Mark Vitner

Data That Anchored the Narrative

The past week delivered a dense run of economic data that reinforced—rather than altered—the prevailing macro story. Growth is cooling toward trend but remains intact. Inflation continues to ease, though not smoothly. The labor market is adjusting through slower hiring rather than rising layoffs. Against that backdrop, markets spent the week trimming expectations rather than reassessing direction.

Inflation: The Signal Beneath the Noise

Core CPI rose 0.24 percent month-over-month in December, leaving the year-over-year rate at 2.6 percent. On the surface, the print fits neatly within the soft-landing narrative. Beneath the surface, the trend looks even better.

The three-month annualized change smooths through distortions created by the government shutdown and seasonal noise. On that basis, core CPI is running at roughly 1.8 percent annualized, or closer to 2.0 percent after accounting for the known downward bias in shelter that will not see a full offset until April. In short, the inflation trend is better than the monthly prints imply once shutdown noise and shelter timing are stripped out.

Manufacturing is contracting overall but expanding in capital-intensive segments.

Shelter remains the last mile, but not the obstacle. Outside of housing, inflation continues to cool as goods disinflation persists and services inflation grinds lower alongside improving productivity.

The federal statistical agencies continue to catch up on delayed data releases, including the closely watched personal income and spending figures, with October and November data due this Thursday. The core PCE deflator—the Fed’s preferred inflation gauge—is likely to paint a slightly less optimistic picture, finishing 2025 just under 3 percent year-over-year. The monthly path will be uneven, but the direction remains favorable. We expect core PCE inflation of 0.2 percent in both October and November, followed by a firmer 0.3 percent reading in December, which will be released in February.

Preliminary January consumer sentiment data suggests households increasingly believe the worst of tariff-driven inflation is behind them. Inflation expectations remain elevated relative to recent realized inflation and measures of price breadth, but market-based inflation expectations, which the Fed weights more heavily, remain well anchored just above the 2 percent target.

Revisions suggest underlying demand is cooling beneath still-strong GDP growth.

Based on the latest employment and retail sales data, along with revisions to prior months, we estimate personal spending was flat in October and rose 0.4 percent in November. We have trimmed our estimate for fourth-quarter consumption modestly while raising our estimate for inventory accumulation. Our fourth-quarter GDP forecast remains well above consensus, near a 2.9 percent annualized pace.

Industrial production rose 0.4 percent in December, with manufacturing output up 0.2 percent, reinforcing the view that activity remains firm in capital-intensive sectors. Core retail sales rose 0.4 percent in November, but downward revisions to September and October trimmed cumulative momentum. Both the Empire State and Philadelphia Fed manufacturing surveys surprised to the upside in early January, suggesting factory output is stabilizing and potentially gaining traction.

Homebuilder sentiment weakened at the start of the year as inventories of completed homes increased and near-term demand softened. Incentives remain widespread. Lower mortgage rates should provide incremental relief, but housing remains constrained by supply rather than collapsing demand. Existing home sales surprised to the upside, rising to a 4.35-million-unit pace, the strongest reading since early 2023.

Housing is lagging the cycle but no longer leading it lower.

We expect an elongated housing recovery in 2026, with sales improving in the first half of the year as mortgage rates drift back toward the 6 percent range. Elevated inventories of unsold homes are likely to restrain new construction, particularly given repeated bouts of policy uncertainty that have contributed to volatility in bond markets and mortgage rates.

Credibility Risk Replaces Timing Risk

Markets are no longer debating the precise timing of rate cuts. They are increasingly pricing institutional credibility as a balance-sheet risk variable.

The recent market configuration is instructive. Global equities sold off while the dollar weakened and gold rallied. In a conventional risk-off episode, investors would expect dollar strength and falling long-dated yields. That pattern did not materialize. Instead, the price action reflects uncertainty around policy consistency and governance rather than an imminent downturn in demand.

For corporate treasurers, the implication is that long-term funding costs may remain volatile even as inflation cools. Term premia, not short-rate expectations, are driving rate moves. Investors are assigning a small but non-zero probability that political pressure could influence monetary or trade policy at the margin. That risk shows up in the cost of duration, FX hedging, and insurance.

Credit markets remain orderly. Spreads are contained and access to funding is intact. The adjustment is occurring through hedging costs and risk premia, not a withdrawal of liquidity.

This environment favors funding discipline over rate-cut optimism. Opportunistic term issuance, stress-testing of cash and FX hedges, and flexibility in duration exposure matter more than precisely timing the first rate cut.

The Script Has Flipped: Capital Over Calories

For much of the past decade, growth relied on consumption, leverage, and fiscal sugar highs. That model delivered speed, not durability.

This cycle looks different. Growth is increasingly driven by capital investment in AI infrastructure, power generation, advanced manufacturing, aerospace, biopharma, and defense—long-cycle investments tied to productivity and resilience rather than leverage.

This is a capital-fed expansion, not a credit-fed one. Stronger growth can still be disinflationary.

Productivity has surged, and the multi-year trend since 2019 is consistent with roughly 2 percent annualized growth. Inventory rebuilding and reshoring reinforce the durability of the expansion.

Setting the Stage for 2026

The data and the evolving composition of growth argue for a more constructive 2026 than consensus implies. A capital-led expansion supported by productivity gains and inventory rebuilding is well positioned to deliver stronger real growth with less inflation pressure.

Under this mix, U.S. real GDP growth in 2026 now looks likely to run close to 3 percent. Lower interest rates become the outcome of disinflation, not its precondition.

Policy remains the wild card.

Piedmont Perspective

Echoes of Jimmy Carter: Credit Controls Revisited

President Trump’s proposal to cap credit-card interest rates at 10 percent reflects a familiar impulse. Affordability pressures rise, and policymakers reach for visible solutions.

Credit controls do not make borrowing cheaper. They make credit scarcer.

The closest historical parallel is President Jimmy Carter’s 1980 credit controls. Inflation did not fall. Credit availability collapsed, consumer spending retrenched sharply, and the economy entered a steep recession.  Real GDP declined at an 8% annual rate in Q2 1980, marking one of the steepest quarterly drop on record.

A rate cap would operate through the same channel today. Credit would contract most sharply where marginal propensities to spend are highest. History suggests such policies stick briefly, then snap—and make a mess.

Greenland in the Crosshairs

Ukraine and the Middle East continue to add background risk rather than acute shocks. The more consequential geopolitical development for markets this week has emerged from the Arctic. The escalating U.S. push to assert control over Greenland has become a flashpoint, underscoring how trade policy is increasingly being used as geopolitical leverage and why the Arctic is no longer a peripheral theater.

President Trump’s posture has hardened since early January, following what the administration views as a successful assertion of hemispheric control in Venezuela. The Greenland episode fits a familiar strategic pattern: advancing foreign policy objectives through executive action amid domestic legislative gridlock and heightened judicial scrutiny. Trump’s negotiating style has long relied on opening from an extreme position, forcing counterparts to engage from ground they would not otherwise accept.

The centerpiece of the strategy is a tariff ultimatum announced via social media. Beginning February 1, the United States would impose 10 percent tariffs on imports from Denmark and seven European allies—Norway, Sweden, France, Germany, the United Kingdom, the Netherlands, and Finland. Those tariffs would rise to 25 percent by June 1 unless a deal is reached for what the president described as the “complete and total purchase” of Greenland.

Greenland’s strategic value explains the intensity of the standoff. The island occupies a central position in Arctic missile-defense architecture, hosting early-warning radar systems critical to U.S. and NATO detection of ballistic and hypersonic threats from Russia. Control of Greenland also strengthens oversight of North Atlantic and Arctic shipping corridors as melting ice opens new routes between Asia, Europe, and North America. These developments carry commercial promise but introduce new security and surveillance challenges.

Layered on top of defense and shipping is geology. Greenland holds significant rare-earth deposits essential to advanced electronics, renewable energy systems, and defense manufacturing. Any disruption to Arctic cooperation or European alignment would have second-order implications for supply chains already undergoing reshoring and diversification.

European leaders have responded forcefully, warning that the move risks fracturing NATO and triggering a retaliatory trade cycle. U.S. imports from the targeted countries have averaged roughly $360 billion annually over the past three years, while European officials have identified more than $100 billion in potential countermeasures. In Greenland itself, protests underscore local resistance, and Danish officials continue to reaffirm sovereignty.

From a market perspective, the episode matters less because conquest is likely and more because escalation is plausible. The probability that the United States would attempt to seize Greenland by force appears exceptionally low—likely 20 percent or less—given institutional constraints, waning public support, bipartisan opposition in Congress, and legal limits embedded in the National Defense Authorization Act. The odds that emergency tariffs ultimately survive judicial scrutiny have also diminished. In short, checks and balances still matter.

Markets are not pricing certainty. They are pricing tail risk.

That is exactly what they are doing. Volatility has risen, term premia have widened, and classic insurance assets have been bid. The VIX has moved to three-month highs, not because global growth is in doubt, but because alliance stability and policy predictability have become less certain. We do not envision an outcome that materially jeopardizes NATO. Still, markets remember how aggressively Trump has pressed allies in the past—on defense spending and Nord Stream among them—and are struggling to price a negotiating style that deliberately tests institutional boundaries.

Bottom Line

The macro story still reads soft landing. The growth story reads capital led. The market story reads credibility sensitive.

This is a regime adjustment, not a regime break. The repricing is quiet at first and historically modest. The implications are not.

The Week Ahead: Validation, Not Revelation

The coming week is less about new information than confirmation. With the Fed in blackout ahead of the January FOMC meeting, markets will focus on data consistency rather than policy signaling.

What Matters

Construction Spending and Pending Home Sales (Wednesday)

Core PCE inflation (Thursday). We expect monthly gains of 0.2 percent in both October and November, corresponding to year-over-year rates near 2.7–2.8 percent. Confirmation would reinforce confidence that disinflation remains intact despite December noise.

Personal income and spending. Income is expected to rise 0.2 percent in October and 0.4 percent in November, with spending flat in October and up 0.4 percent in November, broadly consistent with recent retail sales data.

Labor market consistency. Initial claims are expected to rebound toward 210k. As long as claims remain at historic lows and continued claims do not trend higher, the labor market will be viewed as cooling, not cracking.

PMIs and sentiment. January preliminary PMIs and final Michigan sentiment will help gauge whether risk headlines are bleeding into real activity.

What Matters Less

Headline rate volatility absent a sustained move in term premia.

Geopolitical headlines that do not disrupt energy flows or trade logistics.

Bottom Line for the Week

The burden of proof remains on downside risks. Absent a negative inflation or labor-market surprise, markets are likely to continue trading the same theme that has defined the start of the year: steady growth, cooling inflation, and rising sensitivity to policy credibility rather than actual cyclical stress.

U.S. macro: mixed signals, durable momentum

Manufacturing ended 2025 on a softer note. ISM Manufacturing fell to 47.9 in December, pushing further into contraction and underscoring how sensitive the sector remains to policy uncertainty and uneven global demand. But the weakness is not uniform. Manufacturing is increasingly bifurcated.

Output of consumer goods rose just 1.4% year over year, while output of business equipment surged 12.5%. That strength is narrowly concentrated in capital-intensive segments—aerospace and miscellaneous transportation equipment, including shipbuilding, where output jumped 25.2%, and semiconductors and related components, up 16.5%. Even within nondurables, pharmaceutical and medicine production stands out, rising roughly 6–7% over the past year.

The signal from industrial production is clear: this is not a consumer-led manufacturing cycle. It is a capital-, defense-, technology-, and innovation-driven expansion operating alongside a still-soft factory backdrop. Reshoring will become more evident during 2026, with pharmaceuticals and steel likely to be two of the earliest beneficiaries.

Manufacturing is contracting overall but expanding in capital-intensive segments.

Services, meanwhile, continue to do the heavy lifting. The Institute for Supply Management Services index climbed to 54.4 in December, signaling sustained momentum in business activity, new orders, and hiring. This is now the economy’s center of gravity. Large, scalable service platforms benefit from recurring demand, pricing power, and operating leverage. Unlike goods production, services are less constrained by inventories and more adaptable to shifts in labor and capital mix.

GDPNow, trade, and the arithmetic of growth

Atlanta Fed GDPNow remains eye-catching. As of January 9, the model was tracking Q4 real GDP growth above 5%, even after a modest pullback. The strength is not coming from housing or consumer excess. It is coming from trade arithmetic and capital spending.

October trade data showed a sharp narrowing of the trade deficit, driven largely by tariff-related timing effects. Pharmaceutical imports reversed abruptly after September front-loading, while capital goods imports surged, reflecting sustained spending on AI infrastructure, data centers, and high-tech equipment. Exports were also boosted by an unusual spike in gold shipments, which flatters the headline trade balance but contributes little to real GDP.

GDPNow captures the arithmetic of the moment; forecasting requires judgment about what lasts.

We adjusted our Q4 real GDP forecast modestly higher following the trade release, but not nearly to the levels implied by GDPNow. The model is deliberately mechanical. When net exports swing sharply and equipment spending remains firm, it upgrades growth aggressively, even if some of that strength is likely to reverse as gold flows normalize and import-timing effects fade. Our 2026 growth forecast remains above consensus, with risks currently skewed to the upside.

Labor market: slow lane, not pile-up

The December Employment Situation capped a notably slower hiring year. Payroll gains averaged roughly 49,000 per month in 2025, a sharp deceleration from prior years, with the unemployment rate ending the year at 4.4%. Wage growth cooled but did not collapse, with average hourly earnings running in the high-3% year-over-year range—firm enough to support consumer spending while remaining consistent with a disinflationary labor backdrop.

Hiring remains narrowly concentrated, with many cyclically sensitive industries showing little net change. Layoffs remain historically low, however, reinforcing the view that firms are reluctant to shed labor. Adjustment continues to occur primarily through hours rather than headcount, with aggregate hours worked declining modestly and underemployment edging higher at the margin. Productivity is doing more of the work. After a strong third quarter, nonfarm productivity remains up roughly 2% year over year, underscoring a meaningful improvement in output per worker even as hiring slows.

Slower hiring reflects higher productivity and tighter labor supply, not labor-market stress.

Quarterly productivity readings are inherently noisy. The more reliable signal comes from year-over-year trends and multi-year averages, which point to underlying productivity growth closer to 2%, with scope to rise toward 2½%–3% as capital deepening, AI adoption, and the buildout of digital infrastructure shift a larger share of growth toward capital rather than labor. At the same time, businesses are pruning lower-return activities, retaining higher-quality workers, and becoming more selective in hiring; reinforcing the productivity rebound.

This increasingly resembles a low-hire, low-fire equilibrium. Employers are cautious about adding workers but reluctant to cut existing staff. The implication is straightforward: labor costs are becoming more predictable, not more volatile, reducing downside risk to margins even as top-line growth moderates.

Rates, financial conditions, and policy risk

Markets have shifted toward a patient Fed narrative. Rate cuts remain priced for later in 2026 if inflation cooperates, but near-term urgency has faded. Financial conditions reinforce that view. Credit spreads remain contained, issuance has surged, and risk assets are not behaving as though policy is overly restrictive.

A new variable entered the equation this week: direct political pressure on Federal Reserve leadership. The Administration publicly accused Chair Powell of misconduct tied to his prior regulatory decisions and indicated support for potential legal action, an extraordinary step that reframes the policy outlook—not through inflation or employment, but through institutional credibility.

Central Bank independence is a policy tool. Undermining it raises the cost of easing.

Markets have largely discounted immediate consequences, assuming the Fed’s reaction function remains intact. That assumption appears reasonable. Inflation expectations remain well anchored, rate pricing has barely moved, and financial conditions show no signs of credibility shock. Policy is still being set inside the FOMC, not outside it.

History, however, offers an important guide. Episodes of political pressure on central banks rarely result in faster accommodation. More often, they produce the opposite outcome. When independence is questioned, policymakers tend to lean more heavily on process, caution, and institutional legitimacy. Powell’s response fits that pattern. His remarks were institutional, procedural, and deliberately defiant. He made clear that the Federal Reserve’s mandate, framework, and decision-making process remain unchanged. That message was not accidental. It was designed to reinforce credibility at a moment when it was being tested.

Threats to Fed independence rarely hasten easing. They usually reinforce caution.

The irony is that the macro backdrop would otherwise support patience. Growth remains solid, labor markets are cooling without distress, and funding conditions are accommodative. Political pressure risks turning what could have been a benign pause into a longer one, even if inflation continues to drift lower.

This episode is best viewed as a test of norms rather than a transfer of authority. The Federal Reserve’s independence ultimately rests not on rhetoric or statute alone, but on credibility and the willingness of its leadership to hold the line. On that front, Powell has been clear.

Equity and credit: funding windows reopened

Investment-grade credit markets opened the year with force. Roughly $95 billion in U.S. corporate bond issuance marked the busiest first full week since early 2020. This is classic January front-loading, amplified by strong demand and a desire to lock in funding early.

That behavior is inconsistent with a narrative of tightening liquidity. It suggests that access to capital remains available, terms are competitive, and balance-sheet strategies are being executed from a position of relative strength.

Equities have reflected a similar message: growth intact, wage pressure easing, and margins supported by productivity rather than labor expansion.

Geopolitics: risk premium, not shock yet

Venezuela was the headline shock. The U.S.-led capture of Nicolás Maduro sent a clear signal about hemispheric control, inviting comparisons to the 1989 intervention in Panama. Markets have so far treated the episode as a geopolitical risk premium rather than a systemic macro event, with oil prices and broader risk assets largely contained.

Russia intensified strikes on Ukrainian infrastructure during extreme cold, raising humanitarian and energy-system risks. Iran escalated rhetoric toward Israel and the United States, keeping the Middle East risk envelope wide, while renewed movement around Aleppo underscored Syria’s continued volatility. These developments reinforce a backdrop of persistent geopolitical tension without triggering outright disruption.

Geopolitical risk is being priced through volatility and term premia.

The timing matters. Geopolitical assertiveness abroad is coinciding with institutional tension at home, a combination markets typically price with a lag. After a strong start to the year, this raises the likelihood of intermittent volatility, making early-year issuance and proactive funding decisions look increasingly well timed.

Theme: geopolitics, pricing power, and term premia
The common thread across these developments is not immediate disruption but option value. Supply chains remain intact, yet redundancy, inventory buffers, and routing insurance continue to carry a cost. That dynamic keeps a floor under goods inflation even as headline pressures ease. In fixed income, the transmission runs less through near-term rate expectations and more through term premia, as investors demand compensation for geopolitical uncertainty, policy risk, and elevated fiscal supply. The result is a curve that resists flattening and volatility that reappears episodically rather than persistently.

The week ahead: data that can move the narrative

This week’s calendar is dense enough to stress-test the emerging patient-Fed consensus.

Tuesday: December CPI and the NFIB Small Business Optimism Survey. Inflation remains the gatekeeper, particularly core services and shelter. We expect a better-than-feared print, helped by softer grocery prices and easing rent pressure. NFIB sentiment will be closely watched for signs of stabilization.

Wednesday: Retail sales and existing home sales. Control-group sales will shape Q4 GDP tracking and early-year consumer momentum.

Thursday: The Empire State and Philadelphia Fed manufacturing surveys will provide early insight into how manufacturing entered 2026. The data have been volatile, but orders, shipments, and pricing matter more than the headlines.

Friday: Industrial production, capacity utilization, and the NAHB Housing Market Index will round out the week.

The Beige Book will be quietly influential throughout. Confirmation of a low-hire, low-fire labor market would reinforce patience into the spring. With Chair Powell under scrutiny, Fed communication will be parsed less for timing and more for institutional resolve.

Piedmont Perspective

Institutional Home Buying: Populism Meets the Balance Sheet

President Trump’s proposal to limit institutional purchases of single-family homes is best understood as a political signal rather than an economic lever. It speaks to real affordability frustration among younger households, but its economic impact is limited.

Institutional investors hold only 1–3% of single-family homes nationally and under 5% of single-family rentals. Where they matter is at the margin. Purchase flows can amplify price pressure in fast-growing metros during low-inventory periods, particularly in parts of the Sun Belt and Midwest.

Even there, institutions are not the root cause. The binding constraints are underbuilding, zoning restrictions, infrastructure costs, and in-migration. Since 2022, large institutional buyers have slowed acquisitions, shifted toward build-to-rent, and in some cases become net sellers. Restricting their participation risks slowing one of the few scalable sources of new housing supply without materially improving affordability.

Housing responds to capacity. Policies that expand it tend to work. Policies that constrain it tend to reshuffle ownership while leaving prices largely unchanged.

Calibrated Power, Calibrated Policy

The first full trading week of 2026 offered a familiar lesson dressed in new clothes. Geopolitics can move markets, but fundamentals still write the longer chapters. The arrest of Venezuela’s Nicolás Maduro delivered an early risk-on jolt, pushing equities to record highs and briefly reviving talk of a supply-side oil shock. Yet crude prices barely flinched. Brent and WTI drifted lower, a reminder that global inventories, spare capacity, and demand elasticity still matter more than regime headlines. History rhymes here. Iraq in 2003 changed geopolitics overnight, but oil prices ultimately followed barrels, not banners.

Markets are rediscovering an old truth: geopolitics can move prices in the short run, but fundamentals will anchor them over time.

That same tension between narrative and reality showed up in Monday’s ISM Manufacturing report. The overall PMI fell 0.3 percentage points to 47.9 in December, marking the tenth consecutive month below the expansion threshold and the weakest reading of 2025.

Despite its long run in contraction territory, the weaker ISM index is not a signal of collapse. Instead, it is a picture of a factory sector treading water. Production is eking out modest gains, but manufacturers remain cautious—paring payrolls, preserving liquidity, and holding inventories at unusually lean levels. Capital spending continues, but selectively. Firms are not retreating so much as waiting.

What manufacturers are waiting for is clarity. Trade policy uncertainty and labor availability remain the binding constraints, not demand. On that front, the Trump Administration appears increasingly inclined to oblige. The policy posture emerging early in 2026 is consistent with our central calls for the year: that restoring affordability and momentum ahead of the midterm elections would require easing cost pressures rather than amplifying them. A lighter touch on tariffs and a more pragmatic approach to immigration both fit that playbook.

Manufacturing is not weak because demand has vanished, producers are overly cautious because policy clarity has.

Against that backdrop, trade policy delivered one of the more telling signals of the week. The decision to delay scheduled tariff increases on upholstered furniture, kitchen cabinets, and vanities into 2027 is small in headline terms but meaningful in context. This was not a rollback. Existing tariffs remain in place. But it was a clear acknowledgment of inflation sensitivity and political timing. Furniture is a highly visible, price-elastic category. Allowing tariffs to ratchet higher would have fed directly into consumer prices at a moment when policymakers are trying to declare progress.

Markets understood the message. Home goods and furniture stocks rallied as near-term margin risk eased, and retailers gained a rare commodity in today’s environment: cost visibility. More broadly, the move reinforces a quiet but important evolution in trade strategy. Tariffs are being treated less like permanent fortifications and more like negotiating instruments with built-in off-ramps. That flexibility lowers near-term inflation risk and supports risk assets, even as it raises longer-term planning uncertainty for global supply chains.

Policy restraint is quietly doing some of the Fed’s work for it.

For the Federal Reserve, this matters at the margin. Goods disinflation has been one of the more reliable allies in the fight against inflation. A tariff escalation would have complicated that story just as services inflation shows signs of grinding lower rather than falling cleanly. By delaying the tariff hike, policymakers effectively removed one potential source of renewed price pressure from the 2026 outlook. It does not force the Fed’s hand, but it narrows the set of upside inflation risks the Committee must weigh as it debates the timing and pace of eventual rate cuts.

More broadly, the move reinforces a quiet but important evolution in trade strategy. Tariffs are being treated less like permanent fortifications and more like negotiating instruments with built-in off-ramps. That flexibility lowers near-term inflation risk and supports risk assets, even as it raises longer-term planning uncertainty for global supply chains.

Policy restraint is quietly doing some of the Fed’s work for it, reinforcing the disinflationary trend.

For the Federal Reserve, this matters at the margin. Goods disinflation has been one of the more reliable allies in the fight against inflation. A tariff escalation would have complicated that story just as services inflation shows signs of grinding lower rather than falling cleanly. By delaying the tariff hike, policymakers effectively removed one potential source of renewed price pressure from the 2026 outlook. It does not force the Fed’s hand, but it narrows the set of upside inflation risks the Committee must weigh as it debates the timing and pace of eventual rate cuts.

Geopolitically, the landscape remains unsettled but contained. Venezuela’s future oil contribution is likely measured in quarters, not weeks, and depends on capital, infrastructure, and sanctions mechanics as much as politics. We expect a modest uptick in oil output this year, somewhere around 300,000 additional barrels per day. Gains beyond that will require significant investment and time. What markets seem to be underestimating is U.S. energy know-how, specifically related to Venezuelan crude.

Russia’s war in Ukraine continues to evolve tactically rather than strategically, while China’s tightening grip on dual-use exports to Japan underscores how economic statecraft is becoming more precise, more targeted, and harder to model. None of this has yet bled meaningfully into U.S. macro data, but it continues to shape the risk distribution around the outlook.

The still-growing protests in Iran hold the most promise for the next major geopolitical upheaval. Change may also come sooner than expected in Cuba, but talk about Greenland is most likely a distraction. Unless Greenland becomes a base for Chinese and Russian asymmetric attacks on the U.S., there is no reason for Denmark or other NATO nations to be concerned about an unwanted military takeover by the U.S.  Remember that President Trump is always negotiating. The repeated heightened rhetoric on Greenland may be designed to secure a more favorable arrangement with Greenland, such as a lease deal or a mineral rights deal. The U.S. already has the right to operate military bases in Greenland.

Early 2026 is shaping up as a period of calibrated power and calibrated policy. Growth is slower but steadier. Inflation is easing, but has not been vanquished. Manufacturing is waiting, not failing. Tariffs are no longer blunt instruments, and geopolitics is loud without yet being inflationary. The margin for error is thinner than it looks—but the runway remains open, for now.

2026 Top Calls

• Manufacturing treads water, then stabilizes. Production growth remains modest, inventories stay lean, and labor trimming continues into midyear, but conditions improve as policy uncertainty fades.
• Tariffs become more flexible, not more forceful. Expect selective delays, exemptions, and enforcement discretion aimed at containing inflation and protecting politically sensitive consumer categories.
• Immigration pragmatism returns quietly. Incremental easing helps stabilize labor supply, lower service-sector cost pressures, and support affordability without reopening broader political fights.
• The Fed cuts later and by a little less than markets once expected. With goods disinflation intact and services inflation grinding lower, the Fed gains time rather than urgency.
• Geopolitical risk stays elevated but contained. Markets price uncertainty, not disruption, favoring resilience over recession trades.

For a deeper discussion of our macro framework and policy outlook, see the December edition of The CAVU Compass, where these themes were first laid out in detail.

The Piedmont Perspective

The removal of Nicolás Maduro is more than a regime change. It is a stress test of a gray-zone alliance built on opacity, grievance politics, and sanctions arbitrage. For more than a decade, Caracas served as the Western Hemisphere hub of a loose alignment linking Russia, China, Iran, and Cuba. The glue was not ideology but utility: Venezuela offered geography, oil optionality, and permissive terrain for sanctions evasion; its partners provided capital, weapons, intelligence cooperation, and diplomatic cover.

That ecosystem extended beyond states. Venezuela became an enabling environment for Iran-aligned networks tied to Hezbollah and, indirectly, Hamas. Caracas did not direct militant operations, but it lowered coordination costs through diplomatic alignment, financial opacity, and limited physical safe haven. Permissive hubs matter: they reduce friction, extend reach, and complicate enforcement.

That model now looks fragile. Asymmetric coalitions tend to hold only while their hubs remain intact. Russia’s leverage in Venezuela was coercive and military, optimized for access rather than development. China’s engagement was financial and extractive, centered on oil-backed lending that insulated Beijing while hollowing out PDVSA. Iran focused on sanctions workarounds and logistics, using Venezuela as both testbed and rear area. With Caracas destabilized, the connective tissue frays. No partner can easily replicate Venezuela’s mix of proximity to U.S. markets, energy scale, and permissiveness elsewhere in the hemisphere.

Markets initially priced these developments through energy, but expectations should remain disciplined. Venezuela holds roughly 303 billion barrels of proven reserves, yet production remains a fraction of late-1990s peaks above 3 million barrels per day. Recent output has hovered around 650,000–750,000 barrels per day, with exports discounted and routed through opaque channels, largely to China.

Venezuela is a geological superpower operating like a marginal producer. Years of underinvestment, infrastructure decay, sanctions frictions, and human-capital flight make supply restoration a medium-term project, not a cyclical shock. Even under a credible transition, gains would be incremental and capital-intensive, constrained by financing, diluent availability, and logistics. This is not an oil-shock story; it is an optionality story constrained by capital, infrastructure, and credibility.

The slope matters more than the headline. U.S. technology lowers break-evens before it lifts volumes.

Pundits are underestimating the U.S. technology advantage. Expertise in heavy-crude processing, enhanced recovery, project execution, and cost discipline can materially lower Venezuelan break-evens over time. The most plausible path is a modest rise in output in 2026—on the order of 300,000 barrels per day—followed by more durable gains contingent on political clarity and capital access.

An important regional tail risk has also diminished. The prospect of Venezuelan pressure on oil-rich Guyana has faded as Caracas destabilizes and its external backers turn defensive. That removes a non-trivial risk to one of the world’s fastest-growing new oil provinces and supports the view that recent events reduce upside volatility in energy markets rather than create a supply surge.

The more durable market impact runs through financial plumbing, not crude flows. Venezuela functioned as a settlement node for sanctioned trade, providing parallel payment rails, gold-for-energy exchanges, and opaque mechanisms. Removing that node raises transaction costs, lengthens settlement chains, and increases enforcement risk. It does not reverse reserve diversification, but it slows its velocity at the margin.

At the margin, this is modestly dollar-supportive. Reduced leakage reinforces the dollar’s role as the least-bad settlement option in a fragmented system. The effect is best read as a reduction in downside risk, not a new upside catalyst. By lowering the odds of energy-led inflation surprises and tightening financial plumbing, these shifts reduce the likelihood that the Federal Reserve is forced into a defensive policy response.

Risks remain. Cyber retaliation, proxy agitation, and short-term commodity volatility fit the playbook of a network under pressure. When opaque systems lose a hub, coordination degrades before adaptation sets in. Near term favors noise; medium term favors fragmentation and normalization.

Toppling the Maduro regime is no victory lap. It is a clearing of fog. The Americas regain strategic depth. Energy markets gain marginal optionality rather than abundance. And a coalition built on friction, provocation, and evasion finds itself, at least temporarily, short of all three.

The broader lesson extends beyond the hemisphere. Gray-zone power projection relies on permissive hubs combining geography, resources, and weak governance. When those hubs are disrupted, coordination tightens and strategic optionality narrows. For Beijing, the signal is less about oil than exposure. Sustaining external pressure campaigns, including around Taiwan, requires economic resilience, diplomatic bandwidth, and reliable logistics. Peripheral entanglements dilute focus and raise costs; patience, resilience, and allied cohesion remain the more durable sources of leverage.

Looking Ahead: Cooling, Not Contracting

The remainder of the week should reinforce a theme that is becoming clearer as 2026 begins. Manufacturing is treading water, and the broader U.S. economy is cooling following the outsize 4.3% real GDP growth in the third quarter. That deceleration, however, should not be mistaken for deterioration. Growth is likely converging toward its underlying trend, which is best approximated by private domestic final demand and has been growing at a 2.5% pace.

The key question now is not whether the economy is slowing, but what is doing the work underneath the hood. How much of that growth is being driven by capital deepening—investment in equipment, software, AI infrastructure, and productivity-enhancing technologies—and how much is still coming from labor inputs? That distinction will shape both the inflation outlook and the Federal Reserve’s tolerance for patience.

This week’s labor-market data will help clarify that balance. ADP and JOLTS should confirm continued cooling in labor demand rather than outright weakness. Job openings are expected to drift lower, consistent with firms trimming at the margin while remaining reluctant to shed workers aggressively. That pattern aligns with an economy leaning more on productivity than hiring to drive growth.

The ISM Services report later in the week will provide an important cross-check. Services activity remains expansionary, but employment components have been softening. A further easing would reinforce the view that labor is no longer the primary growth engine, even as demand holds up.

Friday’s employment report should anchor the week. Payroll growth is expected to remain positive but modest, with the unemployment rate holding near recent levels (possibly rising 0.1 percentage point at most) and wage growth contained. An outcome along those lines would be consistent with an economy growing near trend rather than above it, as the Q3 data showed. Economic growth is moderating but not slipping to stall speed or less.

From a policy perspective, this composition matters. Growth driven by capital deepening and productivity is inherently less inflationary than growth driven by rapid labor expansion. If the data continues to support that mix, the Federal Reserve gains time. The debate shifts from whether cuts are needed urgently to how confident policymakers can be that disinflation continues without requiring a material rise in unemployment.

The bottom line is the economy is slowing toward trend, not rolling over. Manufacturing is waiting, not faltering. And the durability of growth in 2026 will hinge less on how many jobs are added and more on how efficiently capital is deployed. Our forecast remains unchanged from where it has been since the last GDP release, with a slower pace in the near term and a stronger pace as the year progresses.