As the first frost of November settled in, markets reflected both a sense of relief and ongoing caution. While toasting the end of America’s longest government shutdown, markets also braced against fresh headwinds from Federal Reserve comments that tempered hopes for swift policy easing. With the government shutdown over, investors will await the release of delayed economic data to gain insight into the underlying state of the U.S. economy, particularly the current state of the labor market, with the release of the September labor report scheduled for Thursday.
Looking at the trend in earnings estimates and manufacturing activity (see the chart of the week below), a growing divergence appears to be emerging between the equity markets and underlying economic activity.
The latest data on the labor market may offer clues as to the direction of travel for equity markets should there be evidence of a pickup in hiring trends. A pickup would have the potential to boost consumer confidence (and in turn spending) heading into the all-important holiday shopping period in the U.S. and abroad.
This comes against a backdrop of uncertainty around future policy moves, following recent comments from Federal Reserve officials about the prospects of a December rate cut.
Divergence Between Economy and Earnings Estimates
What Happened
U.S. Shutdown – The U.S. Senate & House passed a spending bill signed by President Trump to end the U.S. Government Shutdown.
Fed Governor Comments – Fed governors indicated a preference for steady interest rates for the near future.
AI Capex – Cisco raised guidance based on continued strong trends in AI-related capex spending.
