The US government shutdown, which began on 1 October, has delayed the release of the closely watched non-farm payrolls report. Other economic data published last week were downbeat, reinforcing our expectation that the Federal Reserve will implement two 25-basis-point rate cuts (on 29 October and 10 December) to counter labour market weakness. Meanwhile, negotiations over government spending between the Democrats and Republicans are set to continue in the run-up to the third-quarter earnings season.
Market recap
Beyond the numbers
Macroeconomics
Last week, the much-anticipated non-farm payroll (NFP) report was delayed due to the government shutdown, but the private-sector ADP survey for September offered a glimpse into the labour market: the economy shed 31,000 jobs, falling well short of the expected 51,000 gain, a worse outlook than depicted by the JOLTS survey. Meanwhile, consumer confidence slumped to a five-month low due to concerns about the labour market.
The ISM services index turned more pessimistic, falling to 50, while the ISM manufacturing index edged up slightly to 49.1 from 48.7. Both indexes indicate a more fragile economic situation compared with the PMI composites, where manufacturing came in at 52 and services at 54.2. The discrepancy arises because ISM indexes are more sensitive to international demand, while the PMI focuses more on domestic demand.
Last week’s data validates our view that the Federal Reserve will respond to US labour market weakness with a series of ‘insurance’ cuts, specifically, the Fed is expected to deliver two 25-basis-point rate cuts on 29 October and 10 December.
In the eurozone, base effects drove headline inflation to 2.2% year-on-year, which is in line with expectations, while core inflation held steady at 2.3%. Against this backdrop, the European Central Bank will be reluctant to cut its rates at their next meetings. Last, the final September composite PMI was confirmed at 51.2, with Spain still outperforming and France continuing to lag behind.
In Japan, Sanae Takaichi, was elected as the new leader of Japan’s LDP and is expected to be appointed prime minister. She favours an expansionary fiscal stance, but the country’s divided governing coalition may constrain her agenda.
This week, negotiations over US government spending between the Democrats and Republicans will continue. Key US data releases include the Fed’s meeting minutes and the University of Michigan’s consumer sentiment index, which will provide further insight into consumer morale. Elsewhere, the eurozone’s retail sales for August will be published.
Asset allocation: strategic views as at October 2025
Equities
Global equities advanced last week (MSCI ACWI total return +1.7%), with US equities (S&P 500 +1.1%) staying positive despite the federal government shutdown and weaker private employment data which supported a ‘bad is good’ narrative.
Japanese equities were stable (-0.3%) ahead of the elections, but have registered a strong outperformance over the past month (+9.8% vs. global equities’ +4.9%) on fiscal stimulus hopes from a new LDP leader who was confirmed over the weekend.
European equities outperformed (+2.9%), notably Switzerland (+4.8%), as healthcare emerged as the week’s best-performing sector globally (+7.1%). Pharma stocks surged following a drug pricing deal between the Trump administration and Pfizer in exchange for tariff relief. This is seen as a potential industry blueprint and leads us to upgrade our conviction level on the healthcare sector from 3/5 to 4/5.
Meanwhile, AI-related developments continued to sustain gains in the global technology sector (+3.0%) with continued strong outperformances from Chinese technology companies (Hang Seng Tech +6.9%). In the week ahead, the market focus will turn to US political developments ahead of the Q3 earnings season kicking off. Expectations of +8% EPS growth (S&P 500) would mark the ninth consecutive quarter of earnings expansion for US corporates.
Healthcare stood out as last week’s best-performing sector globally
Fixed income
Bond markets continued to put in strong performances, supported by a ca 6-bp decline in US Treasury yields across the curve despite the government shutdown, with 10-year paper closing the week at 4.12%, and spreads holding steady at near historic lows. For the week, investment grade (IG) gained 0.4%, high yield (HY) 0.2%, AT1s 0.3%, and emerging markets (EM) 0.5%.
In France, President Macron’s decision to retain most of his cabinet sparked opposition backlash and prompted newly elected Prime Minister Lecornu to resign. French 10-year yields rose 8 bps to 3.59% on Monday morning.
New bond issuance remained robust. September saw IG issuance hit USD 214 billion, 60% above the post-Covid-19 average, marking the fifth-largest monthly issuance on record. HY issuance reached USD 59 billion, the third-highest ever, and EM issuance totalled USD 67 billion, 37% above average. Notably, despite ‘de-dollarisation’ narratives, USD-denominated EM issuance held steady at 85%, matching last year’s figure and exceeding 2022–23 levels.
End-of-quarter data showed the HY default rate falling 8 bps year-to-date to 2.47% (1.4% for bonds, 3.5% for loans), well below long-term averages, particularly for bonds. Year-to-date, 42 defaults and liability management exercises totalled USD 42 billion, down 24% on 2024 and 37% on 2023.
The high yield default rate is down to 2.47% year-to-date, well below long-term averages
Forex & Commodities
Last week, USD exchange rates traded in a tight range, as the US government shutdown got under way. There were few US data releases, meaning that investors could not judge the latest developments in the economy. We expect that these tight trading ranges will persist until the publication of NFP data once the government shutdown comes to an end.
The USD/JPY fell slightly over the week, as markets moved to price in a Bank of Japan (BoJ) rate hike with a higher probability. BoJ Governor Ueda was not forthcoming with any commitment to a rate hike. The coming week’s real cash earnings data should give an indication of whether underlying inflation trends will be sustained. We note that the USD/JPY continues to trade well above two-year yield spread indications, and we would establish a short position on any rally to levels of 149.00.
Gold traded higher once again to levels of just under USD 3,900 per oz. The upward move has been relentless, and has not seen any kind of significant drawdown in recent months. This is a profound change in normal price action, suggesting that the underlying demand profile has changed considerably. A prolonged US government shutdown will be constructive for gold, because it will increase fears of a stagflation scenario. We maintain our highly constructive view on gold, expecting it to rise to levels of USD 4,600 per oz by Q4 2026.
We expect gold to rise to levels of USD 4,600 per oz by Q4 2026
The opinions expressed herein are correct as at 6 October 2025 and are subject to change without notice. This information should not be relied upon by the reader as research or investment advice regarding any particular fund, strategy or security. Past performance is not a guide to current or future results. Any forecast, projection or target, where provided, is indicative only and is not guaranteed in any way.
