October of contrasts: between shutdown, rates, and Tech, markets remain on edge

The past month saw political tensions clash with signs of economic recovery. While the Fed and the ECB proceed cautiously, the technology sector continues to lead Wall Street.

October was a month of sharp contrasts in global markets. The prolonged U.S. government shutdown and the default of two companies in the automotive sector fueled fears in private credit, compounded by the absence of economic data for September and October. However, the “hawkish” turn of Federal Reserve Chair Jerome Powell rekindled hopes of a return to a more orthodox monetary policy. Treasury yields thus rose back to their September levels, and the dollar strengthened. The ECB, meeting in Florence, also opted for prudence, indicating December as a key moment to redefine economic projections and assess the impact of tariffs.

On the macroeconomic front, the lack of official labor market data generated uncertainty and volatility. Private estimates, such as those from ADP and Indeed, offered a mixed picture: hiring slowed and layoff announcements increased, but unemployment claims remained stable. The end of the shutdown, however, should allow for a swift recovery in economic activity.

Inflation, back at the center of debate, shows more encouraging signs: the latest reading came in slightly below expectations and, although tariffs could push prices up by between 0.4% and 0.8% in 2025, falling rents are helping to contain inflationary pressures. Overall, the picture appears more reassuring than the fears that marked the beginning of the year.

Technology continues to drive the markets. Giants such as Microsoft, Alphabet, Meta, and Amazon have announced investments exceeding $500 billion by 2026, primarily in artificial intelligence infrastructure. Quarterly results, which beat expectations, confirm the sector’s leadership role, accounting for a quarter of U.S. earnings growth.

Looking ahead, the conclusion of the shutdown will help piece together an economy that remains fragmented. Yet significant uncertainties persist - first and foremost, the future composition of the Fed, whose new leadership will be decisive in shaping post-Powell monetary policy. With markets already pricing in further rate cuts in 2026, the scope to defend U.S. duration in portfolios remains limited. In this context, the most prudent strategy seems to be maintaining hedged exposure to the dollar and continuing to rely - albeit cautiously - on the strength of the technology sector.

Andrea Pelucchi