The November US jobs report, released last Friday, was more reassuring than yesterday’s Cagliari Calcio game, where they lost 0-1 against Fiorentina. While the report points to a solid US labor market, Cagliari’s defeat means my favorite team remains dangerously close to the relegation zone. However, headlines can sometimes be misleading. For example, consider yesterday’s game: Fiorentina, ranked 4th, secured its 8th consecutive win, while Cagliari’s performance was respectable. In other words, the challenge was likely too great for a team still fighting to stay in Italy’s soccer top league.
Similarly, while the US jobs report highlighted a strong rebound in nonfarm payrolls (+227k in November, above the consensus of +200k) and upward revisions for the prior two months (+56k total), it also revealed some underlying weaknesses. The US labor market is not yet fully stabilized or in a balanced state. For instance, the unemployment rate ticked up to 4.2% in November, up from 4.1% in October. Although still below the Fed’s year-end projection of 4.4%, the rate is rising again, nearing the 4.3% peak seen during the summer. Therefore, the November numbers can partly be seen as a recovery story, rather than a signal of new job creation, as around 70k individuals returned to work after temporary absences in October (due to hurricanes or strikes).
Moreover, consumer sentiment, as reflected in the Conference Board Survey, suggests that the unemployment rate may continue to rise. The gap between those reporting that « jobs are plentiful » and those stating that « jobs are hard to get » is shrinking. While the current situation remains healthy, with an historically low unemployment rate and more than one-third of consumers saying « jobs are plentiful » (versus less than 15% saying « jobs are hard to get »), the trend appears to be deteriorating.
Jobs hard to get – jobs plentiful vs. unemployment rate: the trend is deteriorating contrary to the situation in 2018-19, before the pandemic
On the other hand, average hourly earnings rose 0.4% month-over-month in November, exceeding the expected 0.3%. Year-over-year, wage growth is running at 4.0%, a somewhat « hot » figure for the Fed, especially in the context of still elevated super-core inflation (which excludes goods, energy, and housing to focus on labor costs in the service sector).
QoQ% annualized rate in core inflation, super core inflation & core PCE: not behaving well lately
As a result, the Fed is facing uncertainty about the labor market’s future and the precise trajectory of its policy rate. The same uncertainty applies to other major central banks, which are assessing their growth and inflation outlooks. The same goes for us as investors, trying to predict what 2025 holds. While the base-case macro scenario remains generally supportive—suggesting a soft landing for US/global economies—tail risks on both sides have increased due to the unpredictability surrounding the timing, scope, and impact of potential policy changes under Trump. Given this environment, central banks are likely to maintain as much flexibility as possible as they head into the new year.
This is why a 25bps rate cut from the Fed next week seems prudent. It would help prevent further deterioration in the labor market or negative market reactions while maintaining restrictive monetary policy (with rates above 4% and inflation expectations below 3%). The Fed can always pause later if needed. Similarly, a 25bps rate cut by the ECB this week would likely be a better option than a more aggressive 50bps move.
From a pragmatic investment perspective, the same principles—flexibility and optionality—should apply too as we head into 2025. While the macro backdrop remains generally supportive, with resilient growth, falling inflation, and central banks cutting rates, there are a few key considerations. First, valuations are more stretched than 12 months ago, with lower risk premia. Second, sentiment and positioning are notably more optimistic than last year. Third, volatility is at historically low levels. According to Goldman Sachs, based on SPX option price data going back to 1996, we are approaching levels not seen in decades. The chart below illustrates the cost of hedging a portfolio with S&P 500 1-month options. This cost has only been lower during two brief periods over the past 30 years. As a result, options may be worth considering, either for hedging downside risks or gaining exposure to potential upside.
Cost to hedge a portfolio with SPX 1M options (source: Goldman Sachs)
When thinking about a balanced, diversified, and liquid portfolio, it’s also time to revisit bond allocations, adding gradually and shifting toward sovereign duration over credit. The valuations of long government bonds haven’t changed significantly since last year, with long rates roughly at the same levels. However, considering relative risks and returns, diversification benefits (in case of a negative growth shock), and excess returns over cash (which is now declining for cash), sovereign bonds are regaining appeal. Meanwhile, credit is offering one of the worst risk-reward profiles among asset classes. Long duration is still at risk due to the potential for a reflation trade, inflation reacceleration, or fiscal concerns, but within a broader asset allocation, it offers more benefits than it has over the past 12-18 months. In a year marked by uncertainty about the economy and markets, it’s hard to make bold, long-term bets. So, the key to success in 2025 will likely lie in our ability to adapt and respond quickly to unfolding developments, while remaining open-minded.
Economic calendar
The year-end is near with about 15 days of trading left and a few key economic reports and, more interestingly, several major central banks meetings ahead of an uncertain 2025 as far as policy rates precise trajectories are concerned. This week, all eyes will be on the US CPI report on Wednesday. Other main highlights will include the US NFIB Small Business Optimism Index on Tuesday (where we expect a significant increase related to Trump’s victory, well above consensus expectations) and the ECB monetary policy meeting on Tuesday. Speaking of central banks, the RBA (Australia) tomorrow, the BoC (Canada) on Wednesday and the SNB (Switzerland) on Thursday morning will also set rates this week. Furthermore, we will also get the China CPI today and the Tankan quarterly survey in Japan on Friday.
Starting with the US, the November CPI report on Wednesday, which will be the last one ahead of the Fed meeting next week (18 December), will be key for investors assessing whether Jay Powell and its colleagues deliver, or not, another -25bps cut before year-end. Futures are currently pricing in a 87% probability of it doing so. Consensus expects headline and core CPI to advance both +0.3% MoM, and +2.7% and +3.3% YoY respectively (basically unchanged prints vs. October), leaving enough room of maneuver to the Fed for a cut, in our view. Interestingly, the NFIB Small Business Optimism Index may surprise on the upside: while the median forecast points to a marginal increase to 94.1 from 93.7, we rather expect it to skyrocket if past history is future guide (see the graph here below and the surge of this index when Trump won the US presidential election in 2016).
NFIB small business optimism index: SME sentiment was boosted by Trump 1.0
Turning to monetary policy, the main event is the ECB decision on Thursday as growth concerns mount, while French budget and debt sustainability may be challenged by the current political instability. We foresee another 25bps cut but the door remains (slightly) open for a more aggressive easing as futures are currently pricing in a 10% probability of a 50bps cut. We just believe ECB may prefer to wait for more clarity on Trump policies, especially around the timing, extent and impact of US tariffs impacts on growth and inflation in the euro area, as well as how the political situation evolves in France and Germany, before to act more boldly/swiftly. In other words, it’s certainly key for the ECB to keep some optionality. Other central bank decisions for next week include Australia’s RBA on Tuesday (hold at 4.35% expected), the Bank of Canada on Wednesday (-50bps cut to 3.25% expected) and Switzerland’s SNB on Thursday (-25bps cut to 0.75% expected). Rounding off with Asia, the China CPI was out this morning and it was below the median estimates on Bloomberg (+0.2% YoY vs. +0.4% expected and +0.3% in October): that’s the lowest reading over the last 5 months and with producer prices still shrinking (-2.5% YoY), China is still facing and flirting with a major deflation threat. In Japan, the BoJ’s quarterly Tankan survey for December due Friday (Tokyo time) should confirm a consolidation of business conditions at large companies either active in manufacturing or in services, with levels remaining close to historic highs. The Japan GDP grew +1.2% a.r. last quarter (vs. +1.0% expected), thus keeping alive market expectations for an interest rate hike next week from the BOJ (19 December). The decision remains ultimately hard to call as markets remain split over whether the central bank will deliver a hike or not (32% probability priced in this morning).
We opt for no cut… with a great pinch of uncertainties.
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