How a Data Blackout and Shutdown Sparked a Market Rally

The previous week was a very rare balancing act between optimism on continued Fed easing and uncertainty over the U.S. government shutdown.

U.S. stocks finished the week higher, with the S&P 500 and Dow Jones Industrial Average each rising about 1.1 percent, while the Nasdaq Composite gained around 1.3 percent. The indices hit record highs midway through the week — even as volatility continued to creep higher — and brushed off a government shutdown that started Wednesday, leading to partial data releases interruption

Investors have remained confident that the Fed will continue to cut rates later this year, especially as more signs emerge of a weakening labor market and in the absence of headline employment data because of the shutdown.

The 10-year Treasury yield closed the week around 4.12 percent, lower than its recent highs. Investors are betting that the Fed will cut rates in the months ahead, pricing a greater than 90% chance of a 25-basis point cut at its October meeting. The data gap from the shutdown provided a boost to bond demand, with markets placing greater emphasis on weak private sector data and Fed signals.

Commodity markets diverged sharply. Gold prices climbed to fresh records breaking the $3,800/oz level and notching a seventh weekly gain. The softer dollar also provided support for the precious metal.

In contrast, oil (crude) declined very sharply –– down over 7-8% on the week –– on fears of supply glut and weak demand indicators. Reports that OPEC+ could boost output and a stronger U.S. inventory picture are additional pressure points. Other commodity sectors were mixed: Industrial metals steadied as ongoing supply constraints offset most of the downward pressure on prices, while agricultural prices fluctuated, depending largely on crop and weather developments.