Macro Musings: Official data releases are at least 2 months behind schedule. In our current environment where data dependence has replaced forward guidance, this feels like an eternity. However, even with the lack of official data to confirm, the workings of economic trends have not changed: recoveries happen slowly, but deteriorations can occur suddenly. Between the end of Q3 and now, there is very little to point to that would suggest a substantial recovery in labor demand. Instead, it has weakened further, and we see a risk of a more rapid decline in the months ahead as firms stop hoarding labor and shed workers. Adding insult to injury (for an economy that is weak ex-AI spending), the gov’t shutdown likely had a negative impact on Q4 GDP (potentially losing up to 1.5%).
Market Thoughts: We are at an important crossroads as a combination of momentum fading (after a solid year of returns) and year-end ahead (where market depth can narrow) if subsequent data release and/or the Fed surprise, market may have an uncharacteristic (for the time of year) jump in vol. We argue to remain disciplined and defensive while seeking liquid assets. We believe that the anti-seasonals (where performance was probably pulled forward into September and October at the expense of a year-end rally) along with the risk that the Fed does a hawkish cut, or worse, a skip, could accelerate drawdowns. Nonetheless we expect volatility to pickup and be present into the Fed meeting.
Fed and Rates View: With key months of data unavailable by the next FOMC meeting (no October and November NFP and no October CPI), it is going to be a close call, but we think the Fed will cut. Overall, we do not believe the Fed will fully ignore the alternative data, which has been pointing to further labor market weakness. We argue that going on hold sometime in Q1 makes more sense. In addition, it’s year-end and there are signs of liquidity constraints in the banking system at large. If they do not cut in December, that could unnecessarily shock markets. Further afield there is a risk that the Fed goes on an extended pause in the early part of 2026, which is a risk to our base-case and overall market pricing.
US Policy Updates: An amended version of the House-passed continuing resolution was passed and signed by the President, ending the gov’t shutdown on Nov 12. However, partial gov’t funding expires on Jan 30, 2026, opening the possibility of another funding showdown early next year. Additionally, the Supreme Court is weighing the legality of IEEPA tariffs after hearing arguments on Nov 5, with potential deficit implications if the administration is forced to pay back some or all of the tariff revenues collected under the emergency authority.
Special Topic – Stablecoins: We provide a high-level review of what are SCs, how they compare to other forms of money, and the potential impact on USTs.
Please see the PDF report link above for the full write-up with charts and forecasts…