This Week

Traders shrugged off the government shutdown last week, pushing the SPX to new highs. As we enter week two of the shutdown, markets remain without key economic data, and this week sees a relatively quiet earnings calendar. That will change next week with the start of earnings season and (presumably) the return of official data at some point. More on what’s ahead in a bit, but first a round-up of some stories from over the weekend:

• Stock Traders Brace for Extended Shutdown Amid Lofty Valuations (Bloomberg)

  • Ahead of the crucial earnings season, threats to the torrid US stock market rally are compounding. With no end in sight for the government shutdown, traders are gearing up for the aftermath as equity valuations are at eye-watering levels and the labor market shows signs of cooling.

  • There has been a “pretty significant demand for hedging” in recent weeks, though it’s not solely related to the government shutdown, said Robert Knopp, co-head of the S&P options desk at Optiver in Chicago. He added that most of the options trading “has to do with investors trying to pinpoint” when payrolls and inflation data will be released.

  • Three-month put skew, a measure of the relative cost of protection from stocks falling, has risen faster than other tenors, according to Mandy Xu, vice president and head of derivatives market intelligence at Cboe.

    The attitude among investors appears to be: “You’ve had a good year, lock it in,” said Xu.

• Federal-Worker Buyouts Are Kicking In, Darkening the U.S. Employment Picture (WSJ)

  • Some 100,000 federal workers came off the government’s payroll this week, the latest bit of unwelcome news for the softening U.S. labor market. The departures coincide with the government shutdown, which could bring another round of cuts.

• ‘There will start to be layoffs’ if Trump decides shutdown talks have stalled, Hassett says (CNBC)

  • White House economic advisor Kevin Hassett said that layoffs for federal government employees will begin if President Donald Trump decides that negotiations to end the government shutdown “are absolutely going nowhere.” Hassett expressed optimism that negotiations this week could resolve the impasse. His comments come as the government shutdown enters a new week, with no clear offramp in sight.

  Foreign Buyers Are Backing Treasury Bonds. It Comes With Strings Attached. (Barron’s)

  • Big private foreign investors are now among the largest purchasers of America’s debt—and their cash threatens to make the Treasury market less safe.

• Why Corporate Bonds Are on a Tear (WSJ)

  • Think stocks are hot? Try corporate bonds. The S&P 500 hit its 31st record of 2025 on Friday, but the enthusiasm for companies’ bonds could be even more remarkable. By one measure, Wall Street is less worried about highly rated businesses getting downgraded or defaulting on their debt than at any other time in the past quarter-century. The yield premium offered by investment-grade bonds has shrunk to an almost three-decade low.

Short duration implied volatility remains subdued despite some signs of upticks in 30 day expected volatility measures. For this week, SPX is pricing in just a 1.2% move, similar to the past two weeks:

This Week’s Expected Moves:

• SPX/SPY: 1.2%

  • QQQ: 1.6%

  • IWM: 1.8%

  • TLT: 1%

  • USO: 3.4%

For now, traders appear comfortable buying all the small dips with some light hedging beginning to emerge. That’s affecting volatility measures in a couple of ways. The first being some uncertainty around the shutdown’s potential duration has some traders beginning to look for protection while protection is cheap. The second aspect was somewhat apparent in recent examples of a rising VIX alongside rising stocks. That hints at some speculative froth building, particularly in some smaller cap names. Still, realized (Actual) volatility remains low as the SPX continues to grind higher and IWM faced some selling as it made an all-time high.

This week’s economic calendar is fairly quiet, featuring several central bank speakers early on, the FOMC minutes release on Wednesday (the Fed is unaffected by the shutdown), a Powell speech on Thursday, and a Consumer Sentiment report on Friday:

Economic Calendar: 

• Monday

  • ECB Lagarde and BOE Bailey speeches

• Tuesday

  • Fed Speak: Bostic, Bailey, Bowman, Miran

• Wednesday

  • 2pm - FOMC Minutes

• Thursday

  • 8:30am - Powell Speech

• Friday

  • 10am - UofM Consumer Sentiment (prelim)

As far as earnings, really thin again this week with Thursday being the highlight with Delta and Pepsi. Things pick up dramatically next week:

Earnings (with expected moves):

• Monday

  • After-hours: STZ 5.8

• Thursday

  • Pre-market: DAL 6.5% , PEP 4%

One final point: It’s hard to determine the effects of the government shutdown as a resolution likely gives equities another reason to gap higher, while a prolonged shutdown that included government layoffs and the lack of official economic data into the October FOMC probably puts some pressure on equities as who knows what the Fed would do or say in that meeting if the government is still in shutdown. Either way, volatility markets probably have it correct to at least be preparing for the chance of October volatility, whether its a rollover in the indices, or euphoria to the upside.

It’s also likely that everyone starts taking some cues from the treasury market in the meantime.

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