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Investing.com - A cooling U.S. labor market is a "bigger worry" for financial markets than an ongoing U.S. government shutdown, according to analysts at Capital Economics.
Writing in a note to clients, the analysts led by Jonas Goltermann suggested that, historically, a shutdown of the federal government is "unlikely to make much impact" on investors even if "it drags on for some time."
Instead, a softening in the labor picture points to "downside risks" for a range of asset calsses, including equities, U.S. Treasury yields and the dollar, they argued.
On Wednesday, a reading of U.S. private payrolls showed a surprise decline in September, falling by 32,000 from a downwardly-revised decrease of 3,000 in August. The figures from the ADP National Employment Report received particular focus due to the U.S. government shutdown, which is expected to lead to a delay to the publication of this week’s official nonfarm payrolls numbers from the Bureau of Labor Statistics.
Labor market conditions have also become a crucial factor in the Federal Reserve’s outlook for interest rates. Last month, the Fed slashed borrowing costs by 25 basis points and projected more drawdowns to come this year, as policymakers moved to prioritize supporting job expansion over sticky inflation.
"So far, the slowdown in employment growth has prompted a sizeable reassessment of the monetary policy outlook in the U.S., with the terminal rate discounted in money markets falling by around 20 basis points since the release of the July nonfarm payrolls report roughly two months ago," the Capital Economics analysts said.
They added that this, in turn, has contributed to about a 30-basis point drop in the 10-year U.S. Treasury yield and around a 2.5% depreciation in the dollar index, which tracks the greenback against a basket of six currency peers. The S&P 500, meanwhile, has edged up by approximately 5% and "corporate credit spreads remain exceptionally tight," the analysts flagged.
Calling investor sentiment a "half-glass full view," they predicted that the U.S. economy will continue to hold up despite a "gloomy" labor market. An artificial intelligence-fueled boom in stocks is anticipated to run further as well, while a fall in U.S. interest rate expectations and the dollar is "now somewhat overdone" and may "rebound over the coming months," they said.