Economic and Market Review September 2025
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Overview
Early in the month, the market traded overall sideways awaiting economic data that would indicate which way the Fed may move on rate-cuts. On September 5th, the jobs report came in weaker than expected, with September 11th’s CPI release coming in exactly on expectations, sealing the market’s expectation of a cut.
The Morningstar US Market Index measures the performance of large-, mid- and small-cap stocks in the U.S., representing the top 97% of the investable universe by market capitalization.
Overall, the Fed’s preferred inflation gauge Core PCE (Personal Consumption Expenditures, less food and energy) rose 2.9% year over year, below the estimated 3.0%.
Consumer spending accounts for 70% of US GDP and despite near record low consumer sentiment, consumer spending is still hot, and GDP is still up.
Morningstar
Recently, the health of the labor market has come more into focus for the Fed. The August jobs report from early September showed just 22,000 added jobs, with unemployment rising to 4.3%. This is a massive miss, with the consensus expecting 110,000 jobs. Historically, consumer spending has ‘broken’ before employment, being a coincident indicator with jobs being a lagging one.
US Government Enters Shutdown on October 1st
Congress has failed to pass the necessary continuing resolution or full budget, and the government has entered into a shutdown. Typically, shutdowns result in the furlough of 300,000 federal workers, or around 0.5% of all US non-farm payrolls. More pressingly, all federal employees, around 2% of total US-employment, will not get paychecks even if they are working during the shutdown. Usually, shutdowns don’t last longer than a few weeks, with the longest lasting 35 days.
During that last 35-day shutdown, the Congressional Budget Office studied economic impacts and determined that there was a real GDP impact of just 0.2% annualized (~$11 billion). However, it is important to note that the last shutdown had 5 of the 12 required spending bills passed, meaning there were at least some federal employees receiving paychecks. The current shutdown is the result of zero being passed, with more recent estimates by Goldman Sachs put real GDP impacts at 0.2% annualized per week.
Historically financial markets have reacted by devaluing the US dollar and increased volatility across the board. According to TD, equity markets initially react negatively to shutdowns, with investors moving money into safer assets. So far, this is no different with the 10-year yield dipping slightly.
The most substantial capital market impact is the delay of economic data. The jobs report for September will be delayed, and if the shutdown lasts, CPI and PCE data could be delayed as well. This could have a marginal impact on the Fed’s rate cut decision later in the year, though economists stress that missing a month of data is not enough to move the needle either direction.
Market Temperature Still Hot
During the September Fed meeting, the FOMC voted to cut rates by 25bps citing an increased amount of stress in the labor market. A Morningstar chart shows that even though the underlying economy shows weakness, the temperature is still hot on several indicators.
The US Market P/E is still elevated, though lower than it was at the 20 year high in March 2021. US Stocks have been the second best asset, other than gold, over the trailing 20 years. Equity valuations are likely to remain elevated so long as corporate earnings expansion continues though there is a long way down if growth expectations begin to take consistent hits.
Oil prices are the only item of the 7 Morningstar tracks that is closer to the bottom end of its range. With Chinese demand weak, and production still elevated across OPEC and in the US, there isn’t much absorption. A broader slowdown in the US economy would likely send oil prices lower, with the EIA expecting prices to decline to $50/bbl by early 2026. This could give consumers a soft cushion if economic hardship arises, with gas prices for 2026 expected to hover around $2.90 everywhere except west of the Rockies.
As previously mentioned, the US dollar will likely see some declines especially surrounding the US shutdown. While we have tracked de-dollarization closely, and especially the upward pressure it has placed on gold prices, the US dollar still dominates foreign exchange volumes according to the Bank for International Settlements.
BIS
With home prices near their record highs, and likely to soar higher with rate cuts, it could provide those with home equity another line of credit to tap into if economic conditions become materially worse. On the negative, this does price younger consumers out of home buying.
Yield Curve Steepens
With the Fed cutting rates, typically short-term yields fall with longer maturities staying high. The curve has steepened compared to earlier in the year, though the spread between the 2 and 10 year has widened to 50bps compared to 37bps earlier in the year.
Analysts expect the curve to continue to steepen, especially if there are more rate cuts. However, analysts also caution that the longer-term yield could remain at its present level due to long-term inflation expectations and excessive government spending.
The Fed released its year-end expected dot-plot during the September meeting, and it currently expects another 50bps through the end of 2025, and one more cut next year.
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