Making sense of macroeconomic and market moves and what the shifting landscape means for investors.
This week saw multiple central bank decisions and progress on the Ukraine/Russia ceasefire, both of which will continue to be an influence into 2026. We look at US and UK employment and inflation numbers and what these tell us, and turn an eye to next year.
Top stories
- It’s been a very busy 24 hours in the world of monetary policy, with the Bank of England (BoE), Bank of Japan (BoJ) and European Central Bank (ECB) all meeting. We got the full ‘selection box’ of outcomes: the BoE cut rates by 25 basis points to 3.75%, the BoJ raised rates by 25bps to 2% and the ECB left rates unchanged at 2%. The BoE cautioned that the pace of cuts may slow as the “neutral” policy rate draws closer, while the ECB reiterated that policy was in “a good place” with inflation close to target and growth forecasts revised higher. The BoJ’s decision was well telegraphed – likely an attempt to avoid the market volatility previously seen around decisions to tighten policy as inflation in Japan becomes more entrenched.
- US and European officials agreed in principle to offer Ukraine a NATO-like security guarantee. German chancellor, Friedrich Merz, said the deal presented a “real chance of peace”. US officials said the guarantee would be modelled on NATO’s Article 5, which treats an attack on one ally as an attack on all. Merz said the US had agreed to provide “substantial legal and material security guarantees from the USA and Europeans” to secure a ceasefire. Although US president, Donald Trump, said talks had brought a peace deal “closer now than we have ever been”, European officials noted sensitive territorial issues remained unresolved. Ukraine president, Volodymyr Zelensky, said the US and Ukraine remain divided on territorial concessions that Russia continues to demand as a condition to end the conflict. Zelensky said: “At this stage our positions differ … the issue of territories is painful because Russia wants what it wants”. Ukraine still controls around a third of the Donbas region that Russia is seeking full control of as a condition of any peace deal. The mood music is certainly more positive from the western side, but the question remains whether this optimism will again hit a brick wall once the proposals are put to Russia.
By the numbers
- 4.6% – the level of US unemployment in November, a four-year high. Non-farm payroll data was published for October and November this week following delays from the government shutdown. October saw non-farm payrolls decline by 105,000; November saw an increase of 64,000. The November figure was ahead of expectations of 50,000 while October’s loss surprised to the downside, dragged lower by a 162,000 decline in federal government employment as the DOGE cuts earlier in the year entered the data. Federal employment is down 271,000 since Trump took office. The data also showed negative news in the ”underemployment rate”, which climbed from 8% in September to 8.7% in November. This includes both unemployed people and individuals who would prefer full-time work but worked part time or reduced hours or could not find full-time jobs.
- 2.7% – US inflation for November was well below expectations of 3%, boosting expectations of further rate cuts sooner rather than later. But all may not be as it seems: the surprisingly good data may have been impacted by the government shutdown limiting the usual level of data collection. We must wait for December’s data before drawing too many conclusions.
- 5.1% – the level of UK unemployment in October, up from 5% and in line with expectations. Average earnings including bonuses climbed by 4.7% compared to 4.9% previously, but ahead of expectations of 4.4%. The number of payrolled employees fell by 38,000 in November, compared to a revised decline of 22,000 in October. Payrolls were 171,000 lower than November 2024.
- 3.2% – UK inflation in November is at an eight-month low, below expectations of 3.5% and notably lower than October’s 3.6%. The Office for National Statistics said the reading was primarily attributed to lower food and drink prices along with declines in clothing costs. Services inflation eased to 4.4% in November from 4.5% in October.
Market movers
The round of central bank meetings this week brought no Christmas surprises – we received exactly what we expected. But what comes next may be a little more nuanced. In the UK the messaging from the BoE was that future rate decisions would be a close call. Divisions on the Monetary Policy Committee look set to persist, with the majority group, including bank governor, Andrew Bailey, believing “the disinflation process was on track”, while the dissenters, including chief economist, Huw Pill, placed more emphasis on “prolonged inflation persistence”. Markets are pricing 38bps of cuts by November 2026, suggesting just one more rate cut is fully priced. As Bailey said, “with every cut we make, how much further we go becomes a closer call”. But with inflation expected to be close to the 2% target in the second quarter of 2026, and unemployment rising amid what the BoE described as “lacklustre” growth, at least two further cuts still seem likely. The ECB appears to be very comfortable in their “good place”, as bank president, Christine Lagarde, continues to describe it, so policy looks set to stay on hold through 2026. Japan, as we know, is going the other way. The policy “normalisation process”, as described by bank governor, Kazuo Ueda, will continue in 2026, albeit at an extremely gradual pace, and monetary policy will remain very accommodative.
The investment lens
The storm before the calm? Hopefully that sums up a week of very heavy news flow before things go quiet for Christmas. All being well, that’s 2025 pretty much done and dusted. Christmas week will see limited news flow and thin volumes as trading desks empty. A year that started with questions over incoming US President Trump’s policies, the health of the global economy and concerns over lingering inflation ends with many remaining unanswered. However, 2025 has shown that despite high levels of uncertainty, financial markets have displayed significant resilience as the worst fears over a trade war and its impact dissipated, economic growth held firm, interest rates were cut and corporate earnings strengthened and broadened. As things stand we are relatively sanguine over the outlook for 2026. The economic cycle is set to be extended by a combination of looser monetary policy in the US and globally by fiscal stimulus that shows little sign of abating despite ever growing government debt burdens. A supportive economic backdrop should also be a tailwind for corporate earnings. So, the backdrop is positive, but after (eventually) a strong year of returns, it pays to be mindful that market valuations are certainly not cheap, leaving limited room for error should the generally upbeat narrative begin to unwind.
Thank you for all your support in 2025 and I wish you and your families a very Merry Christmas and a Happy New Year.
