Baker Market Update 2025-10-03

As we kick off the new quarter this week, it has already brought unexpected hurdles, highlighted by a government shutdown following Congress’s inability to reach agreement on a funding measure. A lack of concession amongst Congress members regarding federal budgets, ultimately leading to closure, has happened 21 times in the past 5 decades. On average, government shutdowns last about eight days; while they often stem from broader budget disputes, they can also be used as political leverage when Congress and the White House are controlled by opposing parties. In this case, the disagreement between the two congressional parties stems from disputes pertinent to spending issues such as cuts on Medicaid and the extension of health care subsidies.

The government shutdown earlier this week forced the U.S. Labor Department to postpone the release of key economic data, including Friday's highly anticipated employment report, which is the most comprehensive gauge of labor market conditions. Fortunately, on Wednesday, the ADP National Employment Report gave us a glimpse into the current scene of the private sector labor market. Private employer payrolls declined by 32,000 last month, which is just another confirmation of eroding labor market conditions that we have seen since the beginning of this year and have intensified since the midpoint of 2025.

The manufacturing industry has continued to experience eroding sentiment, as evidenced by Tuesday’s release of the Chicago Business Barometer (Chicago PMI), which reflected the same downward trend in the manufacturing industry. The index print of 40.6 was below both analysts' expectations and the month’s prior values of 43.3 and 41.5, respectively. The Chicago PMI is a diffusion index where readings above 50.0 signal improving sentiment among survey respondents, while readings below 50.0 indicate deteriorating sentiment. The ISM Manufacturing Survey was released the following day on Wednesday and is a broader measure of sentiment as it tracks the general or overall state of the manufacturing industry. Survey results also remained in contractionary territory, coming in at 49.1, but were a few points above both expectations and the month’s prior values of 49.0 and 48.7, respectively.

Unlike the manufacturing sector, the housing market showed signs of strength this week, with US Pending Home Sales MoM surpassing analysts' expectations and the prior month's values by a staggering amount. Pending home sales increased by 4.0% month over month, prior month's values were in negative territory, while analysts’ expectations were for only a 0.4% increase. This surge likely reflects pent-up demand finally being released as buyers who were previously sidelined by elevated mortgage rates, caused by the Federal Reserve's restrictive monetary policy, are now entering the market while inventory remains constrained. The activity may represent a normalization of previously suppressed demand rather than speculative excess demand in anticipation of rising home prices. However, sustained housing market recovery will likely remain dependent on further declines in mortgage rates to restore broader affordability for the average consumer.

Have a great weekend everyone!

Source: Bloomberg, L.P.