ab Global Research 2 January 2026 US Economics Weekly We expect a bumpy 2026 Economic Comment: another volatile year for macro In this week's economic comment we updated our outlook for the federal funds rate for 2026, pushing back expected rate cuts, based on our projection for the December employment report and the inflation data we expect to see in the first half of the year. We also take stock of the expansion's fragility. It's hard to get too bearish expecting a bumper tax refund season thanks to OBBBA ...

Core Insights - The Federal Reserve is facing a challenging 2026 with mixed economic signals and a leadership change as President Trump prepares to appoint a new Fed chair [1][9] - Analysts predict that the Fed may lower interest rates a couple of times due to signs of a weakening economy, particularly highlighted by the November jobs report [1][4] - The internal dynamics of the Federal Open Market Committee (FOMC) will play a crucial role in shaping interest rate decisions, with potential divisions among members [3][9] Economic Indicators - The labor market is showing signs of softening, with unemployment rising to 4.6% in November and only 64,000 jobs added [4] - Despite this, consumer spending and investments in artificial intelligence are contributing to overall GDP growth, which may mitigate risks to the labor market [4] - Economic data is expected to become less supportive of lower rates by mid-2026, complicating the Fed's decision-making process [4] Leadership Changes - Trump's nominee for Fed chair is expected to be finalized soon, with potential candidates including Fed Governor Chris Waller, former Fed Governor Kevin Warsh, and economist Kevin Hassett [6][7] - Betting markets suggest that Hassett is the most likely pick, raising concerns about his alignment with Trump's aggressive interest rate cut agenda [7] - The new Fed chair will need to navigate a divided committee, as past votes indicate challenges in achieving consensus on rate cuts [3][9] Federal Reserve Structure - The FOMC consists of 12 regional district heads who provide local perspectives, and their appointments have been secured for the next five years, enhancing the Fed's perceived independence [17][18] - The influence of the administration on the FOMC is expected to increase as Trump may have opportunities to appoint additional members to the Fed's Board of Governors [13][14] - Powell's future as Fed chair remains uncertain, with his term ending in May 2026, but he may choose to remain on the board to reinforce the Fed's independence [15][16]

Key Takeaways There's also the question of what will happen with current board member Stephen Miran, whose term ends in January 2026. Miran has consistently advocated for aggressive interest rate cuts during his term on the board. He is serving the remaining term of former Governor Adriana Kugler and could return to his role as chairman of the White House Council of Economic Advisers, which he left to take the short-term appointment as a Fed governor. Significant changes are anticipated for the Federal Rese ...

The record for 2025 is unambiguous. Trump has repeatedly called Powell a “loser” and labeled him with the moniker “Too Late” for supposedly failing to cut short-term interest rates early enough or deeply enough. Vice President J.D. Vance chimed in that it was “monetary malpractice” for the Fed to refuse to cut rates in the spring.And let us be worried about what 2026 holds, as Trump gains even more influence over the Fed. Powell’s term as Fed chair ends in May, and Trump is expected to nominate a loyalist a ...

In 2018, inflation began to rise, and the Fed started raising interest rates. The subsequent market downturn irked President Trump, who seemed to blame the 2018 stock market decline on the Fed raising the Federal Funds rate in order to tamp down inflationary pressures. In late 2018, just one year after Powell's nomination, he said, "I'm not even a little bit happy with my selection of Jay."Yet while Powell was initially nominated to the Chairmanship by President Trump, President Trump has been highly critic ...

Core Viewpoint - Gold prices have experienced a significant decline after a prolonged rally, with a notable selloff attributed to profit-taking by investors rather than macroeconomic or geopolitical factors [2][3]. Price Movement - Gold futures fell by $61.30, or 1.49%, to $4,053.10 per ounce, marking a two-day selloff after reaching an intraday record of $4,398 per ounce [1][2]. - The precious metal lost 5.74% on Tuesday, closing at $4,109.10, representing its worst performance since 2013 [2]. Market Analysis - Analysts from UBS indicated that the recent decline in gold prices is largely technical, driven by slowing price momentum and rising option volatility, leading speculative investors to take profits [3]. - Despite the recent pullback, gold prices remain up over 50% year-to-date and nearly 5% for the month, with underlying fundamentals such as inflation and political instability expected to persist [3][4]. Future Outlook - UBS analysts believe it is premature to adopt a negative outlook on gold, suggesting that the factors driving its price increases are likely to continue [4].

Core Insights - Concerns over inflation, deteriorating U.S. fiscal health, Federal Reserve independence, and geopolitical instability are prompting central banks to shift their focus back to gold, traditionally viewed as a safe asset [1][9] - Gold has recently surpassed the euro to become the second-largest global reserve asset after the U.S. dollar, marking a significant shift as it now represents a larger share of central banks' reserves than Treasuries for the first time since 1996 [2][9] - The last time gold held a greater share of global reserves than Treasuries was in 1996, a period characterized by aggressive gold sales by many European countries ahead of the euro's launch [3][6] Market Context - Gold prices experienced a significant decline to around $250 an ounce in August 1999, down 40% from early 1996, which led to the adoption of the "Washington Agreement" to cap central bank sales [6] - The late 1990s environment was not favorable for gold, marked by solid economic growth, low inflation, and a rare U.S. budget surplus [6] - The current global macro environment is markedly different, presenting conditions that are more conducive to gold investment, while Treasuries are facing relative struggles [7]

Core Insights - Gold is experiencing its largest weekly gain in five years, with prices reaching an all-time high near $4,380 an ounce, marking an increase of approximately 8% this week, the highest since March 2020 [1] - Silver has also reached new highs, with prices hitting nearly $54.50 an ounce, reflecting an increase of over 85% this year [3] Group 1: Market Drivers - Concerns over credit quality in the US and renewed trade tensions with China are driving investors towards precious metals as safe-haven assets [2] - Geopolitical risks, rising public debt, and threats to the Federal Reserve's independence are contributing to the increased demand for gold and silver [2] Group 2: Price Movements and Trends - Gold has surged more than 60% this year, supported by central bank purchases and inflows into exchange-traded funds, with traders anticipating at least one significant US rate cut by year-end [3] - The London silver market has tightened significantly, leading to a price increase above New York silver futures, with borrowing costs for silver sitting around 20% [4] Group 3: Supply and Demand Dynamics - Over the past week, over 15 million ounces of silver have been withdrawn from Comex warehouses in New York, with much of it likely heading to London to alleviate tightness in the market [5] - A notable outflow of 10 million ounces from silver-backed exchange-traded funds occurred on Thursday, contributing to the ongoing supply dynamics [5]

Economic Outlook - The US economy is expected to experience a modest reacceleration, supported by a strong equity market and significant investments in AI and data call centers [4][5]. - The economic data, excluding hiring metrics, has shown improvement recently, indicating a positive trend [4]. Government Shutdown Impact - A government shutdown could lead to the suspension of essential services and key economic data releases, which would create uncertainty in the markets [6][10]. - The potential impact on GDP is estimated to be a drag of one-tenth of one percent per week, manageable in the short term, but could increase significantly if the shutdown extends beyond 20 to 30 days [8][9]. - The timing of the shutdown is critical, particularly around October 12th to 18th, as it may affect the collection of important labor market data [11][12]. Federal Reserve and Monetary Policy - The independence of the Federal Reserve is crucial for maintaining market stability and preventing excessive volatility, especially in fixed income markets [33][34]. - Current discussions suggest that the Fed may be pressured to lower rates, which could pose risks for inflation in the near to medium term [35][36]. - There is a growing belief that the de facto inflation target may be moving towards 3%, reflecting current economic conditions [51][55]. Bond Market Insights - The term premium, which compensates investors for the uncertainty of future interest rates, is rising, indicating increased risk perception in the bond market [24][26]. - The bond market's response to inflation expectations suggests a disconnect between market pricing and public sentiment regarding long-term inflation risks [41][42]. AI and Investment Trends - There is a bullish outlook on AI, with expectations that it will enhance productivity and living standards over time, despite potential short-term market volatility [30][31]. - Major financial institutions are integrating AI into their investment strategies, indicating a significant shift in how investment decisions are made [30].

Government Shutdown Implications - Essential services such as military, law enforcement, and postal services will continue during a government shutdown, but affected workers will not receive paychecks [1][2] - Non-essential services, including national parks and Smithsonian museums, will close, leading to potential damages and trash accumulation [2][3] - Federal Medicare and Medicaid programs are mandatory spending and will not be impacted, while Social Security distributions will continue, though staffing and services may slow down [3][4] Market Reactions - Historically, stocks have shown indifference to government shutdowns, with the S&P 500 often rising rather than falling during such events [5] - A shutdown could delay key economic data releases, such as the jobs report and CPI report, which may affect market sentiment [5] Airline Industry Concerns - Airlines, particularly Breeze Airways, may face immediate operational challenges due to the shutdown, as air traffic controllers and TSA agents are government employees who would work without pay [5][34] - The potential for longer lines and closed checkpoints could disrupt travel and impact airline revenues [2][34] Political Dynamics - Both political parties may view a shutdown as an opportunity for political leverage, with Democrats needing to demonstrate resistance to the Trump administration and Republicans signaling their willingness to negotiate on issues like Obamacare premiums [25][26] - The political landscape is shifting, with factions within both parties potentially supporting a shutdown for various strategic reasons [30][31] Economic Impact Timeline - The initial effects of a shutdown may be minimal, but if it extends beyond a few days, significant economic repercussions could arise, particularly if it lasts for weeks [38] - The government typically catches up on funding after a short shutdown, but prolonged closures could lead to a real drag on the economy [38]