US foreign policy signals sway markets in first week of 2026

12/01/2026 04:48 AST

Global markets this week were influenced by a combination of mixed economic data, US policy signals and ongoing geopolitical developments. In the United States, labor market indicators softened into year end, as November job openings fell to 7.15 million, the lowest level in over a year, the vacancies to unemployed ratio eased to 0.9, and hiring slowed to its weakest pace since mid-2024; manufacturing activity remained in contraction, with the ISM index declining further to 47.9, while services activity strengthened to 54.4, highlighting continuing sectoral divergence.

December nonfarm payrolls rose by 50K, below expectations, while the unemployment rate edged down to 4.4 percent; preliminary University of Michigan consumer sentiment and inflation expectations came in at 54.0 and 4.2 percent respectively. US Treasury yields flattened over the week, with the 2s10s and 5s30s curves compressing by 8.4 bps and 6.6 bps respectively, while the DXY closed at 99.133 [+0.72 percent]. In Canada, labor market data showed a fourth consecutive month of modest job gains, while the unemployment rate rose to 6.8 percent, driven by a sharp expansion in labor supply, with USD/CAD last trading at 1.3913.

Across Europe, euro area headline inflation eased to 2.0 percent, with core inflation at 2.3 percent, and softer services prices reinforcing expectations for a continued ECB policy pause; the HCOB composite PMI moderated to 51.5, and EUR/USD closed the week at 1.1636 [-0.70 percent]. Swiss inflation edged up to 0.1 percent YoY, consistent with a neutral SNB stance, with USD/CHF last printing at 0.8012, while in the UK, services PMI edged up to 51.4 and the composite PMI held at 51.4 despite rising input cost pressures, with GBP/USD closing the week at 1.3403 [-0.39 percent].

In the Asia Pacific region, China's CPI rose to 0.8 percent YoY, while producer prices contracted by 1.9 percent YoY, underscoring persistent deflationary pressures, with USD/CNY at 6.9783; in Australia, core inflation eased to 3.2 percent YoY and headline CPI to 3.4 percent, reinforcing the RBA's hold bias, with AUD/USD closing the week at 0.6687 [-0.09 percent]. Globally, equity markets delivered mixed performances, sovereign yield curves saw modest repricing, and oil prices advanced - with Brent up 4.26 percent on the week - amid supply concerns and geopolitical developments in the Middle East, Russia/Ukraine, and Venezuela, alongside heightened strategic attention on Greenland; spot gold and silver also rose over the week to reach 4509.50 and 79.86 respectively.

US and Canada
The Trump administration has advanced a forceful domestic and foreign policy agenda, with near-term market implications. On housing, the President pledged to ban large institutional investors from purchasing single-family homes and directed Fannie Mae and Freddie Mac to buy $200B of agency mortgage bonds, equivalent to just over 2 percent of the $9T outstanding market. Mortgage-backed securities tightened, with the 30-year fixed mortgage rate averaging 6.16 percent in the week ending January 8.

Separately, Trump called for a one-year cap on credit-card interest rates at 10 percent, versus an average rate near 21 percent, targeting a core profit centre for US banks and raising risks to credit availability. On foreign policy, the US ordered withdrawals from 31 UN bodies and signaled a more unilateral posture, while actions in Venezuela and renewed rhetoric on Greenland unsettled allies, notably Canada, reinforcing geopolitical risk premia across markets. DXY last printed at 99.133.

US labor market indicators softened into year-end, reinforcing signs of cooling demand for labor. Nonfarm payrolls increased by 50K in December, below the 70K median forecast, following downward revisions to the prior two months, while the unemployment rate edged down to 4.4 percent. Average hourly earnings rose 0.3 percent MoM, in line with expectations, indicating easing but stable wage momentum. Private payroll growth slowed to 37K, with job gains concentrated in leisure and hospitality and health care, offset by declines in retail trade, construction and manufacturing.

Complementary data showed job openings falling to 7.15M in November, the lowest level in over a year, with the vacancies-to-unemployed ratio declining to 0.9. Together, the data underscore a gradual normalization in labor market conditions amid a cautious Federal Reserve policy stance. Swap markets are currently pricing two Fed rate cuts in 2026. Separately, University of Michigan consumer sentiment and inflation expectations printed at 54.0 and 4.2 percent respectively.

US manufacturing PMI falls
US economic activity showed a marked sectoral divergence in December. Manufacturing conditions deteriorated further, with the Institute for Supply Management (ISM) manufacturing index easing to 47.9 from 48.2, marking the tenth consecutive month in contraction and the weakest reading in over a year. The downturn was driven by inventory drawdowns at the fastest pace since October 2024, alongside sustained cost pressures, with the prices-paid index holding at 58.5, around six points above end-2024 levels. New orders, exports, and employment all remained in contraction. In contrast, services activity strengthened materially, with the ISM services index rising 1.8 points to 54.4, the highest since October 2024. New orders, business activity, exports and employment all accelerated, underscoring continued resilience in the services-led expansion despite persistent manufacturing weakness.

Canada employment up 8.2K
Canada's labor market recorded a fourth consecutive month of job growth in December, with employment increasing by 8.2K, defying expectations for a 2.5K decline, while the unemployment rate rose 0.3 percentage points to 6.8 percent as labor supply expanded sharply. Statistics Canada reported that the labor force grew by 81K, the largest increase in over a year, lifting the participation rate to 65.4 percent, led by gains in Ontario and Quebec. Employment gains were driven by 50.2K full-time positions and higher self-employment, with notable strength in health care and social assistance (+20.8K) and construction (+11.2K), partly offset by a 42K decline in part-time roles. Annual employment growth slowed to 1.1 percent, the weakest since 2016 excluding the pandemic, while wage growth for permanent employees eased to 3.7 percent, indicating moderating labour market momentum amid rising slack. USD/CAD last printed at 1.3913.

Euro area inflation at 2.0% target
Euro-area inflation eased to the European Central Bank's 2.0 percent target in December, down from 2.1 percent, with core inflation slowing to 2.3 percent and services inflation moderating, supporting a continued policy pause. Inflation dynamics remain uneven across major economies, with Germany at 2.0 percent, France at 0.7 percent, and Spain at 3.0 percent.

Growth indicators softened modestly, with the HCOB composite Purchasing Managers' Index (PMI) easing to 51.5 from 52.8, while the fourth-quarter average of 52.3 marked the strongest reading since the second quarter of 2023. Services activity continued to offset manufacturing contraction, sustaining expansion across the bloc. National PMI trends showed Spain outperforming, Germany moderating, and France stagnating. Swap markets price approximately five basis points of ECB easing by September, implying a 20 percent probability of a 25bp cut, broadly consistent with a prolonged rate-hold baseline amid contained inflation pressures. EUR/USD last printed at 1.1636.

Swiss inflation rises
Swiss inflation increased to 0.1 percent YoY in December, up from 0.0 percent in November, marking the first acceleration since July and aligning with market expectations. The outcome leaves fourth-quarter inflation in line with the Swiss National Bank's (SNB) 0.1 percent forecast and reduces immediate pressure to reintroduce negative interest rates. Underlying inflation firmed to 0.5 percent, driven primarily by higher costs for rent, education, and tobacco. FY 2025 inflation averaged 0.2 percent, the weakest since the first year of the COVID pandemic, underscoring persistently subdued price dynamics. The SNB's December policy deliberations reflected a neutral bias, judging neither easing nor tightening appropriate, while maintaining a high threshold for sub-zero rates. Forward guidance remains cautious, with inflation projected at 0.3 percent for the year amid soft growth and a still-strong franc. USD/CHF last printed at 0.8012.

UK services activity edges up
The S&P Global UK Services Purchasing Managers' Index (PMI) rose modestly to 51.4 in December from 51.3 in November, below the provisional estimate of 52.1, signaling lackluster business activity growth at the end of 2025. Input costs accelerated to the fastest pace since May, driven by higher staff expenses and rising raw material and fuel costs, while output prices increased at their quickest rate since August. Hiring declined for the fifteenth consecutive month, though the pace of contraction eased slightly. New orders improved after four months of decline, and exports rose for the first time since August. Composite PMI, incorporating manufacturing, increased to 51.4 from 51.2. Persistent services price pressures may constrain the Bank of England's policy easing, despite last month's bank rate cut to 3.75 percent. Swap markets are pricing in one or two quarter-point cuts in 2026. GBP/USD last printed at 1.3403.

China CPI rises to 3-year high
China's consumer inflation rose to 0.8 percent YoY in December, the fastest pace since February 2023, driven largely by higher food prices and seasonal consumption. For FY 2025, headline inflation averaged 0.0 percent, the weakest outcome since 2009, underscoring persistent deflationary pressure. Food prices increased 1.1 percent YoY, while vegetable prices surged over 18 percent amid weather disruptions. Core CPI remained stable at 1.2 percent for a third consecutive month, and non-food inflation held at 0.8 percent. Producer prices fell 1.9 percent YoY, marking a 39th consecutive monthly decline but the narrowest contraction in over a year. Services inflation softened further, and housing-related prices turned negative, highlighting continued demand fragility. The data point to ongoing deflation risks despite temporary cost-driven price support. USD/CNY last printed at 6.9783.

Australia's inflation momentum softened in November, reinforcing the Reserve Bank of Australia's near-term case to maintain policy settings. The trimmed mean measure rose 3.2 percent YoY, easing from 3.3 percent and in line with consensus, while headline CPI increased 3.4 percent, below the 3.6 percent forecast. Disinflation was broad-based, with annual goods inflation slowing to 3.3 percent from 3.8 percent and services inflation easing to 3.6 percent from 3.9 percent. Housing remained the largest contributor to inflation at 5.2 percent, followed by food and non-alcoholic beverages at 3.3 percent and transport at 2.7 percent. Market pricing for near-term tightening moderated marginally following the release. Swap markets are currently pricing an 80 percent chance of a rate hike by May 2026. The RBA is expected to await the quarterly inflation report on January 28 before reassessing policy, with future decisions remaining data dependent. AUD/USD last printed at 0.6687.

Kuwait
USD/KWD closed last week at 0.30560.

Kuwait Times