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The most important charts and themes in markets and investing…
1) A Confusing Labor Market
The labor market in the US may have been even more confusing than it is today.
The latest nonfarm payrolls report reveals that the US has added an average of 10K jobs per month over the past 4 months, the fewest since the 2020 recession.
The total number of jobs in the US increased by 0.6% over the past year, the slowest rate of growth since March 2021. In the past 50 years, weakness like this has preceded recessions and spikes in the Unemployment Rate of as much as 100%.
But is this time different?
Many argue this, and point to low levels of immigration as the main factor causing the rapid decline in employment. A Minneapolis Fed analysis found that half of the decline in wages can be attributed to reduced immigration.
But what about the other half?
There has been a lot of debate on this, with Fed Chairman Jerome Powell recently saying that the US has overstated the number of jobs by 60 thousand per month. So perhaps some of this decline is simply reflecting reality compared to the previous model of increasing employment.
“This is a complicated, unusual and difficult situation, where the labor market is also under pressure, where job creation may actually be negatively impacted,” Powell said.
Indeed, looking at ADP’s private payroll figures for the last 3 months (-4k/month), that appears to be the case.
Regardless of your explanation for the decline in wages over the past year, this much is clear: the labor market is cooling. Evidence pointing to this fact includes:
- US Unemployment Rate rose to 4.6% in November, the highest level since September 2021.
- There are currently 160 thousand more Unemployed than Job Openings in the US. Excluding the coronavirus recession in 2020, this is the widest spread we’ve seen since 2017.
- The percentage of US workers who quit their jobs has fallen to 1.8%, the lowest since May 2020.
However, a weak labor market is not the same as a labor market experiencing a recession. In a cooling labor market, companies slow down their hiring rates, whereas in a recession, companies actively reduce their workforce due to decreased demand.
The best evidence for this downside scenario is Initial Jobless Claims, which are near their lowest levels this year. During a recession, we expect this number to increase as recently laid-off workers file for unemployment.
So when it comes to labor market weakness, this time is actually different – at least so far.
2) Distorted Inflation Data
The good news?
The CPI fell to 2.7% in November, well below the consensus estimate of a 3.1% rise.
The bad news?
The data released by the BLS does not contain many important figures due to the government shutdown (including the entire CPI rate in October), causing many to question how reliable the 2.7% figure really is.
The decline in Shelter CPI inflation from 3.6% YoY in September to 3.0% YoY in November was the main factor in lowering the overall CPI as Shelter represents more than a third of the index. But the question is whether this number is correct or is biased downward due to the BLS closure of filling in 0% inflation for missing owner-equivalent rent data. The BLS has not yet commented on this but if the bias is downward, we could see the inflation rate rise again in the next report.
3) More Rate Cuts and a Return to QE
As expected, the Fed cut interest rates again in December, bringing the Fed Funds Rate down to a new range of 3.50-3.75%.
Meanwhile, the US CPI has increased by almost 4% per year since the start of 2020 (2x the target inflation rate), meaning the Fed has completely abandoned its mandate to maintain price stability.
And after reducing its balance sheet by $2.4 trillion from its peak in April 2022, the Fed officially changed the policy. QT ended in November and QE has returned. In their last meeting, the Fed announced $40 billion per month in Treasury Bill purchases would begin.
Where does the money come from? They will create it out of thin air, with an accelerated increase in the money supply that continues to reach record highs.
My hope is that this latest announcement will pave the way for more bond purchases in 2026 in the long term.
Why?
Even though the Fed cut short-term interest rates by 175 bps from September 2024, long-term bond yields have risen. The 30-year Treasury yield was below 4% when the Fed started lowering interest rates and is now above 4.8%. That is, the market is betting on higher long-term inflation.
How do you solve it?
Either by implementing policies that reduce future inflation (reducing the deficit, raising interest rates, reducing money printing) or by manipulating the bond market. The most suitable option is yield curve control (more precisely QE) – which is why I believe it is only a matter of time before the Fed is pressured to do so.
4) Lower Value Litmus Test
Speaking of pressure, this much is clear: the next Fed chair will be more receptive to President Trump’s incessant calls to lower interest rates.
How do we know this?
He had said exactly that…
And who are the main candidates for the chairman position? Kevin Hassett, who stated in the past week that the US is “well behind the interest rate reduction curve” and that “there is more room to lower interest rates.”
Say goodbye to the “independent” Fed.
5) The Year of the Comeback
On April 8, the S&P 500 was down more than 15% on the year, its 4th worst start to a year. But after rallying 38%, it is now up 17% in a year, reaching 38 all-time highs. This was one of the biggest market comebacks in history.
The US economy is also showing a major revival. After a decline of -0.6% in Q1, real GDP bounced back with +3.8% in Q2 and +4.3% in Q3. The Q3 figure was 1% higher than consensus estimates.
The US economic expansion is currently 65 months long and will likely show further growth in Q4 (Atlanta Fed projects +3%).
6) Everything is Calm Again
Volatility feels high in 2025. But in reality? That’s not extreme at all. The $VIX has an average of 19 this year, slightly below its historical norm.
In April during the “Tariff Tantrum”, the Volatility Index ($VIX) briefly exceeded 60. Today, on Christmas Eve, it is below 14, which is the lowest level this year. Everything was calm again.
7) Some Interesting Statistics…
a) Gas prices in the US have fallen to $2.89 per gallon, which is the lowest level in the last 4 years (note: national average).
b) Actual US Trade Deficit widened 17% in the first 9 months of this year.
c) The US collected $246 billion in duties over the last 12 months, 3x more than it collected in the previous 12 months ($81 billion).
d) In the first 2 months of Fiscal Year 2026 the Federal Government received $740 billion and spent $1.2 trillion. Don’t try it at home.
And that’s all for this year. Thanks for reading! Merry Christmas and Happy Holidays!
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