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The government shutdown that began October 1 transformed what should have been a critical data week into an information void, with the Bureau of Labor Statistics furloughing approximately 2,000 employees and indefinitely postponing Friday's September employment report. Markets were left to navigate using Wednesday's catastrophic ADP print showing a 32,000 job loss—the worst reading since March 2023—while Treasury yields fell across the curve as traders bet the Fed will have no choice but to cut rates aggressively at its October 28-29 meeting despite operating without official statistics.

Credit Pulse

Credit markets demonstrated remarkable complacency despite accelerating macro deterioration, with investment grade spreads tightening to 70 basis points—an extraordinary 2nd percentile valuation that implies virtually no recession risk. High yield spreads widened a mere 3bp to 256bp, similarly compressed at historically tight levels despite ADP's employment contraction and the ISM Services index hitting breakeven. Yet this extreme compression has powerful technical support: taxable bond funds drew a stunning $65 billion in August inflows—the largest monthly haul since April 2021—while year-to-date corporate issuance reached $1.737 trillion, up 5.9% year-over-year. Oracle's $18 billion AI infrastructure deal priced September 24 with peak orders of $88 billion, nearly 5x oversubscribed, exemplifying insatiable demand for corporate paper regardless of macro headwinds.

The CLO market continues its record run with 2025 issuance on pace to match 2024's robust volume, supported by Moody's forecast for speculative-grade defaults to decline to just 2.6% by October versus 5.6% a year earlier. With operating margins at record highs near 31%, net leverage stable at 2.8x, and earnings growth projected at 9% for 2025, the fundamental backdrop remains constructive. Yet it's the technical bid—massive fund inflows, limited net supply after refinancings, and structural demand from banks and insurers—that keeps spreads pinned at historic tights even as the economic cycle turns.

Federal Reserve Faces October Meeting Blind

The Federal Reserve enters its October 28-29 FOMC meeting in an unprecedented position: making critical policy decisions without access to two months of employment data and potentially missing September inflation metrics as well. Markets have already rendered their verdict, pricing in a 98% probability of a 25 basis point cut this month and an 87% chance of another reduction in December, but Fed officials spent the week pushing back against aggressive easing expectations despite the deteriorating data. Real yields remained remarkably anchored at 1.77% on the 10-year TIPS, implying breakeven inflation of 2.35%—still comfortably above the Fed's 2% target—suggesting the bond market sees persistent price pressures despite growth weakness.

Dallas Fed President Lorie Logan delivered the week's most hawkish commentary on September 30, warning that "there may be relatively little room to make additional rate cuts" and characterizing current policy as "likely only modestly restrictive." Her focus on non-housing services inflation running at 3.4%—"high enough to keep overall inflation above 2 percent by 30 to 40 basis points"—suggests at least some FOMC members remain more concerned about price stability than employment. Chicago Fed President Austan Goolsbee echoed this caution on October 3, describing the Fed as in "a bit of a sticky spot" and expressing wariness about "front-loading too many rate cuts." The disconnect between market pricing and Fed rhetoric grew wider as the week progressed, setting up a potentially volatile FOMC meeting.

Dollar Strength Defies Fed Easing Narrative

The Dollar Index staged a counter-intuitive rally during the week, rising over 1% to 98.19 despite deteriorating U.S. employment data and aggressive Fed easing expectations. This divergence—dollar strength amid domestic weakness—reflected a critical shift in global monetary dynamics: while markets price three Fed cuts by year-end, the European Central Bank held rates steady at 2.15% on September 11 after its own easing cycle, and the Bank of England paused at 4.0% on September 18 with UK inflation still elevated at 3.8%. The relative pause from global peers transformed traditional rate differentials, with the U.S. still offering the highest developed market yields despite its easing trajectory.

Foreign demand for Treasuries remained remarkably robust despite the shutdown chaos, with indirect bidders—primarily foreign central banks and sovereign wealth funds—capturing 66% of the week's 56-day bill auction at a 3.0x bid-to-cover ratio. This continued international appetite for U.S. assets even amid political dysfunction suggests global investors still view Treasuries as the ultimate safe haven, though conversations in Beijing, Brussels, and Basel increasingly focus on reducing dollar dependency. The dollar's year-to-date decline of 9-10% marks its steepest fall in three years, but this week's bounce amid global uncertainty hints the currency may have found a tactical floor as international alternatives remain limited.

Navigating the Void: Markets Create Their Own Reality

The government shutdown exposes critical vulnerabilities in America's market infrastructure that extend far beyond missed data releases. Credit rating agencies have repeatedly warned that political dysfunction threatens U.S. sovereign ratings—Moody's downgraded the U.S. to Aa1 in May, citing "institutional and governance strength erosion." The current shutdown validates those concerns, demonstrating that America's political system can no longer guarantee basic governmental functions like producing employment statistics. For foreign investors holding $7.8 trillion in Treasury securities, the shutdown raises uncomfortable questions about whether U.S. assets deserve their traditional safe-haven premium, though this week's continued strong foreign bid at Treasury auctions suggests no immediate alternatives exist.

Markets create feedback loops in data absence: Without official statistics, markets increasingly rely on private alternatives—ADP for employment, ISM surveys for activity, earnings calls for inflation anecdotes—creating a fragmented information landscape where narrative trumps data. This week saw that dynamic in full effect: Treasury yields fell not because official data showed weakness, but because private substitutes suggested it might exist. The danger lies in self-reinforcing cycles where market moves based on incomplete information become self-fulfilling, potentially forcing Fed action based on market expectations rather than economic reality.

The week ahead offers little clarity with the shutdown continuing indefinitely. Critical markers include FOMC minutes on October 9 that gain outsized importance given the data vacuum, weekly jobless claims as one of the few remaining real-time indicators, and multiple Fed speakers who must navigate policy communication without their primary inputs. Treasury auctions of 3-year and 10-year notes will test whether foreign demand remains resilient amid dysfunction. Most critically, the October 28-29 FOMC meeting looms with the Fed potentially making rate decisions without seeing official employment data for two consecutive months—an unprecedented policy challenge that markets are betting they'll resolve with aggressive easing.

The shutdown reality crystallizes a broader truth: America's economic machinery now operates on two levels—the official statistics that guide policy but can vanish instantly due to political theater, and the private market indicators that fill the void but provide fragmentary, often contradictory signals. This week's cross-asset divergence—stocks at records, bonds pricing recession, credit assuming perfection, the dollar strengthening despite it all—reflects this informational chaos. When different markets price completely different realities based on incomplete information, the stage is set for violent convergence once clarity returns. Whether that clarity comes from the shutdown's resolution, the Fed's October decision, or an unexpected catalyst, the current divergences suggest the resolution will be dramatic. Until then, markets navigate by instruments in heavy fog, hoping the rocks they can't see aren't dead ahead.