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Markets faced an unusual challenge last week as the U.S. government shutdown entered its seventh day, leaving investors to navigate without key economic data while political instability in Japan and France added to global uncertainty.

Equities: Tech Resilience Amid Volatility

The Nasdaq continued its outperformance, climbing to around 108 (normalised), buoyed by another blockbuster tech deal. AMD's collaboration with OpenAI, which added $80 billion to OpenAI's valuation in a single day, reinforced the AI infrastructure narrative despite growing questions about productivity returns from these massive investments. The extent of the AI infrastructure spend is becoming increasingly evident. Not only is it probably masking weakness elsewhere in the economy the sheer scale is unprecedented and the payoffs less certain than in traditional infrastructure. This may well be money well spent but it's also likely that there will be doubts along the way.

Japanese equities surged 4.8% on Monday following the victory of Sanae Takenaka as LDP leader, with markets anticipating a more dovish monetary policy stance and increased fiscal stimulus. The Nikkei hit record highs as the yen weakened 1.8%, though questions remain about how sustainable this policy mix will be given potential US pressure on currency weakness.

European markets struggled with French political instability after Prime Minister Sébastien Lecornu resigned after just 28 days in office, marking France's sixth prime minister in less than two years. French banks bore the brunt of the selloff as concerns mounted about fiscal policy paralysis.

Fixed Income: Steepening Pressures Build

Bond yields rose globally, with Australian 10-year yields jumping from 4.33% to 4.41% through the week. The move reflected both domestic inflation concerns and global factors but there is some evidence that inflation pressures are building in the local economy in a way that might restrain the RBA’s ability to cut rates much this year and even early next year. U.S. Treasury yields also drifted higher despite the data vacuum, with markets increasingly pricing in fiscal expansion risks from Japan, ongoing U.S. shutdown costs, and French budget uncertainty. The potential for all three major economies to run looser fiscal policy simultaneously is creating steepening pressure across yield curves.

Economic Data: Flying Blind

The U.S. government shutdown forced markets to rely on private sector indicators, which painted a concerning picture of labour market deterioration. The ADP report showed a 32,000 decline in September private payrolls (with August revised from +54,000 to -3,000), while private alternative data sources suggested Q3 layoffs could be at their highest since Q3 2020 and hiring intentions at their weakest since 2009.

Fed officials face a difficult decision at their next meeting, forced to navigate without official employment data while private indicators suggest the labour market may be at a tipping point between the current "low hiring, low firing" equilibrium and something more troubling.

Australian Resilience

Against this global backdrop, Australian data provided a relatively bright spot. Household spending rose 5% year-on-year (6.2% excluding alcohol and tobacco), the RBA's Financial Stability Review showed mortgage arrears declining to pre-pandemic levels, and households maintaining significant payment buffers. However, the trade surplus fell to its lowest level since 2018 as export values declined 10%, particularly in coal and gold.