence—including 7,000 in September alone. The most concerning signal: announced hiring plans plunged 58% to just 204,939, the lowest since 2009. Seasonal retail hiring plans totaled only 100,800 in September compared to more than 400,000 at the same point last year.
Challenger, Gray & Christmas, Inc. (2025) September Job Cuts Fall 37% From August; YTD Total Highest Since 2020, Lowest YTD Hiring Since 2009. Available at: https://www.challengergray.com/wp-content/uploads/2025/10/Challenger-Report-September-2025.pdf (Accessed: 2 October 2025)
Disclosure
This material is provided by Todd Van Der Meid, MBA, CFP®, through Rhino Wealth Management, Inc., a Registered Investment Adviser, solely for informational purposes. It is not intended as investment, tax, legal, or accounting advice. Investors should consult qualified professionals before making financial decisions.
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