U.S. unemployment casts its shadow

Making sense of the forces driving global markets

By Jamie McGeever, Reuters Open Interest Markets Columnist 

Wall Street mostly fell on Tuesday - the Nasdaq bucked the trend and rose - while the dollar and Treasury yields slid after figures showed the U.S. unemployment rate in November rose to 4.6%, the highest in more than four years.  

More on that below. In my column today, I look at China's pledge to prioritize boosting domestic demand next year. One can't argue with the aim, but investors are skeptical Beijing will deliver the fiscal stimulus needed to make a real difference. 

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Tuesday's U.S. employment figures painted a pretty clear picture - the labor market continues to soften. But due to the government shutdown, data collection issues, and fog around immigration, it is unclear exactly how these numbers should be interpreted. 

Dovish policymakers have numbers to justify further easing, Fed hawks can reasonably argue persistent uncertainty around the data warrants holding off. Traders aren't fully pricing another rate cut until June. Will that be brought forward if unemployment gets closer to 5% in the coming months? 

The U.S. and European auto industries are turning less green. On Tuesday, the European Commission proposed dropping the EU's effective ban on new combustion-engine cars from 2035, which comes a day after Ford took a $19.5 billion writedown and axed several EV models.

Europe's move follows intense pressure by the continent's carmakers struggling to compete against Tesla and Chinese electric vehicle makers, while Ford's announcement was in response to the Trump administration's policies and weakening EV demand. The big winners in all this? China's auto industry. 

There have been several false dawns over the past four years, but a peace deal between Russia and Ukraine could be close at hand. Certainly, investors are beginning to price in what one might look like from a markets perspective.

European defense stocks slumped on Tuesday - Rheinmetall fell 4.5%, and the broader index fell 2%, dragging U.S. defense stocks down 0.8%. More importantly for the wider economy, oil is tumbling - down 3% on Tuesday to a 4-year low, and now down 22% from a year ago. That's a bit of welcome disinflationary relief. 

Chinese authorities last week pledged to prioritize domestic consumption in 2026, but these promises are already being met with skepticism that the massive fiscal support needed will actually be forthcoming – even as more dour economic data rolls in. 

The world's second-largest economy could very well grow by roughly 5% next year, in line with the government's recent targets, but that will probably be thanks to booming exports and a trade surplus exceeding $1 trillion - not domestic consumption.

At last week's Central Economic Work Conference (CEWC), a key gathering of Communist Party leaders to set the 2026 policy agenda, officials said they will take action to spur spending and fight deflation. However, they also indicated that there will be no "aggressive" fiscal easing next year, with authorities prepared to rely on existing support and "incremental" measures, noted economists at Societe Generale.

"Our concern is that policymakers are too complacent," SocGen economists wrote on Monday.

Barclays had a similar take. The bank's economists expect policy support next year to be "measured and reactive" rather than forceful and proactive. Authorities signaled this by dropping the word "unfavorable" from their description of the global environment, Barclays argued, and by committing to maintain only a "necessary" budget deficit.

Beijing is, therefore, likely to stick to an overall budget deficit target next year of around this year's record 4% of GDP. That's high for China, but likely to be insufficient. The International Monetary Fund last week said China will need to spend 5% of GDP to bring an end to the property crisis within three years – and that's before tackling other factors weighing on consumption.

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