The Macro Outlook: Setting the Tone for 2026
The key events for the w/c 5 January 2026: US non-farm payrolls, ISM PMIs, Aus CPI (monthly), S&P PMIs for Dec
The new year opens with a focus on reorientation as the US catches up on delayed data releases over a mostly quiet holiday period. We start the year, however, with further developments in the geopolitical backdrop as the US has now moved to depose the Venezuelan leader over the weekend. These developments warrant observation for their potential impact on broader market stability. Nevertheless, the primary task for markets this week is building out the final view of US economic activity for the close of 2025.
There are several important updates in the week ahead.
US Labor Market Dec: FOMC Implications
The updated suite of US labor market data for Dec will arguably be the most important input in the lead-up to the FOMC meeting at the end of the month. At the time of writing, markets are leaning toward a hold in Jan, with a slight skew to a cut in Mar (Source: CME FedWatch). The Fed’s sensitivity to a weakening labor market remains high. If the unemployment rate continues to increase beyond 4.7%, then we could see rate-cut expectations brought forward. The latest FOMC minutes reiterated the importance of managing the downside risks around the labor market.
Assessing the US Growth Trajectory: Q3 Resilience
The US data catch-up continues this week with housing data for Sept and Oct, alongside US trade figures. Looking back, US Q3 growth demonstrated resilience, with headline GDP accelerating to an annualized +4.3% (up from +3.8% in Q2). This growth was driven by higher personal spending growth, helping to offset a slowdown in fixed investment and continued weakness in the residential sector. While government spending provided a tailwind in Q3, the outlook for Q4 remains clouded by the government shutdown. We expect a dip in the final quarter of 2025, followed by a Q1 rebound.
The data catch-up also means that the Atlanta Fed GDP nowcast will be updated for Q4. So far, and based on limited data, the nowcast for the Q4 GDP growth run rate has started at +3%. The nowcast for Q4 GDP growth is expected to be finalized at the end of Jan.
Global Momentum: PMIs and Global Manufacturing Wanes
As we close out 2025, this week’s US ISM and final S&P Global PMIs will provide some insight into year-end momentum. Early data suggests that while global manufacturing momentum remains in positive territory, the pace of expansion waned during the final two months of Q4. The focus now shifts to whether services can maintain the heavy lifting.
Australian Inflation Pulse and the RBA
Outside of the US, the Aus monthly CPI for Nov will be important. While the RBA remains focused on the quarterly CPI result for Q4 (due 28 Jan), the new monthly series may offer an important directional guide. The RBA is navigating concerns that inflation risks may be tilting to the upside; however, the recent minutes emphasized that it was still too early to determine whether this recent uptick in inflation would be persistent. Expectations for the policy rate have shifted to a hold in the near-term, but are now skewed towards potential hikes in the outlook (Source: ASX Rate Tracker at 2 Jan 26).
Policy Watch: A New Era at the Fed
Finally, the transition in FOMC leadership is front-of-mind as we move forward in 2026. The announcement of a new Federal Reserve Chair is imminent, and markets should be prepared for the potential shift in priorities, communication style, and culture that a change at the top may bring.
Key factors & events to watch this week: US non-farm payrolls, ISM PMIs, Aus CPI (monthly)
US labor market data for Dec
A quick recap: the Nov labor data showed some further softening in conditions, though the data was mixed. Some of the larger-than-expected increase in the unemployment rate could be attributed to temporary layoffs; however, slower employment growth was also a factor.
- Non-farm payroll growth is expected to remain modest at 57k in Dec, little changed from 64k in Nov.
- The unemployment rate is expected to edge back down to 4.5% after increasing notably in Nov to 4.6%.
- Participation is expected to be little changed at 62.5%, while average weekly hours worked is expected to be unchanged at 34.3.
- Job openings at the end of Nov are expected to be 7.65m, down slightly from 7.67m in Oct.
- The Challenger Job Cut Announcements survey for Dec is expected to show little change from the 71k announcements in Nov.
- Initial jobless claims for the week ending 3 Jan are expected to increase to 216k (from 199k in the week prior). Continuing claims have been moving lower in the weeks since the end of the US government shutdown, falling to 1.866m in the latest week ending 20 Dec.
US Q4 growth inputs: ISM PMIs Dec, housing data catch-up, trade
- The manufacturing and services PMIs are expected to be little changed in Dec at 48.3 and 52.3, respectively. Key indicators in focus will be the direction of demand/orders, employment, and prices.
- Housing data catch-up (Sept & Oct): New housing permits are expected to come in around 1.34m on an annualized basis in Oct – remaining subdued. New housing starts are also expected to remain subdued at 1.31m in Oct.
Aus monthly CPI for Nov
This is now the second release of the new, complete monthly CPI series. It’s still early in the transition from the quarterly CPI series to the monthly series, so the RBA will continue to use the quarterly report.
- The uptick in monthly headline inflation in Oct to +3.8% was notable, up from +3.6% in Sept. The core/trimmed mean also increased to +3.3% in Oct from +3.2% in Sept. We’ll be looking for the direction of movement in Nov to see how it impacts the quarterly outlook. The latest RBA forecast has Q4 trimmed mean CPI running at +3.3% over the year, which, so far, aligns with the monthly core inflation for Oct.
Euro area CPI – prelim for Dec
- Headline CPI for the Euro area is expected to remain unchanged at +2.1% in Dec, and core CPI is also expected to remain unchanged at +2.4% in Dec.
Canada labour market Dec
- The recent improvement in labour market conditions is expected to stall this month. Employment growth is expected to fall by -5k in Dec, after rising by +53.6k in Nov. The unemployment rate is expected to edge higher to 6.7% in Dec (from 6.5% in Nov).
S&P Global PMIs: The final composite and services PMIs for Dec will be released early this week.
This week, the US Treasury will auction and settle approx $467bn in ST Bills with a paydown of $25bn. Approx $13bn in ST Bills will mature on the Fed balance sheet and will be reinvested.
More detail (including a calendar of key data releases) is provided in the briefing document – download the pdf below:
Comments and feedback are welcome. Please email me at kim.mofardin@marscapitalpartners.net
Mars Market Update: January 5th, 2026 – Happy New Year!
