Brian Pietrangelo [00:00:01] Welcome to the Key Wealth Matters weekly podcast, where we casually ramble on about important topics, including the markets, the economy, human ingenuity, and almost anything under the sun, giving you the keys to open doors in the world of investing. Today is Friday, October 3rd, 2025. I'm Brian Pietrangelo and welcome to the podcast. With me this morning, I would like to introduce our panel of investing experts here to share their insights on this week's market activity and more: George Mateyo, Chief Investment Officer, and Rajeev Sharma, Head of Fixed Income. As a reminder, a lot of great content is available on key.com/wealthinsights, including updates from our Wealth Institute on many different subjects, and especially our Key Questions article series addressing a relevant topic for investors. In addition, if you have any questions or need more information, please reach out to your financial advisor.

Taking a look at this week's market and economic data, we have three key economic releases for you, but the bigger news is that we don't have some other economic releases, and we'll talk about that here in a minute. First up, earlier in the week, we got the JOLTS Report, the Jobs Opening and Labor Turnover Survey report, which showed that job openings were steady and relatively unchanged from the prior month in August at $7.2 million. In addition, that report showed that the number of quits and the number of layoffs were also relatively unchanged. So at least somewhat good news from this report in that things remain steady on that front with that data point.

However, second, we got the report from ADP, which is their private payrolls report, which showed jobs 32,000 down for the month of September when the estimates were for a positive 45,000 of new jobs created. So that's a pretty big miss and maybe an indicator of things to come. Now, we don't normally report on the ADP payroll report because it's got some disconnectedness with the overall employment situation from the Bureau of Labor Statistics that normally comes out two days after the ADP report, usually the first Friday of the month. But again, we did not get that due to the government shutdown, which we'll talk about here in a minute.

And third, we also received some updates from the Institute for Supply Management with their Purchasing Managers' Indices both on the manufacturing side and on the services side this week. For the month of September, the manufacturing PMI did show that the economy on that end of the spectrum was in contraction and continues to be in contraction. Again, this is not a surprise. This has been going on for roughly about four and a half to five years. It's been fairly stable, but has been in the contractionary mode. On the services side, the report comes out a little later on this afternoon or this morning, actually. So we'll try to talk about that within the podcast.

Now, turning to the bigger news, we did not have two employment reports that we expected to get. The first was the weekly initial unemployment claims on Thursday; it did not come out due to the government shutdown. In addition to today, we get the monthly employment situation report from the Bureau of Labor Statistics, which describes new non-farm payrolls and the unemployment rate, which we also did not get due to government shutdown. So let's turn to George right away and get his reaction on the economic data that we did receive, the economic data we did not receive, his general thoughts, and then we'll go into a discussion on the government shutdown. George.

George Mateyo [00:03:23] Well, Brian, it is jobs Friday today, although we're not getting a jobs report, so we'll have to make do with what we have. And I think the overall data that came up this week, there is probably a little less veracity in the data. The data isn't quite as good as we normally get. And we have to keep in mind, despite the fact that there were some questions around the data integrity earlier this summer, some of these data sets go back decades. And it's kind of interesting to note that the data that the government relies on. Around the employment situation was actually first established during the Great Recession. And, I don't mean the Great, I should say the Great Depression rather than the Great Recession. So the Great Recession, I guess, just to put it in context, was 2007, eight, nine; the Great Depression was in the 1930s. And so I think that was really kind of noteworthy in a sense that a lot of the data that people rely on today, so it was kind of born out of that depression environment almost 100 years ago. But that said, I think it's fair to say that the data did come out kind of more the same overall. I think we're still in this environment that we're seeing and describing as kind of a low firing event, but also a low hiring event. There's not many massive job layoffs, thankfully, but the overall labor market is not really clicking along on all cylinders in the sense that many companies still are not hiring aggressively. So I think it's fair to say that this is kind of like a slowish kind of economy, but there are some pockets of strength. We've seen, for example, consumer spending hold up really well. And we'll probably get into this later in the conversation, but I also would acknowledge that the spending around data centers and AI infrastructure is just exploding again. And that's also kind of coursing through the economy in many respects also. So irrespective of what's kind of happening in the labor market, irrespective of what's happening in the government for now anyway, consumer spending and AI spending are really quite brisk.

Brian Pietrangelo [00:05:14] Well, George, let's dive a little deeper into the government shutdown. And I'm gonna give you some rapid fire questions. I know you've got the answers to all of them, but in general, what is a government shutdown? What would our audience need to know? What are the effects on the markets and the economy? And specifically, what does the effect on investors for short-term reactions to the market and long-term reaction and how does it get resolved?

George Mateyo [00:05:36] Well, how it gets resolved is always kind of the sausage making that is known as compromise. And that doesn't seem to be present at the moment, but that could change pretty quickly. I guess from a broader perspective, I think it is fair to say that we have to acknowledge that every year this can happen basically. Every year, Congress essentially must pass a budget. Or they can do what they call passing continuing resolutions or CRs. And those things essentially allow the government to keep open. And this is kind of the time of year where the budget is revealed for the following year. You know, it's 9/30, 10/1 or so. And if the budget's not passed or CR is not passed, the government essentially shuts down. Agencies closed. Activities related to government activities also are essentially halted. And I think, again, it’s important to note that the media has been covering this quite well. Many of the essential services. We'll remain open, you know, air traffic control, military spending, and also the interest on our debt, which again, is becoming a bigger and bigger deal.

So I think it is fair to say that this is not the same thing. We should really kind of warn people. This is not same thing as a debt ceiling issue. That's a really big deal. And we kind of came close to it earlier this year. The debt ceiling, again, just to remind people, is the limit the overall government can borrow. And if that ceiling is not lifted, then interest payments might not get made, and then technically the government's in default. So that's not the situation now, that it actually was addressed earlier this year in the Big Beautiful bill, and that's behind us and not really kind of a concern at the moment. But shutdowns themselves, as I said, kind of have happened with greater and greater frequency. Since 1980, Ryan, I think there's been 15 shutdowns. And most of the time, shutdowns are really not lasting economic events. The average shutdown, for example, if you go back since 1980, was about nine days. It is noteworthy that the last four shutdowns actually have lasted 18 days, and the most recent shutdown, which occurred in President Trump's first term, lasted 34 days. So that's probably another example and just a reminder of how partisan politics have come.

In terms of the economic impact and market impact, again, most of these things are short-lived events. We do kind of have seen kind of some slow, I guess, kind of short-term drop-off in spending, where essentially people kind of maybe poured cash a little bit more. Maybe they don't go out to eat as much as they would normally. And then when the government reopens, spending kind of popped back up. And that's kind of analogous to what we see around some major weather events, where spending essentially kind of dips and then it bounces back once the storms pass and rebuilding takes hold.

I think there is some concern that this time, workers who typically are furloughed, meaning essentially they're kind of at home, not earning anything, but when they get back into work, essentially they get back pay. And there is concern this time around that maybe some of those workers on the government side might be permanently laid off. That's also been covered widely in the press. I think it's important, though, to put that in context, too, in the sense that the effective workforce might tell anyway. Would represent less than 2% of the overall labor market. So yes, it's a big deal. That would impact people directly, most acutely, particularly in certain parts of the country. But overall, I don't think it's gonna be a major economic event unless this thing really drags out for a long and gritty time.

The financial impact goes a little bit different in the sense that we had to, we talked about this already in the since that the data that we normally rely on when making decisions, the policy makers use to make decisions, is delayed or probably even suspended as well. So we do have to rely on alternate data sets. We've talked about some of those as well, I think equity markets have taken it in stride generally speaking. I think today, for example, Brian, that the shutdown was first announced and really took hold, I think the equity market was up that day. And a lot again, that is driven by AI spending and other things as well. But I think a bigger question, Rajeev, is for you in the bond market, what do you think the Fed does with this information or this void of information as they think about cutting rates potentially in this month?

Rajeev Sharma [00:09:25] Yes, I mean, you make a lot of great points there, George. The information void that we're having due to the government shutdown, the market is taking it pretty much in stride. And if you look at the bond market, it's kind of doing what it anticipated going into the shutdown. Treasuries rallied, everybody ran for safety haven assets and people are now looking at the Fed. They're not getting the data points that are important, not just for the market, but obviously for the Fed as well. So it kind of brings into question what's gonna happen to the rate cutting campaign that the Fed started last month. There were already uncertainties before the government shut down, but the market knows that inflation is sticky. The market knows that labor market had been cooling. The market has confidence that the US economy will land softly and that rate cuts will continue to boost risk assets like equities, as you mentioned.

If you just look at the bond market volatility through the MOVE Index, volatility has been steadily trending downward since Liberation Day. So the market has already priced in a terminal rate of 3%. And so there's very little room for aggressive easing, unless the US is headed for a recession, which is viewed as very highly unlikely. On the other hand, if inflation were to rise further on tariffs, that would be likely reevaluation of the Fed expectations of rate cuts. Again, the impact of tariffs does not seem to be on the mind of market participants. So a lack of data through this government shutdown almost means that the market can wait longer to see if we get a rebound in inflation or a further cooling of the jobs market. And as the market waits for information or to find alternative data sources to kind of make a picture of what the Fed might do, the market continues to focus on risk assets. Specifically the carry that investment grade bonds offer in a rate cutting cycle. And for this to continue and for the market to continue to gravitate towards risk assets like equities and corporate bonds, you need two things in the market. One, low volatility and two, a positive risk sentiment. And we have both of those things right now, even with this government shutdown. So anything that changes those two variables, then there's a harsh reality check that the market would have to have.

But investors are pretty certain right now that the Fed will continue to move along with their rate cutting campaign. Despite some of these key data releases being delayed. In fact, currently the market has a 98% probability that we get a 25 basis point rate cut at the October 29th meeting. And about an 89% chance that we get another rate cut 25 basis points at the December 10th meeting, so the market overall is pricing in two more rate cuts for this year. And the market over all is pricing in 105 basis points of rate cuts over the next 12 months.

So going into the shutdown, as I mentioned, treasuries once again, proved to be the safety haven assets for investors. We saw yields move lower along the yield curves, specifically in the front end. The yield curve has further steepened, but even without the jobs data today, there are still other factors in the market that could move the picture. We have Fed speak, obviously many Fed members have been coming to market and kind of weighing in on what they feel about the government shutdown. And in fact, the most recent one was Chicago Fed President Goolsbee. Who noted that unemployment in his estimates would have probably printed around 4.3% if we got the labor market data today. In other words, at 4.3%, there's really no change from August. So by making that statement, it's kind of the markets has to interpret what that really means. So if unemployment sticks at where it was in August, that any signs of job stabilization would pull yields higher. And maybe put back into question is the Fed going to really continue cutting rates? But it's not enough again, to move the probabilities that we're seeing in the market right now. Market still anticipating two rate cuts, but I think we're gonna get, if we don't get the data, we're going to get noise and that noise is gonna be in the form of Fed speak or maybe other headlines that hit the market that move the yield curve one direction or the other.

I do feel however, that if you look at risk assets, as you mentioned equities, if we look at corporate bond spreads, they've been extremely stable even through all of this. They've remained that way for pretty much most of the year, except for two weeks in April. And I anticipate that stability to continue as we enter the bottom couple of months of the years. I do think that the new issue calendar is going to continue to be robust. There's a lot of issuers that are coming to market with new bond deals. Again, there's a lotta demand for these deals. So there really isn't any catalyst that I see right now in the near term that could take credit spreads wider. Without something really significantly changing, maybe default rates moving up. But again, if you have an economy that's not entering recession and you have corporate bonds that are continue to be in huge demand, I think spreads remain pretty much in this tight range that we've seen multi-decade types that we see.

Brian Pietrangelo [00:14:22] Well, thanks Rajeev. I've got a final question for George and that is just to remind people that certainly past performance is no guarantee of future results. But when we talk about the volatility near a shutdown, George, it tends to ascend the market down, but three, six months, 12 months later, the market tends to rebound. So what final reminders might you have on that note for our investors and in general?

George Mateyo [00:14:43] Well, I think Brian, everybody thinks that this time is different and this time it's different on occasion, but this time doesn't feel that different to me just yet. And we've kind of seen this before, to some extent. Again, there'll probably be some wrinkles and if we've learned anything this year, I guess we should learn that we should probably expect the unexpected. So we have to kind of keep that somewhere in the back of our minds at the very least, but I kind of suspect that again, this shutdown will probably follow the pattern of previous shutdowns. Again, as you pointed out, there is some volatility around the shutdown itself. Maybe it kind of lingers into the final week. You know, we can't look back at, or I guess other analogs. And 2018 into 2019 was a little bit of a different time in the sense that rates were a little restrictive. The Fed was shifting policy, volatility, and really kind of overall market activity dried up a lot because it happened really right at the end of the year where most people are on holiday. So, you know, again, the 2018 analog is a little bit different, but you're right to think that volatility does go up, stocks kind of move down a little. I'd say bond markets and yields move around a little too, but overall it's mostly noise. And as you pointed out, this does kind of settle out. So most of the times, as we've said before, markets settle up when the overall market environment settles down, meaning once the temperature goes back down again, once people get back to work, once some of the statistics that Rajiv talked about get released and we're waiting for some of those numbers, things do settle down a little bit and markets actually resolve higher.

Brian Pietrangelo [00:16:09] Well, thanks for the conversation today, George and Rajeev. We appreciate your insights and thanks to our listeners for joining us today. Be sure to subscribe to the Key Wealth Matters podcast through your favorite podcast app. As always, past performance is no guarantee of future results and we know your financial situation is personal to you. So reach out to your relationship manager, portfolio strategist, or financial advisor for more information and we'll catch up with you next week. To see how the world and the markets have changed and provide those keys to help you navigate your financial journey.

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