US Fed may hold rates as unemployment rate eases to 4.4%

Our weekly podcast by Kevin Lings:

Markets shrug off geopolitical dramas in early 2026

In this podcast, STANLIB’s Chief Economist, Kevin Lings, unpacks recent geopolitical events, including the US intervention in Venezuela and its threatened moves into Greenland and Iran. Surprisingly, this has had little effect on financial markets. He also explores latest US employment data and why SA’s manufacturing output continues to struggle.

The focus areas during the week included:

In the first full week of 2026, the S&P 500 index gained 1.6%. It is already up 1.8% year-to-date, after rising by 16.4% in 2025. This occurred despite continued policy uncertainty from the Trump administration, ongoing geopolitical uncertainty in numerous regions of the world, no formal announcement on who will replace Jerome Powell as chairman of the US Federal Reserve (Fed), and Friday’s disappointing US labour market report.

The S&P 500’s price gain of 16.4% (17.9% total return) for 2025 is the third consecutive year that the index has returned more than 10%. Since 1950, there were only four other periods, namely 1950 to 1952, 1995 to 1999, 2012 to 2014, and 2019 to 2021, when the index posted double digit gains for three consecutive years. Historically, (using these reference periods) returns in the fourth year have been modest, with the S&P 500 delivering an average gain of just 1.5%. However, solid earnings growth in 2026, supported by steady US economic growth and some additional easing of monetary policy, could help to maintain a solid equity performance in 2026 despite ongoing concerns about valuations.

SA’s All-Share Index delivered an incredible 37.7% price return for 2025 (42.4% total return). This occurred despite lacklustre economic growth, weak consumer and business confidence. However, SA’s economic/policy performance in the second half of 2025 was far more convincing than the first half, resulting in upward revisions to its growth forecast for the next few years. The equity performance in 2025 is even more impressive when converted into dollars (given the weakness of the dollar) - a price gain of 56.1% (total return of 62.4%). It is important to highlight, however, that SA’s equity outperformance in 2025 was largely driven by the mining companies (gold and platinum), with the Resource 10 index up a phenomenal 134.6% in the year. In contrast, the Financial 15 gained just over 20% while the Industrial 25 was up around 15% - less than SA’s total bond market return of 24.2% in the same period.

In 2025 the rand gained 13.4% against a weaker US dollar, while the emerging market currency index was up a more modest 9.5%. The rand is technically overvalued but is supported by improving economic fundamentals, including very favourable terms of trade, a better-than-expected fiscal outlook and ongoing policy reforms that have focused on expanding the use of private/public partnerships.

Data released by the US Bureau of Labor Statistics reveals that the US economy added 50 000 jobs in December 2025, which was below market expectations for a gain of 70 000. Employment data for the previous two months was revised down by a combined 76 000 jobs. Most of December’s job gains were in food services (+27 000), healthcare (+21 000) and social assistance (+16 000). The retail sector lost 25 000 jobs, while manufacturing employment declined by a further 8 000 workers. In 2025 the US labour market gained 525 000 employees (seasonally adjusted), which is well down from the increase of 2.095 million reported in 2024. Cuts to federal government jobs of 277 000 in 2025 explain some, but not all, of this slowdown. Despite sluggish hiring, the unemployment rate declined in December 2025 to 4.4% from a revised 4.5% in November, providing a more reassuring signal which could (partially) reflect the recent decline in US immigration. The decline in the rate of unemployment, together with the recent better-than-expected US GDP estimate for Q3 2025, will encourage the Fed to keep interest rates on hold later this month. In the most recent Summary of Economic Projections, most Federal Open Market Committee members indicated that interest rates at their current level (3.5%-3.75%) are weighing on economic activity, and they support modest further reductions.

US weekly jobless claim increased to 208 000 this past week, up from 200 000 the previous week - which was in line with market expectations. Continuing claims, which measure the total number of people receiving benefits, edged higher to 1.91 million, slightly above forecasts for a smaller rise to 1.87 million. Claims of around 208 000 a week suggest that while the US economy is not adding a significant number of new jobs each month, most companies are not cutting employment to any significant extent.

The US ADP labour market report for December 2025 reflected a gain of 41 000 jobs in the private sector. This was slightly below market expectations for a gain of 50 000 jobs, although the November data was revised from an initial decline of 32 000 jobs to a decline of 29 000. Overall, the latest ADP employment report suggests that the US labour market may be stabilising after a soft patch in the past six months. Again, most job gains were in education and health services. Encouragingly, for the first time in four months, companies with fewer than 50 employees added jobs (click here for charts).

US job openings fell to 7.15 million in November 2025, well below market expectations for job openings to remain more elevated at 7.65 million. The decline was broad-based, led by leisure and hospitality, government, healthcare, and transportation. The jobs-workers gap, which measures the difference between labour supply and labour demand, dipped below zero and is a lot more in balance than in prior years. Importantly, lay-offs edged down slightly in November as employers appear to be reducing openings rather than actively cutting staff. Quits ticked up, suggesting workers remain confident enough to seek new opportunities.

Importantly, US non-farm business sector productivity rose by a robust 4.9% q/q (annualised) in the third quarter of 2025. This was up from a revised 4.1% q/q in Q2 2025 but slightly below market expectations for a rise of 5%. It was also the largest increase in US productivity in two years. Hourly wages rose by 2.9% year-on-year – slightly above CPI inflation of about 2.7% – resulting in continued positive real wage gains, on average. Growing disposable income should help to support consumer spending and the broader economy in 2026 and will be boosted by substantial tax rebates in early 2026. Unit labour costs, which reflect wage gains adjusted for changes in productivity, fell by 1.9% q/q (annualised) in Q3 2025, below expectations for a decline of only 0.1%. Lower unit labour costs should help to ease inflation pressures or at least help US companies to continue to absorb a large portion of the higher import duties.

Data from the US Institute for Supply Management (ISM) showed that economic activity in the US manufacturing sector contracted for the 10th consecutive month in December 2025. The ISM’s Manufacturing Purchasing Managers’ Index (PMI) declined by 0.3 points to 47.9, the lowest reading of 2025. The employment index remained in contraction for the 11th straight month, while the prices index stayed in expansion for the 15th consecutive month. There was also a sharp decline in the inventories subindex, which is likely to result in increased imports in coming months, since the spread between new orders and inventories signals potential improvement ahead.

The US Institute for Supply Management’s (ISM) measure of services activity expanded for the 10th consecutive month in December 2025. Gains in new orders (at their highest level since September 2024), business activity, and a rebound in employment from contraction to expansion helped to push the Services PMI to the highest reading of the year. Price pressures also eased slightly, although the services prices index remained elevated. It is worth noting, however, that the ISM index has decoupled from hard data on services activity in recent years.

On Saturday, 3 January, the US carried out military action in Venezuela that resulted in the capture and removal of the country’s president, Nicolás Maduro, and his wife, Cilia Flores. They were flown to New York and charged with narco-terrorism, conspiracy and other crimes. The capture of Maduro took place following months of US pressure on Venezuela. In mid-December, US President Donald Trump wrote in a social media post that he had ordered a “total and complete blockade” of oil tankers travelling to and from Venezuela. Venezuela’s new leader is Delcy Rodriguez, who was formerly Maduro’s vice president. However, Trump said that the US will “run” Venezuela until there is a “safe, proper, and judicious transition” of power in the country. In the near term, the impact on the international oil market appears to be limited, as production and export constraints remain subject to US sanctions and enforcement decisions, which could evolve. Venezuela currently produces under one million barrels of oil per day, which is less than 1% of global output. Over the longer term, Venezuela’s oil sector would require significant capital, infrastructure rebuilding, and policy clarity before any meaningful changes in output could occur. According to the Organization of Petroleum Exporting Countries (OPEC), Venezuela has around 303 billion barrels of proven oil reserves - among the largest in the world. The reaction by most financial markets to this geopolitical event was modest.

South African manufacturing production declined by a very disappointing 1.1% m/m in November 2025 and by 1% y/y. (In December, Absa’s manufacturing PMI fell to its weakest level in nearly six years, reflecting persistently weak domestic demand and aggressive destocking.) Overall, domestic manufacturing activity has struggled to gain any momentum in recent years and remains more than 6% below the level of output achieved prior to the start of Covid in 2020.

China’s consumer price index (CPI) rose by 0.8% y/y in December 2025, in line with market estimates, while producer inflation fell by 1.9% y/y, the smallest decrease in more than a year. Core CPI, which strips out food and energy, increased by 1.2% y/y for the third straight month. China has struggled with deflation since the end of the pandemic, as a prolonged housing downturn and overproduction in several industries have weighed on domestic consumption and corporate profits. Inflation for the full calendar year was zero, the lowest level since 2009 and well below China’s official target of about 2%. The latest inflation report supports the view that China’s central bank will continue to ease policy in 2026.

The People’s Bank of China said it will cut the reserve requirement ratio and interest rates in 2026 to maintain ample liquidity and support growth under an appropriately loose monetary stance. China has kicked off 2026 with a record pace of sovereign bond issuance as authorities front-load fiscal support. The surge in supply has pushed yields higher. The central bank has also extended its gold-buying streak to 14 consecutive months.

Headline inflation in the Eurozone slowed to the European Central Bank’s (ECB’s) target of 2% y/y in December from 2.1% in November. The core rate of inflation eased to 2.3% from 2.4% in November, although services inflation, which is closely watched by the ECB, eased only slightly to 3.4%, while core goods inflation surprised to the downside. At this stage it seems fair to assume that the ECB will keep rates on hold in the short term.

Industrial production in Germany, France and Spain was reported to be better than expected in November 2025. German industrial output increased by a seasonally-adjusted 0.8% m/m, rather than shrinking by 0.5% m/m as predicted by the consensus estimate. This came on top of a jump in manufacturing orders, which grew by 5.6% m/m, defying forecasts of a 1.3% decline.

Japan’s household spending rose by a robust 2.9% y/y in November 2025, well above market expectations for a decline of 1%. In October 2025 household spending declined by 3% y/y. November’s solid rebound in spending was primarily due to an increase in purchases of vehicles. However, even if spending on vehicles is excluded, purchases of other items, including food and eating out, suggest that a recovery in consumer spending is becoming a little more entrenched.
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Swedish headline inflation surprised to the downside in December 2025, slowing to 2.1%, while core inflation also fell more than expected to 2.3%. The downside surprise in inflation was mostly driven by energy prices and continued broad-based discounting by retailers.