Mindy Gudmundson, Institutional Portfolio Manager on the BlueBay U.S. Fixed Income team, discusses how we are closely monitoring labor market data, political developments, and Federal Reserve changes as the third quarter concludes.
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Hello and welcome back to The Weekly Fix. My name is Mindy Gudmundson, and I am an Institutional Portfolio Manager with RBC’s BlueBay Fixed Income team.
U.S. yields rose last week, driven by strong economic data. Second quarter GDP was revised up to 3.8% due to robust consumer spending, though it’s important to note that Q1 GDP was weak at -0.6%, leaving overall growth in the first half of the year slightly below trend. A decline in initial jobless claims has eased fears of further deterioration in the labor market, while durable goods orders indicate strong investment activity. However, this week’s U.S. labor market reports will be important to watch as it pertains to monetary policy. If payrolls align with the consensus estimate of around 50,000 additional jobs, markets may remain uncertain about whether Powell will announce one or two 25bps rate cuts by year-end. But, if there is a net contraction in monthly jobless totals, labor market concerns could resurface, potentially leading to calls for a 50bps rate cut. For now, we are not overly concerned about a significant downturn in the labor market. Slower immigration has reduced the growth of the U.S. labor force, meaning that job gains of around 70,000 per month should be sufficient to keep the unemployment rate relatively stable.
This week, we’ll be watching to see if a government shut down materializes as Senate Democrats push back against President Trump’s threats to slash government jobs should they not approve a budget extension to November 21st. In previous government shutdowns, workers have been temporarily sent home and have received back pay when the shutdown ends. Permanent firings would be a deviation from that protocol, further intensifying already heightened political tensions. An extended shutdown could pose minor economic risks, but it is unlikely to significantly affect the broader macroeconomic outlook. The primary concern for investors is the possibility for widespread delays in the release of economic data at a time when everyone is quite eager for such data.
Potential upcoming changes to the Federal Reserve – most notably the proposed removal of Lisa Cook and the announcement regarding the next Federal Reserve Chair - are also on our radar. Ultimately, we anticipate that a candidate will be selected who will guide the Fed in a more dovish direction. This would likely lead to a steepening of the U.S. yield curve and a modest weakening of the dollar, though neither outcome is expected to pose significant challenges for the U.S. economy. In terms of our macroeconomic outlook, we believe that 2026 will be a stronger year than 2025 supported by rate cuts, tax reductions, and deregulation. Rate cuts have already provided a tailwind to the housing market, with pending home sales for August coming in much higher than expected.
There’s a lot to watch for this week as the 3rd quarter comes to a close and we’ll be following developments carefully as they unfold.
Thank you so much for joining us today and hope you have a great week!
Key points
Second-quarter GDP was revised up to 3.8%, driven by strong consumer spending, while labor market concerns eased with a decline in initial jobless claims.
This week’s U.S. labor market reports are crucial. If payrolls meet expectations of 50,000 new jobs, uncertainty about Federal Reserve rate cuts will persist.
A potential shutdown looms as Senate Democrats oppose President Trump’s budget threats. An extended shutdown could delay economic data releases but is unlikely to significantly impact the broader economy.
We expect 2026 to outperform 2025, supported by rate cuts, tax reductions, and deregulation.