Baylee Abernathy

The world was on tenterhooks this morning as all waited to see if the Supreme Court would rule on the administration’s use of the International Emergency Economic Powers Act (IEEPA) to implement some of its tariffs in 2025. The much-anticipated IEEPA ruling did not come, so the big news of the day is the weaker than expected December jobs report. Private sector hiring slowed, prior months were revised lower, and the number of jobseekers declined, allowing the unemployment rate to fall even as jobs growth slowed. The data reinforce the view that 2025 was a “low hire, low fire” year, characterized by a pronounced deceleration in job growth and a modest rise in the unemployment rate (Chart 1).

Survey data this week were mixed. The ISM Manufacturing Index contracted for a tenth consecutive month, with respondents citing “tariff related pricing pressures” and notable reductions in 2026 capital expenditure plans. By contrast, the ISM Services surprised to the upside, highlighting continued resilience in consumer demand for travel, healthcare, and professional services. The divergence between manufacturing and services has persisted throughout the year, as manufacturing remains more exposed to tariff related uncertainty. Both surveys indicated easing price pressures and softening labour demand, consistent with today’s payrolls release.

Developments in Venezuela added complexity to the oil market backdrop. Markets are assessing the administration’s commitment to the “Donroe Doctrine” and its implications for global oil supply. Despite Washington’s efforts to restore Venezuelan output, significant logistical and political hurdles remain. WTI moved down toward US$57 following the announcement that up to 50 million barrels of seized Venezuelan crude will be released to help address household affordability concerns. Adding to the affordability theme, housing data showed that homebuilding remains subdued, which doesn’t help the cost of housing (Chart 2). The administration has a clear desire to act on this front, promising a ban on institutional investor purchases and demanding government purchase mortgage-backed securities to help lower mortgage rates, though we await details on actual policy actions.

Prior to Friday’s jobs numbers, Federal Reserve officials suggested risks around employment and inflation were broadly balanced. Minneapolis President Kashkari indicated the labour market may be approaching equilibrium, while Richmond President Barkin characterized the economy as “finely tuned,” implying the FOMC would need to give equal weight to prices and employment. This reinforces our view and the view of the market that the FOMC is not in a hurry to cut rates further now, though we do expect to see interest rates come down later this year. We look ahead next week to the release of CPI inflation data, and after being let down by the Supreme Court this week, we are not going to be alone in being eager for news about when they may release decisions next.

This was arguably the biggest week for U.S. economic data in several months, as highly anticipated employment and inflation data delayed by the government shutdown was finally released. Financial markets largely took the data in stride, with U.S. Treasury yields falling slightly on the week, while equity markets were roughly unchanged as of the time of writing.

On the data front, the employment report showed that the economy continued to add jobs in the fourth quarter. However, headline job growth was weighed down by a large decrease in federal government jobs in October (Chart 1) - a byproduct of the deferred resignation offers sent out earlier in the year. Despite the near-term distortions, job growth has decelerated through the second half of the year, which has led to an uptick in the unemployment rate and motivated the 75 basis-point reduction in interest rates implemented by the Federal Reserve since September.

The pace of monetary policy easing has been deliberately gradual though, as inflation risks have been rising at the same time. However, November CPI data showed that there may have been a break in this trend in recent months, with the annual percentage change in core inflation falling to 2.6% - the lowest level since March 2021. Given the shorter collection period for this data owing to the government shutdown and the sharp drops recorded in several index categories (Chart 2), this data should be taken with a grain of salt. Market pricing for the Federal Reserve’s January meeting was largely unchanged, with only a 25% chance for a fourth consecutive cut.

The handful of Federal Reserve officials we heard from this week offered notably different assessments on the policy rate outlook. Miran made the case for aggressive rate cuts, positing that inflation metrics were anomalously high, while Waller also took a dovish tone but noted a gradual pace of rate cuts would be warranted going forward. On the other end of the spectrum was Bostic, who voiced greater concern for inflation risks and stated he did not currently see the need for rate cuts in 2026. Other speakers, including Vice Chair Williams, echoed Powell’s comments from his press conference last month that monetary policy was in a good place heading into 2026. Despite growing dissent among FOMC members, the balance of opinion is one of relative caution heading into the new year. Market pricing has followed suit, with another rate cut not expected until the Fed’s meeting in late April next year at the earliest.

Looking ahead to next week, there will be few items on the economic agenda during the holiday shortened week, but the preliminary estimate for third quarter GDP on Tuesday will be a highlight. A strong reading for annualized growth of roughly 3% is expected, which will likely be followed by a deceleration in the fourth quarter owing to the government shutdown. Nevertheless, we expect the economy to grow by 2.2% in 2026, aided by fiscal and monetary policy support.

The main event this week was the Federal Reserve’s much anticipated interest rate announcement. While policymakers elected to push ahead with a third consecutive quarter-point rate cut – bringing the target range to 3.50%-3.75% – the move came amid an increasingly divided FOMC (Chart 1). Uncertainty over the extent and timing of future rate cuts didn’t stop the S&P 500 from briefly notching a new all-time high but pared those gains towards the end of the week. The yield curve steepened by roughly 10 bps, with the 10-year currently sitting at 4.19%.

Accompanying the statement, the FOMC also released a revised set of economic forecasts, known as the Summary of Economic Projections (SEP). The SEP represents the median of the individual forecasts submitted by FOMC participant. Relative to the September projection, economic growth for 2025 saw a very modest upgrade (1.7% vs. 1.6%), while there was a notable upward revision to 2026 (2.3% vs. 1.8%). The expected trajectory for the unemployment rate was unchanged, while the inflation forecast is expected to remain above the 2% target through 2027 despite being nudged a tick lower in both 2025 and 2026. Importantly, the median projection on the federal funds rate remained unchanged at 3.6% for 2026 and 3.1% for 2027 – suggesting just one additional cut in each of the next two years (Chart 2). However, there was considerable dispersion across those projections, with the range of estimates for the appropriate level of the policy rate by the end of 2026 spanning 175 bps – a wider range than in September.

The growing divide among policymakers was further underscored by the fact that three participants dissented against December’s decision. Regional Fed Presidents Schmid and Goolsbee favored keeping the policy rate unchanged, while Governor Miran voted for a larger 50 bps cut. But as seen in Chart 2, there were a total of four Fed members who came into the meeting thinking a cut was not required.

The subtle shift in the dots wasn’t lost on market participants. Come January, the four regional presidents who are currently voting FOMC members (Goolsbee, Schmid, Collins, and Musalem) will be replaced by Paulson of Philadelphia, Hammack of Cleveland, Kashkari of Minneapolis and Logan of Dallas. While we don’t know for certain if any of the incoming Fed Presidents ‘quietly’ opposed the December cut, recent speeches by both Logan and Hammack have struck a more hawkish tone. Moreover, Kashkari had advocated for a pause on rate cuts ahead of the October meeting. This suggests that the hawkish tilt from Fed presidents isn’t going away despite the turnover in voting members.

However, this needs to be balanced against a new Fed Chair, who will be in seat May 2026, and is likely to have a more dovish policy stance. Moreover, should Chair Powell elect to not serve out the remaining two years of his term on the board of governors, it will create another vacancy for which President Trump can appoint a new board member. The takeaway from all this is that the division among FOMC members is only likely to deepen next year, putting in question both the timing and extent of further policy easing.

Markets are convinced that the Fed will deliver an early holiday gift – a rate cut – next week. Odds of a December cut have hung near 90% ever since shifting up in late November, following support for more easing from Fed Presidents Williams (NY) and Daly (San Fran.). Economic data out this week, while mixed, did not perturb that balance. Equities managed to trek modestly higher, with S&P 500 up 1.1% from last week’s close.

September’s personal income and spending report provided a snapshot of spending and inflation trends before the government shutdown. Spending was flat in real terms in September, ending the third quarter on a soft note. Consumption for the quarter was up 2.7% (q/q annualized) – below expectations but still an improvement from 2.5% in the second quarter. September provides a soft handoff to the fourth quarter, which coupled with the government shutdown, slowing job growth, and weak consumer confidence, suggests spending will slow further at the end of the year. Early data from Thanksgiving weekend suggests holiday shopping was healthy but likely grew at a pace slightly below that of last year. Online sales continued to lead the way, with Cyber Week spending up nearly 8% year-over-year (y/y) according to Adobe. In-store gains were softer, with closely watched indicators pointing to growth in the low single-digits. AI tools helped boost retail site traffic, while a growing Buy-Now-Pay-Later (BNPL) trend also played an important role in propping up spending.

Core PCE inflation rose 0.2% month-over-month (m/m) in September, and 2.8% in y/y terms – a modest easing from 2.9% in the prior two months. The ISM services price index recorded a notable pullback in November – marking a modest positive post-shutdown signal with respect to inflationary pressures. Nonetheless, Cleveland Fed Inflation Nowcasting puts core PCE at 0.23% (m/m) for both October and November, 2.8% and 2.9% in y/y terms respectively – still well above target.

Employment data was mixed. Initial jobless claims dropped to a three-year low of 191k at November’s end. The Thanksgiving holiday may have distorted the data. But even prior to that last week, initial claims were still trending lower. Conversely, the ADP report showed private payrolls fell by 32k in November. Its three-month average, which is more closely aligned with the BLS equivalent, turned slightly negative too (Chart 1). Job cut announcements, meanwhile, also pointed to continued challenges. Layoff announcements in November were cut in half from their October tally, coming in at 71k. But even when looking past the weakness in the government sector, the trend in layoff announcements remains elevated (Chart 2). Overall, markets seemingly expect the Fed to focus on signs of labor market softness and maintain a cautious policy stance.

Our reading is that the Fed won’t disappoint market expectations next week. But in the New Year, the bar for additional cuts may be higher. Having delivered some insurance cuts, the Fed will likely take time to digest delayed economic reports and carefully assessing post-shutdown data to form a clearer picture of the economy’s health.

U.S. equity markets traded higher through the holiday shortened week, boosted by expectations for a December rate cut and renewed enthusiasm for the AI trade. Meanwhile, economic data out this week reinforced the narrative that some sluggishness has materialized in the U.S. economy. The S&P 500 is looking to end the week higher by over 3%, more than erasing last week’s losses and is now up 16% year-to-date. Treasury yields dipped by a few basis points on the week, with the 10-year currently hovering around 4%.

Fed futures have been on a wild ride recently. Just over a week ago, markets attached a roughly one-third probability to a December rate cut. But since then, two Fed officials who hew closely to Chair Powell, including NY Fed President John Williams and San Francisco Fed President Mary Daly (non-voting member) voiced support for a December rate cut. Pricing has since swung back to over 80% (Chart 1). The Fed doesn’t tend to fight the market and with the decision just over a week away, a further trimming in the policy rate looks to be a safe bet. Though if ADP employment data were to surprise to the upside next week, odds may yet shift again.

Turning to this week’s economic data releases, retail figures for September showed that spending slowed at the end of the third quarter – putting Q4 on a shakier footing. The softening in September spending isn’t entirely surprising. Measures of consumer sentiment have nosedived recently, with the Conference Board’s November reading slipping to its lowest level since April and second lowest reading since the depths of the 2020 Global Pandemic (Chart 2). Survey details show that consumers’ assessment of job availability is particularly downbeat, as are prospects for making ‘larger purchases’ over the next six months. While shifts in consumer confidence metrics have proven to be a less reliable predictor of spending patterns post-pandemic, the steady downward trend across multiple measures suggests the direction of travel is likely to be lower over the near-term.

This was further confirmed in the Fed’s Beige Book, which noted that overall consumer spending had ‘declined further’ in recent months, even though higher-end retail spending remained resilient. The Fed’s contacts chalked some of the weakness up to the government shutdown, and a pullback in EV sales following the expiration of the federal tax credit. However, the softening labor market also likely had some influence, with the majority of Districts seeing a decline in hiring and about half noting weaker labor demand. Importantly, employers across most Districts reported limiting headcounts using hiring freezes, ‘replacement-only’ hiring and attrition rather than through layoffs.

This reinforces the ‘low hire, low fire’ narrative’ (see report). But it’s a precarious balance, and one where the downside risks have the potential to materialize very quickly. While this supports the case for a bit more easing in the fed funds rate, still elevated inflation and a policy stance that is quickly closing in on neutral are important considerations that can’t be overlooked. Bringing the policy rate much lower runs the risk of putting the Fed out of position in the event the labor market were to firm in the months ahead.

Equity markets sold off this week amid concerns about high tech-stock valuations and aggressive AI capital spending. As of writing, the tech-focused Nasdaq Composite was down 2.5% on the week, while the S&P 500 had declined 1.9%.

Official economic data began to trickle in, with September’s payroll report being the most notable. However, reporting backlogs are expected to persist. October payrolls will be released with November’s figures on December 16, not in time for the FOMC’s next meeting on December 9–10. Other data points, like October CPI, will not be released. On the housing side, existing home sales edged higher in October, supported by falling mortgage rates. Still, the housing market continues to tread water as affordability remains stretched, despite some modest improvement in recent months (Chart 1).

A busy slate of Fed speakers reaffirmed the lack of consensus among FOMC members for another rate cut in December. Some, like Governor Jefferson (voter), advocated for a cautious, “meeting-by-meeting approach,” as the policy rate moves closer to neutral. Chicago Fed President Goolsbee (voter) joined the hawkish camp, downplaying the recent labour-market weakness and emphasizing the lack of progress on inflation.

Minutes from the October FOMC meeting also highlighted the growing divide, with many participants  seeing no case for easing in December. This contributed to market pricing shifting towards the next cut coming in January rather than December. After that meeting, Chair Powell stated that a December cut “is not a foregone conclusion, far from it.”

But policy doves like Governor Waller (voter), argued that another rate cut in December is warranted, given his assessment that the labor market remains weak, longer-term inflation expectations are anchored, and the impact of tariffs on inflation are likely to be transitory. Echoing this view, FOMC Vice Chair Williams emphasized that inflation expectations remain “very well anchored” and noted room for further cuts over the ‘near-term’. These remarks helped to tip market odds back in favour of a December cut on Friday morning.

The delayed September payrolls report did little to reconcile the divide among policymakers. Hawks were likely reassured by the better-than-expected job gains: payrolls rose by 119k—the strongest reading since April (Chart 2). However, policy doves are likely to point to the negative revisions to prior months, the narrow concentration of job gains, and the uptick in the unemployment rate.

All in all, hawkish voters appear to outnumber the doves on the FOMC for now, and there is no official jobs or inflation data before the next meeting to shift views. Therefore, we expect the slow-and-steady approach to carry the day and for the Fed to hold rates steady in December. Chair Powell perhaps said it best: “when you’re driving in the fog, you slowdown”. That said, the door for a cut in January remains open.

Ksenia Bushmeneva, Economist | 416-308-7392

The government shutdown entered its 31st day on Friday, and if it extends past November 3rd, will become the longest in U.S. history (Chart 1). At the time of writing, there is no offramp to end the shutdown. On Tuesday, Senate Democrats rejected (for the thirteenth time) a House-passed stopgap measure to fund the government through November 21st, while Senator Thune pushed back on the idea that Republicans were considering piecemeal bills that would reopen portions of the government. Elsewhere, President Trump traveled to Asia this week, which culminated in three new trade agreements and a further easing in trade tensions with China. Stateside, the Federal Reserve delivered another rate cut and signaled an end to its quantitative tightening program. Powell’s remarks that a December rate cut “is not a foregone conclusion” led to some firming in Treasury yields, as market pricing for a December cut fell to 70%. A healthy slate of earnings reports capped off the week, pushing the S&P 500 up 1.0%.

In a further move to de-escalate trade tensions with China, President Trump agreed to cut the fentanyl tariffs from 20% to 10%, suspend the increase of its reciprocal tariffs (scheduled to rise from 10% to 35% on November 10th) and ease restrictions on blacklisted Chinese firms. In return, China eased its restrictions on rare earth exports and said it would increase purchases of U.S. soybeans. Both countries also agreed to suspend their port fees, which came into effect earlier this month.

The U.S. also reached trade agreements with three other counties this week, including Thailand, Malaysia and Cambodia. Trade to these countries account for roughly 3% of total U.S. annual imports, but combined with the other seven agreements, 30% of U.S. trade is now covered by a new trade deal (Chart 2). Details of this week’s agreements remain vague, but based on White House fact sheets, each country will face a 19% reciprocal tariff rate and have agreed to reduce tariffs and trade barriers on U.S. imports along with making commitments to purchase energy products and aircrafts.

The Federal Reserve’s move to cut its benchmark rate by another 25 basis points – bringing the target range to 3.75-4.0% – came as little surprise. However, Powell’s remarks in the press conference regarding a December rate cut being far from guaranteed offered a shot in the arm to market odds, which had another cut as a near certainty. Indeed, the statement showed a growing divide among FOMC members. Recently appointed Stephen Miran dissented in favor of larger (50bps) cut, while Jeffery Schmid voted to hold rates steady. Given the data fog created by the government shutdown, Powell noted that there was a “growing chorus to at least wait a cycle” before making another cut, particularly given today’s policy rate is at the upper end of some estimates of neutral. We interpret Powell’s hawkish tone as a way of bringing more balance into market expectations. Another cut in December remains our base case, but we acknowledge that a flurry of data releases once government reopens could quickly shift views on the economic outlook and reshape the Fed’s thinking on its policy adjustment.

The ongoing government shutdown became the 2nd longest in history this week, as it stretched into week 4. With divisions in Congress largely unchanged relative to September, a resolution remains out of sight, but as the economic impacts become more material, intransigence will likely yield. Elsewhere in D.C., President Trump called off trade negotiations with Canada over the use of anti-tariff television advertisements broadcast in the U.S., forestalling a near-term trade agreement with the nation’s second largest trading partner. Despite political dysfunction in the Capitol and rising trade tensions in recent weeks, the S&P 500 still managed to rise 2% this week from a host of positive third quarter earnings reports.

While the Department of Labor remains unfunded, the CPI data for September was released on Friday owing to its use in the annual inflation adjustment to social security payments. The data showed that recent inflationary pressures moderated slightly in September but remained elevated on aggregate, with the three-month annualized percentage change in core CPI running above 3.5% (Chart 1). With price growth still well above the Fed’s 2% target and the timing of future data releases uncertain, policy decisions are expected to be cautious moving forward.

The shift in the Federal Reserve’s stance on monetary policy over the past few months came on the heels of a slowdown in the labor market, tracking of which has been obscured by the lapse in data releases. As the FOMC begins deliberations next week, they will likely assume that the slowdown persisted through September and opt to meet financial market expectations for a quarter-point rate cut. Chair Powell’s press conference will be closely watched for insights into how the policy response function of the Federal Reserve will adapt to a prolonged government shutdown, as inference becomes more difficult the further we are from the last official data release.

On the trade front, U.S. Treasury Secretary Bessent will be meeting with a Chinese delegation in Malaysia over the weekend. The deadline to reach some form of agreement is becoming tight, with President Trump’s threat of 100% tariffs on China starting November 1st. The President will also be travelling to Asia Friday night, with plans to visit Malaysia, Japan, and South Korea, culminating with the Asia Pacific Economic Cooperation (APEC) summit where he is expected to meet with his Chinese counterpart. Amid rising trade tensions in recent weeks, financial markets will be watching for any signs of de-escalation.

Markets will also be watching for several big tech earnings reports next week, including Microsoft, Apple, Alphabet, Amazon, and Meta, which collectively account for nearly a quarter of the S&P 500 (Chart 2). Given the high level of concentration in equity markets, growing concerns about elevated valuations, and the influence of these trends on the economy, these results will be monitored closely on the heels of Wednesday’s Federal Reserve decision.