By Michael Brown, Senior Research Strategist at Pepperstone
DIGEST – The December US jobs report was a bit of a mixed bag, though stabilising unemployment means the Fed should now stand pat at the end of the month. This week, US CPI, and the start of Q4 earnings season, highlight the calendar.
WHERE WE STAND – Friday in two words; ‘damp squib’.
We spent half the day waiting for the December US jobs report, that told us little we didn’t already know. Only to then not even receive the Supreme Court ruling on IEEPA tariffs that every man and his dog had convinced themselves was imminent.
Anyway, as for that jobs report, data pointed to the US economy having added a sub-consensus +50k jobs as 2025 drew to a close, which was further compounded by a chunky net -76k revision to the prior two months’ worth of figures. The household survey, however, was a bit more optimistic, with unemployment surprisingly declining to 4.4%, from a downwardly revised 4.5% in November. For the time being, the labour market is still bending, and not yet breaking.
That stabilisation in the unemployment rate, coupled with a fall in U-6 underemployment, is probably enough to keep the FOMC on the sidelines for the time being, with Powell & Co set to stand pat at the January confab, and the USD OIS curve now pricing just a 5% chance of a 25bp cut in three weeks’ time.
Having said that, I do worry that the Fed might be falsely reassured by the U-3 and U-6 figures, as under the surface the labour market hardly looks in great shape. Once again, essentially all of the job creation in December came from the healthcare sector (+39k), which is not only almost entirely domestically focused, but also non-cyclical, and non-interest rate sensitive. Put simply, the economy is only adding jobs, because the population is getting older; private payrolls excluding healthcare have fallen in every month, bar one, since last May, with the 3- and 6-month averages of this metric comfortably in negative territory. Plus, those U-3 and U-6 rates only fell because the labour force shrunk (i.e. people stopped looking for work), again hardly a positive!!
All that leads me to think that I’d be inclined to take out a bit more ‘insurance’, in terms of easier policy, if I were on the FOMC. However, I’m not, and what I think the Fed should do doesn’t matter, as one can only trade based on what the Fed will do instead.
Of course, one man who isn’t on the FOMC, but still thinks policymakers should do his bidding, is President Trump, whose Department of Justice has taken the unprecedented step of subpoenaing the Fed, and threatening criminal indictments. Ostensibly, this relates to Chair Powell’s testimony on renovations to the Eccles Building last June, but in reality it is yet another attempt by the Admin to strong-arm the Fed into lower interest rates, akin to the strategies that you might more often find used by a dictator in some ‘banana republic’. While Trump strops about like a petulant child because he hasn’t got what he wants, institutional confidence in the US is again called into question.
Back to Friday and, interestingly, the modest hawkish repricing of policy expectations didn’t have much by way of impact on markets as we moved into the weekend, with the jobs report being shrugged off almost as soon as it had been released, and that non-existent SCOTUS tariff ruling – rather obviously – having little impact either. Incidentally, the Supreme Court has set Wednesday as another date when opinions may be issued, though I’m reluctant to get my hopes up on the IEEPA front all over again.
With all that in mind, what we saw on Friday was markets simply taking the ‘path of least resistance’, on what was ultimately a remarkably calm day to end the week.
Stocks, consequently, gained further ground, with spoos reclaiming the 7,000 mark, on a day where the tech sector led broad-based upside on Wall Street. I remain bullish here, reminded of the old adage that record highs tend to beget further record highs, though will of course be closely watching the start of earnings season this week, considering that robust earnings growth remains a key pillar of the underlying equity bull case.
Elsewhere, precious metals enjoyed a strong end to the week as well, and I remain bullish here too, especially now all of the nonsensical hyperbolic takes about the rebalancing of the Bloomberg commodity index have not only quietened down, but also proved miles wide of the mark, with that rebalancing hardly being the ‘end of the world’ for either gold or silver. In fact, those two ended the week above $4,500/oz and $80/oz respectively, probably teeing us up quite nicely for further gains into the new trading week, as fresh longs look to enter the fray.
The dollar also gained into the weekend, with the DXY reclaiming the 99 figure to wrap up its best week since last November, seeing the index reclaim its 200-day moving average in the process, having ridden on the coattails of the modest hawkish Fed repricing, and pressure seen at the front-end of the Treasury curve. A break above the Dec highs at 99.20 is now what the bulls – like me – will have their eye on, with such a break potentially putting a re-test of the 100 handle on the cards.
Some back of the envelope maths sees that equate to, roughly, 1.33 in cable, 1.15 in the EUR, and 160 in USD/JPY. Given the continued anaemic economic performance of the UK, where risks point to a considerably faster BoE easing cycle than the SONIA curve currently implies, a continued lack of enthusiasm towards the eurozone, as well as a need to price renewed political risk in Japan amid chatter of elections as soon as next month, those seem like plausible targets over the short-run in my mind.
LOOK AHEAD – Another fairly busy week lies ahead, with US data highlighting proceedings.
Tuesday’s CPI report will be the ‘main event’, with headline inflation set to have held steady at 2.7% YoY in December, and with the policy implications of the data likely to be relatively minimal, owing to an ongoing downwards skew stemming from technical assumptions made by the BLS during last year’s government shutdown. The same impacts the PPI data too, hence we’ll probably learn considerably more about the state of the US economy from Wednesday’s retail sales report, which covers the start of the crucial festive period.
Elsewhere, trade stats from China, and the latest monthly UK GDP figures will also be worth glancing over, while there’s a busy week of central bank speakers, and Treasury supply, to keep us occupied as well.
Lastly, of course, this week also marks the start of Q4 earnings season on Wall St, with JPMorgan kicking things off before the open tomorrow.
Per data compiled by FactSet, overall S&P 500 earnings growth is set to come in at 8.3% YoY in Q4 25, which would mark the 10th consecutive quarter of growth for the benchmark. On a revenue basis, meanwhile, annual growth of 7.7% YoY is expected, which would represent both the 21st consecutive quarter of higher revenues, as well as the second strongest pace of annual revenue growth since Q3 22.