US government shutdown takes effect. Risk sentiment resilient. US equities recover from an initial dip and solid gains for European indices. ADP payrolls weaker than expected contributing to a rally for US treasuries

After a soft tone for risk sentiment in Asia, as the US government shutdown took effect, the S&P has recovered from an initial dip on open to be little changed. European equity indices registered solid gains. A weaker than expected ADP private payrolls reading was consistent with other data indicating the labour market is slowing and contributed to lower bond yields. The US dollar was mixed against G10 currencies and oil prices extended the recent decline. Brent crude traded towards US$65 per barrel.

The shutdown came after Republicans and Democrats failed to come to an agreement to fund the federal government into the new fiscal year. President Trump said the government may consider the permanent dismissal of some federal workers during the shutdown. Key economic data releases are likely to be disrupted. This includes the September labour market report from the Bureau of Labor Statistics, which was scheduled for release Friday.

The ISM manufacturing index edged higher to 49.1 in September aligning with the consensus estimate. The index continues to paint a downbeat picture with the index remaining below 50 for the seventh consecutive month. Respondents still noted the impact of tariffs as a drag in many industries. The new orders index dipped to 48.9 while employment increased but remains at a subdued 45.3 level. The prices paid index dropped to an eight-month low of 61.9.

ADP reported a 32k decline in private sector payrolls in September compare with an expected 51k increase. The fall was below all the estimates in the Bloomberg survey. Although we have often noted the inconsistent relationship with official payrolls, this report will gain more attention than normal given the likely delayed publication of the September labour market report. ADP’s chief economist noted that despite the strong economic growth, US employers have been cautious about hiring.

The Supreme Court has blocked President Trump from immediately removing Federal Reserve Governor Lisa Cook. The court said it had deferred the decision to hear more arguments which means she can continue at the central bank until early next year. The ruling will reduce concerns that the president will be able to force out other members of the Fed’s policy-setting board.

The ADP data contributed to a firming in Fed easing expectations. The market is pricing 47bp of cuts by December, up from 43bp ahead of the data. This supported a rally for US treasuries led by the front end of the curve. 2-year yields dropped 5bp to 3.56%. 10-year yields declined to 4.08% before retracing to 4.12%.

Euro area CPI increased at a 2.2% annual rate in September, which was in line with the consensus estimate, despite the regional releases suggesting the risk of an upside surprise. The core reading was unchanged at 2.3%, and services inflation rose to 3.2% from 3.1%. There was limited reaction in European rates markets. Bund yields are close to unchanged across the curve.

In currency markets, the US dollar struggled for direction as traders processed the shutdown and weak ADP print. The dollar index oscillated in broad range but is little changed from the local close yesterday. NZD/USD is modestly higher in overnight trade. NZD/EUR is the main mover of the major cross rates, and is close to 0.5% higher, having traded up towards 0.4960.

Japan's large manufacturers have shown increased confidence for the second consecutive quarter, bolstering the case for the Bank of Japan to raise interest rates. This data aligns with growing market expectations for a rate hike. Last month, two board members unexpectedly opposed maintaining the current rate, and even a typically dovish board member highlighted the need for policy adjustments earlier this week.

The NZ swap curve steepened the local session yesterday with NZD rates not able to sustain lower levels on a cross-market basis after the post-RBA selloff in Australian rates. 10-year rates closed 4bp higher at 3.70%. 2-year rates were unchanged at 2.67% which saw the 2y/10y curve trade back towards the April peak.

The NZ government bond curve also steepened with 10-year bonds closing 3bp higher at 4.22%. The market looks ahead to the weekly tender today. The NZ$450 million of nominal bonds are split across the May-30 ($250m) and May-35 ($200m) lines. These two maturities have made up more than half of the tender issuance since the new fiscal year began on 1 July.

It is a quiet day ahead on the economic calendar. There is no domestic data of note. The Bureau of Labour Statistics has said the weekly jobless claims are subject to delay if the shutdown is still in effect.

Stuart Ritson is the Senior Interest Rate Strategist at BNZ Markets.