Top of the Morning: CIO Strategy Snapshot - Data backlog

Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. The government shutdown is nearing an end, which is being welcomed by investors.

With investors getting more concerned about the state of the economy and the labor market, the backlog of government data soon to be released will be closely scrutinized. Investors are also showing more concern about the AI trade and whether it can continue. So joining us today for the CIO Strategy Snapshot, glad to welcome back.

Joining us today at the 1285 podcast studio in New York, Head of Asset Allocation for the Americas with the UBS Chief Investment Office, Jason Draho. Jason, I know it's been a couple of weeks since we've had this conversation in person, so it's nice to have you back here at the table. Welcome.

It's great to be back. Like government workers, I was off a little bit, not quite for 40 days, but off for a week. So a lot has happened, a lot to discuss this morning.

Yep, and some positive developments on that front. So perhaps let's begin there. With the government shutdown, the longest in U.S. history at this point, it is poised to end in the next couple of days.

So Jason, for our listeners, can you bring us up to speed as to what the terms of the deal are? And more importantly, when can investors expect to get new economic data? Well, what's happened right now is the Senate has passed 60 to 40, so they got just enough votes.

Essentially, like a bill, a continuing resolution to fund the government, most of the government through the end of January and parts of it until the end of September, which is the full fiscal year. The fiscal year goes October 1st to September 30th. The House now has to reconvene and then vote on it.

It's likely to happen by tomorrow, by Wednesday. And then President Trump has already indicated that he supports the bill and will sign it. So effectively, by Wednesday, Thursday, the latest, it's likely to be sort of a done deal.

And so let's say by Friday, government employees can come back to work. And again, there'll be negotiations again in January, but for the time being, we're kind of back to work. And it's unlikely, but you never know, that there'll be a shutdown of similar length in the winter.

So that's the good news. For investors, I think there's two positives. One, we'll start to get economic data.

Now it's been 40 days since we got a lot of data. It's also, we don't have September data. We're now almost in mid-November.

We don't have October data. And the question will be like, how soon do we get stuff? It's a little bit of speculation in terms of how long it could take.

Imagine at least two to three days for employees to get back before they can start to release data. The other thing that people will focus on, investors specifically, will be the September employment report. Now, the government shut down October 1st.

September 30th was, I believe that was a Wednesday or Thursday. So we were only a couple days away from getting it. The collection period is usually about the third week of the month.

So the data should essentially have been compiled. It's almost, I mean, I'm kind of metaphorically speaking, but almost like as if you just pick up the folder, open it up, double check the data, and it could be out within a couple of days. If the government reopens by Friday, I think by early middle of next week, the 17th, 18th, we could get the employment data.

After that, we'll get things like retail sales, inflation data. That will probably take a week or two beyond that. So that's where we'll get the September data.

Most of it should be available by the end of November. So we also might get some of it right before Thanksgiving. Then the question is, when do we start to get the October data?

Because now that's impacted by the fact that surveys that take place for the unemployment rate. There's literally the Household Survey where people are called and they have to give responses. That was not conducted.

For the Establishment Survey, which does the payrolls growth, that's businesses filing electronically. So we'll probably get and can get payrolls data earlier than we can get conceivably the unemployment data. But to be combined, it could take some time.

So that may not actually materialize until early December. Then the question for November, do we get that before the holidays, the Christmas holidays, or does that kind of drift into next year? So definitely a backlog.

One of the key questions then is, will there be enough data for the Fed to make a decision whether to cut rates in December? They're meeting on the 9th and 10th. I believe that's the Tuesday and Wednesday.

So they will have the September data. They might have the October data, like the employment report. They probably won't have much November data.

They may not have all October data. So they'll be in a situation where they have to make a decision and they're just not going to have enough data, not nearly as much as they would normally have that point in time. Not a guarantee, according to Chairman Powell, per the prior Fed meeting, that we will see a rate cut.

Exactly. So not a guarantee. Part of that is they just didn't have the data and they may not have enough data to have a real-time picture of what's the economy doing as at that point in time.

Even if they did, the point that I think Powell was alluding to was that given the data that they had, it wasn't a clear cut for a lot of people that they actually needed to be cutting as much as they were. And so the fog, so to speak, will lift a little bit but still be enough that, again, for those who are unsure, there's a reason why the market is pricing still only about a 65% chance of a cut for December. If it's not December, then it's likely to be January because I think that's where the markets are at this point in time.

So we'll start to get data soon as next week, but to get a fuller picture, like where the economy is in October, November, we may not really get that until almost December at this point in time. Okay. So it will take some time for that data to present itself in the absence of the government data.

I know, Jason, investors have been relying heavily on private sector data and it's interesting that private sector data suggested that the U.S. labor market continues to be soft and potentially weakening even further. So based on the data that we do have, Jason, what is your assessment of the current state of the U.S. economy? Well, the principal thing is the labor market and the strength of it and whether it's getting weaker and could ultimately crack because that is also going to dictate how much and how soon and how aggressively the Fed cuts.

What we've been able to get since the government shutdown is at the state level there are initial jobless claims. If you aggregate that up, you get a pretty good estimate of what the weekly initial jobless claims would be. They seem to have ticked up a little bit over the past six weeks, but still at a relatively contained level.

Again, it's an imperfect measure, but that would suggest some softening there, but still within the range of where those initial claims have been for many, many months. What was caused a little more concern last week is some of the private sector data, particularly one in particular, the Challenger Gray and Christmas survey, not survey, but it's private sector layoffs that they will announce. I think it was the month of September, increased to the highest level outside of recession.

Sorry, it was in October. Even if you exclude the effect of large announcements, that may be double counting. You had that increase.

There's now a third party, a private sector data collector that's also signaling weakness. ADP, a private sector employment, actually was a little bit better than expected. The composite picture is not an acceleration.

Collectively, it suggests perhaps continuing holding steady, if not softening, but until we actually get the proper labor market reports, we don't have a strong indication. I think there's not enough data that suggests that the trajectory for the economy of a softening labor market, but growth still holding up. That story that we had at the end of September, that has not really changed.

The consumer spending data that we can get from credit card data still shows an aggregate holding up well, but definitely a bifurcation between higher income consumers, those who own assets, versus lower income consumers, definitely kind of a bifurcation there. It is an economy that is kind of moderate and likely to be dealing with the impact of tariffs this quarter, next quarter, kind of the peak negative impact, before ultimately we think growth will kind of accelerate into next year due to stimulus, due to Fed cutting measures, government shutdown sort of alleviating. All that would suggest a better trajectory ahead, but it definitely feels like the economy is, you know, the risk of poverty to the downside have increased over the past six weeks.

So in terms of how the markets have been behaving recently, it was interesting, Jason, looking at market price action last week, we did see some volatility with the tech sector in particular down 4% and more speculative tech stocks down even more. We did see a bit of a rebound yesterday, Monday, as we're speaking right now, U.S. equity markets opening mixed, and that rebound came after news of the government shutdown ending. So what do you make of the recent price action in U.S. equities, Jason?

Well, like a big part of what the pullback in equities last week was the tech sector, these AI-related stocks. You know, I think NVIDIA from its peak, you know, not just last week, it's down 8%, 9%. Oracle's back down to where it was in early September.

So you see definitely kind of a pullback there. It is these concerns about massive cap-ex spending, concerns that sort of the circularity of financing between vendors, like NVIDIA providing financing to OpenAI to buy the semiconductors to run the models, kind of questions about that. You know, there's been definitely an increase in the amount of corporate bonds being issued by some of the hyperscalers alike, Facebook or Meta, you know, to finance the build-out.

That's also raising a little bit of concerns. So there's some jitteriness within the AI trade. I think that's what you saw last week, is that's kind of what led the pullback, even though there wasn't any specific reporting of companies last week that you could point to.

There's a single data point. But if you zoom out just the last two months, I think a good indicator would be, as a proxy for this, like the SOX Semiconductor Index, basically from the beginning of September until late October, it was up 30%. And so pulling back 3 or 4 or 5% over the course of a week is just taking to me a bit of a pause.

Healthy. You know, healthy to some extent. Definitely I think investors have been cautiously optimistic, let's put it that way, not extreme positioning.

And the fact that the markets bounced back as much as they did yesterday, that the tech sector was up 2.5%, the S&P was up 1.5%. Just on the news of the government shutdown likely over, that signals that investors are willing to step in and sort of buy even modest dips, dips of a few percent. So everyone wants to be a bit of a kind of Cassandra calling, like this is bubbles, things are kind of cracking.

And the reality is we are in an environment where the market seems to be kind of climbing the wall of worry. And every now and then there'll be some data points, you know, concerns, some technical factors leading to some pullbacks. But I would not put too much stock in what we saw last week as things are kind of breaking down.

You know, corporate bond spreads are still very tight. Not as tight as they may have been earlier in the summer. But if we think about where they were at the start of the year, they're still at those levels, still historically at kind of relatively tight levels.

So overall I think that's kind of what it is, a little bit of sort of pause after a long rally, some sort of de-risking a little bit given how much the markets have rallied. But the price action on Monday indicates that overall the fundamental story for investors hasn't really changed. They still want to participate in this rally.

And NVIDIA is reporting later this week, I'm sure that will be a big point of interest for investors. You'll definitely get a lot of focus, yes. So let's end, Jason, this morning with asset allocation, given everything you've shared with us.

What are CIO's key recommendations as we're at this point beginning the final stretch of 2025? Hard to believe. Well, think about just equities.

The view we have is more upside in equities. Our price target for June is $7,300, so a solid upside over the next now only eight months that we're looking at close to around a 10% type of return. So the message is kind of basically buy equities.

And so if you get any dips, and this is what investors are doing in general, is buying those dips. Not just the U.S., but globally we see kind of opportunities around the whole world. The tech sector, the AI theme, we think will have a long runway, at least well into next year.

The tech sector is a key beneficiary. What we saw yesterday is a good indication of that. Banks and financials, but banks specifically, are a sector that we think will kind of benefit from deregulation trends.

And the government shutdown ending, we saw yesterday also banks have popped a little bit in the past week or so, they've kind of relatively outperformed. Pivoting to other asset classes like fixed income, given where I said spreads are still relatively tight, sort of staying up in quality, not taking a lot of risk, rather I'd suggest taking risk in equities rather than credit, and not taking a lot of duration risk. We've seen the 10-year fluctuate on risk-off environments like last week, rates have declined.

When it's a healthier environment, investors are more confident, then you see rates kind of back up. Gold, it's interesting, gold rallied yesterday, quite solidly, I think on the news of the government shutdown ending, which, in an environment where you think that's a risk-on environment, gold shouldn't rally, but I think it's, again, investors perhaps just putting capital to work in gold, providing sort of an alternative kind of hedge to your portfolio. So that's something else that we continue to like.

Well, Jason, very productive conversation as always. Was great having you back here in the studio, a lot who have caught our listeners, our clients up on. So thank you for dropping by, and we look forward to continuing with our conversation next week.

My pleasure. Have a good week. You as well.

Thank you for tuning in. Be sure to visit ubs.com slash studios to view the entire UBS Studios suite of podcast channels along with our video offerings, such as UBS Trending. You can also follow us on Instagram for content highlights at UBS Trending.

UBS Studios is part of the UBS Chief Investment Office within UBS Global Wealth Management. Visit ubs.com slash CIO to view the latest research. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management business of UBS AG or its affiliate, UBS.

This material has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient and is published for informational purposes only. As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services. Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements.

In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. For information, please visit our website at ubs.com forward slash working with us. For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at ubs.com forward slash CIO dash disclaimer.