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The U.S. labor market continues to show signs of cooling. 64,000 jobs were added in November, after a sharp decline of 105,000 in October. Unemployment rose to 4.6%, the highest level in years. At the same time, the employment rate rose, especially among 25- to 54-year-olds. That sounds mixed, but is it perhaps better than it looks?
The sharp decline in October was largely caused by the disappearance of 162,000 government jobs, mainly because employees who accepted a deferred dismissal plan under Trump were formally removed from the payroll. The job growth in November came mainly from the healthcare sector and construction.
Trump claims that immigration has almost come to a standstill and that the number of deportations has increased sharply. If that is true, and the US population is indeed shrinking, the weakness in the labor market may be greatly exaggerated.
If the new Fed chairman soon decides to lower interest rates further (which is not a certainty given the growing number of dissidents within the Fed), and at the same time increases the balance sheet again, a new wave of inflation is imminent. And if that then leads to rising long-term interest rates, a sign that the Fed is losing control over long-term interest rates, the central bank may be forced to QE again. In that case, the wave of inflation would not only come back, but would become explosive.
Trump has indicated that he will appoint a successor to Powell in early 2026. But the race was far from over. The new chairman must not only convince Trump, but also get together within the Fed to push interest rates down, while two members already voted against a cut at the previous meeting.
Kevin Hassett is the favorite. He is currently Trump's top economic advisor and is known for his unorthodox views. He strongly believes in the deflationary power of productivity and deregulation. Former Fed director Kevin Warsh is also mentioned. Warsh is decidedly critical of Powell's broad policy and could actually opt for a tighter monetary policy. The third name is Christopher Waller, a member of the Board of Governors since 2020. One thing is clear: Trump chooses someone who believes in low interest rates.
Inflation in the euro zone remained unchanged at 2.1% in November, according to final Eurostat figures. Core inflation was 2.4%, service inflation as high as 3.5%. Despite these figures, most economists expect the ECB not to raise interest rates this week, but to stick to current levels.
Nevertheless, the group that does not rule out future interest rate hikes is growing within the ECB. Isabel Schnabel said in an interview that she “feels quite comfortable” with market expectations of a rate hike later in 2027, while President Lagarde is trying to emphasize confidence in the economy without fueling new interest rate expectations.
There is a remarkable amount of movement on the diplomatic front. According to US sources, Ukraine has indicated that it is open to alternatives to NATO membership in exchange for strong security guarantees. The Trump administration is said to have made a proposal similar to the NATO principle of collective defense (“Article 5-like”), in an attempt to end the conflict with Russia.
Trump said this week that peace is “closer than ever,” but also suggested that Ukraine may need to cede land. European leaders have presented a framework agreement with security guarantees, monitoring a ceasefire and support for EU accession.
At the same time, the US is preparing new sanctions against the Russian energy sector should Putin refuse an agreement. Europe is trying to put extra pressure through an EU-wide loan, financed with frozen Russian assets. Belgium, where most of the assets are, is bothering. But Denmark is threatening to push the decision through without Belgium if necessary.
In the Netherlands, there are now more people over 65 than young people under 20. The population is still growing due to migration, but the ageing population continues unabated. And that has economic consequences.
Ageing means less potential economic growth, a smaller tax base, higher health care expenditures and rising costs for social services. And what happens in the Netherlands also applies to the rest of Europe, China, Japan and soon the US. Ageing is increasingly becoming a structural brake on growth and fiscal policy.
The U.S. labor market is cooling, uncertainty around the Fed is increasing, and geopolitical tensions remain high. This played out in the markets this week.
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