Mark Vitner

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.

Gold, Growth, and a Job-Light Economy

The final full week of 2025 delivered a familiar late-cycle paradox. The macro data still reads like an economy with plenty of altitude, with Q3 real GDP coming in at 4.3% annualized and up 2.3% over the past year, with growth powered by solid consumer spending and an AI-driven investment surge tied to reshoring and technology buildouts. Yet confidence data tells a different story. The economy increasingly feels like one experiencing vertigo.

Things appear to be spinning around the periphery. Consumer confidence fell again in December, with households citing employment and income concerns alongside the usual worries about inflation and politics. The message is not that the expansion is ending. Rather, progress is becoming harder to feel in real time. That disconnect is a defining feature of this job-light, capex-heavy cycle and shows up repeatedly in headlines about how difficult it remains for new entrants and re-entrants to secure employment.

The economy is growing, but the labor market is no longer the messenger.

Under the hood, the labor market is still behaving, at least in the narrow sense that matters for recession risks. Initial jobless claims fell to 214k in the latest week, a historically low level inconsistent with broad-based layoffs. But the labor picture is more nuanced. Turnover remains exceptionally low. With fewer workers voluntarily quitting, firms are hiring less aggressively. Layer in the effects of AI adoption, earlier over-hiring, and lingering reluctance to trim payrolls after the pandemic, and the result is a labor market that looks calm on the surface while quietly adjusting to a more cautious, lower-churn footing.

Labor market uncertainty remains one of the largest open questions for the economy and the 2026 outlook. Revised employment data due early next year are expected to show that job growth slowed sharply in late 2025 and may have briefly turned negative. That would be unusual for an expanding economy. Historically, even modest employment declines have tended to coincide with the onset of recession.

Not every hiring slowdown signals a recession. This job-light expansion appears to be by design.

This cycle may be different, which remains the most dangerous phrase in forecasting. Productivity gains, capital investment, and deliberate talent retention are playing a larger role than broad-based hiring. Rather than an expansion riding a wave of payroll growth, today’s economy is advancing with leaner workforces and stronger productivity, a possible sequel to the “New Economy” dynamics of the late 1990s. Growth is being powered less by headcount and more by automation, efficiency, and strategic staffing, including retaining experienced workers, selectively outsourcing, and relying more heavily on contract and temporary labor.

Markets appear to be reading from the same script. Risk assets are closing the year on a firm note, but the more revealing signals came from hedges rather than headlines. A weaker dollar and a renewed bid for precious metals, specifically silver and gold, echo a familiar holiday refrain from Rudolph the Red-Nosed Reindeer that is now hard to get out of my head.  These moves suggest investors are positioning for a sequel economy defined less by labor abundance and more by real constraints, including power availability, debt capacity, and the ability to absorb and deploy rapid gains in artificial intelligence.

Markets are hedging constraints, missing data points, and policy uncertainty—not contraction.

Part of the move reflects rate-cut expectations and renewed questions about Federal Reserve independence. It also points to growing recognition that the industrial economy is colliding with bottlenecks in electrification-era inputs. Data center and power projects are crowding out other industrial projects at the margin. The tape is not signaling a crisis. Instead, it is quietly pricing a regime shift toward hard assets, supply security, and resilience premia in an economy running more on efficiency than expansion. One encouraging signal has been the recent strength in transportation stocks, which may be hinting at an end to the long-running freight recession.

Recent Developments: Signals Beneath the Noise

That resilience theme extends beyond economics into geopolitics. Ukraine is moving toward a negotiation framework, with a revised 20-point peace proposal reportedly under discussion with President Trump, even as the hardest questions around territorial concessions and security guarantees remain unresolved. In the Middle East, Trump and Netanyahu are preparing talks on the next phase of a Gaza plan, though the ceasefire architecture remains fragile, particularly following recent comments from Iranian leadership and the apparent launch of three satellites.

In Asia, China’s largest-ever drills around Taiwan served as a reminder that geopolitical tail risks are no longer confined to the margins. They are part of the main distribution. Trump’s more aggressive posture toward Venezuela and recent arms commitments to Taiwan may also be contributing to Beijing’s willingness to apply pressure on the island.

Looking Ahead

As we turn the page to the first week of the new year, attention will shift back to fresh economic data. The ISM manufacturing index, December’s employment report, and updated readings on consumer sentiment will help set the tone for how 2026 begins.

Before that, the coming week features a lighter calendar, offering a brief pause to recharge and, perhaps, watch a bit more football. Key releases include the FOMC minutes from the December 9–10 meeting on Tuesday, weekly jobless claims on Wednesday, and global and U.S. PMI indices from S&P on Friday. As always, we will be watching for evidence that reinforces or challenges the soft-landing narrative and tests whether the Fed’s cautious easing path remains appropriate. Our preference would be for cuts at alternating meetings, extending the easing cycle without materially lowering the terminal rate.

For now, the economy appears to be staying on script, marked by cautious optimism, an affinity for gold, and a world that never quite sits still.

As we close out 2025, we want to thank our readers and clients for the continued engagement and dialogue. We wish you a healthy, prosperous, and thoughtful New Year, and we look forward to navigating 2026 together.