Weekly global economic update

Week of December 22, 2025

• Chinese economy continues to show signs of weakness
• US job market data indicates weakness
• US retail sales data indicate weakness
• US inflation data offers little useful information
• Three major central banks decide on policy

Chinese economy continues to show signs of weakness

• The Chinese government recently released data for several indicators of economy activity, with the preponderance of data suggesting continued weakening of the Chinese economy, especially with respect to domestic demand. This is important given the current challenges to trade growth that China faces. A spokesman for the government said that “the economy still faces multiple challenges of external instability and uncertainty as well as insufficient effective domestic demand.” He said that boosting domestic demand is a priority of macroeconomic policy. Yet despite more aggressive fiscal and monetary policy over the past year, domestic demand has remained dormant. Let’s look at the details.

The most onerous indicator was fixed asset investment. In the first 11 months of 2025, it fell 2.6% from the previous year, marking the weakest performance since June 2020. In large part, the weakness was driven by an accelerated decline in property investment, which declined 15.9% from a year earlier. This suggests that the troubles in the property market are worsening. Until recently, the weakness in fixed asset investment was mainly due to the decline in property investment. That is no longer true. When property is excluded, investment rose only 0.8% from a year earlier. This included a 1.1% drop in infrastructure investment and a very modest 1.9% increase in manufacturing investment.

The increasing decline in property investment comes as prices of new homes fall further. In November, the price of new homes in China’s 70 largest cities was down 2.4% from a year earlier, the sharpest slowdown since August. Prices were down 2.1% in Beijing, 5.1% in Shanghai, 4.3% in Guangzhou, and 3.7% in Shenzhen. This trend persists despite government efforts to stimulate activity. This has included cutting mortgage interest rates and offering tax relief and subsidies to property developers.

The decline in property values has reduced household wealth and contributed to subdued consumer spending. The government reported that retail sales rose a very modest 1.3% increase in retail sales in November versus a year earlier. This was the slowest increase since December 2022. This was partly due to the end of government subsidies for appliance purchases. Sales of appliances and audio-visual equipment fell 19.4% from a year earlier. In addition, sales of automobiles fell 8.3%. On the other hand, sales of communications equipment rose a strong 20.6%. Overall, however, consumer engagement remains modest. This is likely a challenge for the government, which is attempting to boost domestic demand.

Finally, the Chinese government reported that industrial production was up 4.8% in November versus a year earlier, the slowest growth since August 2024. The manufacturing component was up 4.6% from a year earlier, slower than the 4.9% growth clocked in October. Within manufacturing, 31 of 40 industries experienced growth in November. This included automotive (up 11.9%), computers and communication (up 9.2%), and railway and shipbuilding (up 11.9%). The continued growth of automotive production, along with continued declining sales of automobiles, implies that exports are strong. If not, then there could be excess capacity and declining prices.

Given US tariffs and ongoing trade tensions with other countries, China will need to accelerate domestic demand for growth to remain stable. Current efforts to boost domestic demand have so far been inadequate. One problem might be that, when consumers are given incentives to spend more on a particular category, they wind up spending less on other categories. This suggests the need for structural reforms meant to reduce consumer saving. Indeed, the International Monetary Fund (IMF) recently urged China to accelerate structural reforms. Specifically, the IMF suggested that China take steps to resolve local government debt problems as well as troubles in the property market. In addition, the IMF suggested social reforms meant to quell household savings.

US job market data indicates weakness

• Since April, 119,000 new jobs have been created in the United States. That is 17,000 jobs per month. This comes from the recent US government report on the job market. The headlines said that 64,000 jobs were created in November, which is not a bad number. Yet the revised data for recent months indicate that job growth has slowed considerably. For the Federal Reserve, which is tasked by the US Congress with minimizing inflation and maximizing employment, this data may provide justification for easing monetary policy. On the other hand, as Fed Chair Powell has suggested, the weakness of job growth likely has much to do with the drastic decline in net immigration. If so, then the shift in job growth simply reflects the impact of changing demographics on the supply of labor and doesn’t necessarily imply economic weakness. However, a rise in the unemployment rate and a deceleration of wage growth suggest otherwise. In any event, let’s look at the numbers.

The US government produces a monthly report on the job market that is composed of the results of two surveys: one is a survey of households, the other a survey of establishments. The establishment survey found that, in November, 64,000 new jobs were created. This followed a decline in employment of 105,000 in October. In three of the past seven months, employment has declined.

Of the 64,000 jobs created in November, 28,000 were in construction. Of that, more than 23,000 were involved in non-residential construction. This might have to do with the rolling out of data centers. Meanwhile, employment in manufacturing declined. In addition, employment declined in wholesale trade as well as transportation and warehousing. It also declined in the information sector, the financial services sector, the leisure and hospitality sector, and the government sector. Notably, employment increased by 64,000 in the health care and social assistance sector, thereby accounting for all the job growth in November. This concentration of job growth suggests significant weakness in the private sector job market.

Also, the establishment survey found that average hourly earnings of workers were up 3.5% in November versus a year earlier. That is the smallest increase since May 2021. This is happening even though inflation is accelerating modestly. That means that real (inflation-adjusted) wage growth is declining. It also suggests a softness in the demand for labor. That, in turn, would be a key consideration for the Federal Reserve. For the Fed, the challenge is that this weakening of the job market is happening even as inflation worsens. Fed Chair Powell has suggested that tariff-related inflation will be temporary. Hence, the decision to cut the benchmark interest rate in the last several months.

Meanwhile, the separate survey of households, which includes data on self-employment, found that the number of people participating in the labor force grew by 323,000 in the past two months. Yet employment grew by only 96,000. The result was that the unemployment rate increased from 4.4% in September to 4.6% in November (data for October was not available). The 4.6% rate is the highest since September 2021. As recently as June the unemployment rate was 4.1%. This increase suggests softer labor demand and offers justification for a tightening of monetary policy.

In response to the jobs report, yields fell modestly for both short-term and long-term bonds. US equity prices fell as well. Investors appeared to interpret the report as evidence of economic weakness, thereby boosting the likelihood of further Fed rate cuts. Indeed, futures markets’ implied probability of multiple rate cuts in 2026 increased slightly on the day of the report.

US retail sales data indicate weakness

• Retail sales in the United States did not increase from September to October, according to the latest government report. The government is still catching up from the disruption caused by the government shutdown. Normally, by now we would be awaiting the report on retail sales for November. Nevertheless, the latest data is helpful for understanding the trajectory of the US economy. Let’s look at the data.

In October, US retail sales (not adjusted for inflation) were unchanged from September and rose 3.5% from a year earlier. This was the weakest performance since May when sales declined. Notably, retail sales at motor vehicle and parts dealers declined 1.6% from the previous month. Excluding the impact of automotive, retail sales rose 0.4% from the previous month. Meanwhile, sales declined at home improvement stores, drug stores, gasoline stations, and restaurants. Sales were up strongly at clothing stores, department stores, and non-store retailers.

The weakness in consumer spending at retail establishments likely has several explanations. First, job growth has declined while job availability is less than previously. Second, wages, while still rising faster than inflation, are growing more slowly than previously. Third, there is increasing financial stress for many households as evidenced by the rise in delinquencies on credit card and automotive debt. Finally, surveys show that consumer confidence is historically low, thereby having a negative impact on the willingness of consumers to engage in discretionary spending.

US inflation data offers little useful information

• Inflation eased substantially in November, according to the latest release of the government’s data. Yet there is good reason to interpret these numbers with caution. There was no inflation report for October due to the government shutdown. As such, the government did not have numbers for October on which to base changes in November. The government most likely kept the October numbers unchanged from September, which could have distorted the November numbers making them appear lower than is probably the case. In the next month, this process may reverse, potentially resulting in higher-than-normal inflation. After that, we can expect the inflation numbers to revert to reality, thereby providing investors and Fed policymakers with valid data on which to base decisions.

In any event, here is what the government reported. Consumer prices were up 2.7% in November versus a year earlier, down sharply from the 3% recorded for September. There was no data reported on the change from October to November. When volatile food and energy prices are excluded, core prices rose 2.6% in November from a year earlier, down sharply from 3% in September.

The government’s 38-page report detailing the change in consumer prices in hundreds of categories has many blank spaces, something I’ve never seen before. This can be attributed to the government shutdown. Meanwhile, investor reaction was muted possibly because investors viewed this data as incomplete or less reliable than usual. More importantly, this report did not offer the Fed much actionable information. And it is likely that the next report on December prices will also be of limited usefulness. Thus, the Fed may have to wait until the January data before it can make reasonable inferences about the direction of inflation. As such, its earlier inclination to hold rates steady for a while might make sense for now.

Three major central banks decide on policy

• The European Central Bank’s (ECB’s) policy committee expects inflation to continue decelerating toward the ECB’s 2% target. Moreover, it reported that it now expects economic growth in the coming year to be stronger than previously anticipated. As such, it recently chose to leave its three benchmark interest rates unchanged.

In her press conference, ECB President Christine Lagarde said that “the economy has been resilient.” She pointed to healthy growth of consumer spending, business investment, and exports. In addition, she said that growth was primarily driven by services, “especially in the information and communications sectors.” On the other hand, industry and construction “remained flat.” She called the labor market “robust,” but noted that the job vacancy rate has fallen to the lowest level since the pandemic. That suggests less wage pressure going forward, which would be favorable for inflation. Finally, she said that government investment in infrastructure and defense should boost growth but that trade tensions will likely “remain a drag on growth” in the coming year.

The decision by the ECB was expected by many investors. As such, there was no significant movement in asset prices or in the value of the euro. Futures markets now expect the ECB to leave rates steady in 2026 with a small probability that it will hike rates later in the year, depending on what happens to inflation and employment. Meanwhile, central banks in Norway, Sweden, and the Czech Republic kept their policy rates unchanged today.

• As expected, the Bank of England (BOE) cut its benchmark interest rate recently. The vote was close, however. The committee voted five to four to cut the rate, with four members voting to keep the rate unchanged. Unlike the US Fed, it is common for committee members at the BOE to vote differently. This kind of open debate is considered healthy, and, in contrast to the Fed, there tends to be less deference to the central bank’s leader.

• In any event, BOE Governor Andrew Bailey said that “we’ve passed the recent peak in inflation, and it continues to fall, so we have cut interest rates for the sixth time to 3.75% today. We still think rates are on a gradual path downward. But with every cut we make, how much further we go becomes a closer call.” Indeed, it was a close call. Plus, going forward the BOE will likely look for evidence that inflation remains subdued before cutting further.

Going forward, the BOE will have to navigate conflicting signals. On the one hand, inflation remains too high, although it shows signs of decelerating. On the other hand, the economy remains weak, although the labor market remains tight. This combination of factors suggests a likelihood of a gradual and cautious easing of policy in the months to come.

• An interesting combination of events took place in Japan last week. The government reported that inflation, while steady, remains higher than the Bank of Japan’s (BOJ’s) target. Because of that, and as expected, the BOJ boosted the benchmark interest rate to the highest level in 30 years. This, in turn, led the yield on the government’s 10-year bond to hit the highest level since 1999. The expansive fiscal plans of the government also contributed to the high bond yield. And yet the value of the yen depreciated against the US dollar, because the BOJ did not signal an intention to continue raising rates in 2026. Also, a combination of higher bond yields and a cheaper yen suggests that the yen carry trade is over. Let’s look at the details.

The Japanese government reported that consumer prices rose 2.9% in November versus a year earlier, lower than the 3% recorded in October and the same as in September. Meanwhile, when food and energy prices are excluded, so-called core-core inflation was 3% in November, lower than in October and the same as in September.

Although inflation is neither accelerating, nor decelerating, the BOJ, continues to focus on its 2% target. Consequently, the BOJ raised the benchmark interest rate by 25 basis points to 0.75%, the highest since 1995. As such, this could be the end of the era of deflationary pressure and zero interest rates.

Meanwhile, the government of Prime Minister Sanae Takaichi has proposed a budget for the coming fiscal year that will boost spending. This comes following passage of a supplemental budget earlier this week. It was the largest supplemental budget since the pandemic. This significant boost to spending, funded by issuance of debt, is meant to stimulate economic activity. The policy involves additional spending to fund 17 priority areas including semiconductors and AI. In addition, it involves funding free school lunches, repealing a gasoline tax surcharge, and additional defense spending. But some investors are becoming concerned that, in a country that already has the highest debt-to-GDP ratio of any major developed economy, additional debt issuance could be problematic. Hence, bond yields have risen.

As for the BOJ, investors likely expected it to signal further rate hikes in the coming year. It did this, but hesitantly. It reported that, if economic growth and inflation behave as expected, the BOJ will “continue to raise the policy interest rate and adjust the degree of monetary accommodation.” Perhaps it was the conditional nature of that statement that influenced investor sentiment as reflected in the movement of the yen, which declined in value, a result not typically seen after a tightening of monetary policy.

Week of December 15, 2025

• US Federal Reserve acts and offers signals about the future
• Chinese exports continue to grow while tensions rise
• Mexico restricts trade with China

US Federal Reserve acts and offers signals about the future

• As expected, the Federal Reserve cut the benchmark interest rate by 25 basis points—the third such cut this year. Yet nothing else that happened was expected. First, the decision was not unanimous; rather, three of the 12 members of the Federal Open Market Committee (FOMC), which makes policy, dissented. There were two members who wanted to keep the rate unchanged, and one wanting to cut the rate by 50 basis points. There had not been three dissents in six years. Moreover, although the Fed signaled the possibility of another rate cut in 2026, given the president is expected to appoint a new Fed chair in 2026, this is uncertain. It is likely that the new appointee may favor a more rapid easing of monetary policy. Then the question will be whether the new chair can convince the other members of the FOMC to shift policy.

The Fed’s decision to cut the rate to between 3.5% and 3.75% was based on the view that the economy will see stronger grow in 2026 than previously expected and that inflation will be lower. Specifically, FOMC members offered their forecasts for growth and inflation. The median expected economic growth in 2026 stands at 2.3%, up from 1.8% in September. The median forecast for PCE-deflator inflation in 2026 is 2.4%, down from 2.6% in September.  

In his press conference today, Fed Chair Jerome Powell said that “conditions in the labor market appear to be gradually cooling, and inflation remains somewhat elevated.” In other words, there is reason to be concerned about both employment and inflation. Yet, given that inflation is now expected to be a bit lower than previously anticipated, and given concern about job market conditions, the FOMC chose to cut the benchmark rate.  On the other hand, the median forecast is that the Fed will only cut the rate once in 2026, suggesting that the committee remains concerned about inflation. 

In his press conference, Powell noted that consumer spending and business investment continue to grow at a healthy pace. On the other hand, he pointed to weakness in the housing market as concerning. Powell also noted a sharp slowdown in employment growth. He said that “a good part of the slowing likely reflects a decline in the growth of the labor force, due to lower immigration and labor force participation, though labor demand has clearly softened as well. In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen in recent months.” 

On inflation, Powell said that the Fed did not have the necessary and up-to-date information due to the government shutdown. Still, available data indicated a largely tariff-driven acceleration in inflation. Yet tariffs mainly influence goods prices while Powell noted a deceleration in services inflation. That, in turn, might reflect the weakening labor market, especially as many services are labor-intensive. 

Powell summarized the situation by saying that “risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation. There is no risk-free path for policy as we navigate this tension between our employment and inflation goals. A reasonable base case is that the effects of tariffs on inflation will be relatively short-lived—effectively a one-time shift in the price level. Our obligation is to make sure that a one-time increase in the price level does not become an ongoing inflation problem. But with downside risks to employment having risen in recent months, the balance of risks has shifted.” 

Going forward, the Fed indicated that future decisions will depend on data. Perhaps the data of most interest will be the degree to which companies pass on the cost of tariffs to their customers. If they pass on the lion’s share of their increased costs, then inflation will rise significantly. If so, it will justify the Fed’s inclination to keep rates stable. On the other hand, a new chair will likely take a different view, given what we know about the US administration’s views on monetary policy. Historically, the FOMC has given considerable deference to the views of the chair. Yet if a new chair takes a radically different view, there could wind up being more division within the Fed. That, in turn, would create more uncertainty for investors trying to infer the future trajectory of policy. 

Aside from cutting the benchmark interest rate, there are some other interesting aspects of Fed policy and organization worth noting:

• First, in addition to the interest rate cut, the Fed announced that it will engage in US$40 billion in monthly purchases of short-term Treasury bonds. Previously, the Fed had been selling assets as part of an effort to reduce the size of its balance sheet. This quantitative tightening, as it came to be known, was effectively a tightening of monetary policy. Now that the Fed has shifted to easing policy, it made no sense to sell assets. The end of asset sales had been anticipated.

However, the large size of the asset purchases on which the Fed is now embarking was surprising to some observers. Still, Chair Powell said that this decision is not part of the monetary policy mix. Rather, it is meant to stabilize the country’s financial plumbing, especially given recent volatility in short-term funding markets.  It will also help the Treasury to fund its massive sale of bonds to cover the budget deficit.

• Second, although three members of the 12-member Federal Open Market Committee dissented on the decision to cut the benchmark interest rate by 25 basis points, there were four nonvoting regional Fed bank presidents who voted to keep rates unchanged. The FOMC comprises seven members of the Federal Reserve Board and five of the 12 regional Federal Reserve Bank presidents. The five always include the New York Fed president and four rotating presidents. The eight regional Fed presidents currently not serving on the FOMC can still express their views. And, in this case, four of them said no to an interest rate cut. This is significant because, over a short period of time, these presidents will return to the committee. It suggests the possibility of greater division among Fed policymakers going forward—especially if the president appoints a Fed chair next year who favors rapid easing of monetary policy.

Meanwhile, the US administration has indicated a preference for reducing the power of the regional Fed bank presidents. Yet, despite that, the seven-member board voted unanimously to approve the reappointment of 11 of the regional Fed bank presidents, with new terms beginning in March 2026. The regional Fed bank presidents are appointed by the commercial banks that are members of the Fed. The decision to approve the reappointment appears to reinforce the Fed’s independence but has likely set the stage for more division in the year to come. 

Finally, in his press conference after the Fed’s announcement, Chair Powell said that the professional staff at the Fed believes that the government’s employment numbers are likely overstated. That is, the official numbers indicate faster employment growth than is actually taking place. Specifically, Powell said that, although the official data indicates recent average job growth of 40,000 jobs per month, the true number could be a loss of 20,000 jobs per month. 

The reason for the difference has to do with the method used by the US Bureau of Labor Statistics (BLS). Given its lack of visibility regarding the creation or destruction of businesses, it guesses the number of jobs created or destroyed, based on a statistical model that often overestimates job creation, thereby leading to periodic downward revisions. The BLS plans to change the method in February, which could lead to more accurate numbers. 

The significance of Powell’s remarks is that, if the Fed believes that job growth has been far worse than reported, it makes sense for the Fed to ease monetary policy.

Chinese exports continue to grow while tensions rise

• China’s exports rebounded in November while exports to the United States continued to decline sharply in the face of tariffs. Meanwhile, China’s trade surplus surged to over US$1 trillion. Other countries are complaining about China’s trade surplus, mainly because their industries feel threatened by intense competition from China’s increasingly competitive exports. Yet the Chinese trade surplus principally reflects China’s excess savings, which is funneled into foreign investment. Let’s look at the details:

In November, China’s exports (denominated in US dollars) were up 5.9% from a year earlier, hitting the highest level in eleven months. Exports were up 4.3% to Japan, up 12.8% to Taiwan, up 35.8% to Australia, up 14.8% to the European Union, and up 8.2% to ASEAN (Southeast Asia). Meanwhile, exports to the United States were down 28.6% from a year earlier. Although the United States and China have reached a temporary agreement on trade, the deal leaves in place very high US tariffs on imports from China. 

China’s trade with Southeast Asia has been expanding for several years and continued to grow rapidly in 2025. For example, Chinese exports to the six largest economies in Southeast Asia were up 23.5% in the first nine months of 2025 versus a year earlier.  Ever since the United States raised tariffs on China during the first Trump administration, there has been a shift in exports away from the United States and toward Southeast Asia. This has often involved sending components to Southeast Asia to be assembled into final goods for export to the United States. This year that process accelerated, as the United States imposed steeper tariffs on Chinese imports. The United States, however, has warned against transshipment of goods from China through Southeast Asia to the United States. It has threatened steeper tariffs on goods deemed to have been transshipped. Moreover, this year, the United States imposed steep tariffs on Southeast Asian countries as well. Still, US imports from Vietnam, for example, were up 28% from December to August.

Also, China’s strong exports to the European Union have drawn criticism from some European leaders concerned about China’s ability to compete vigorously in such categories as automobiles and capital goods. This comes as Europe faces a trade war with the United States that involves a significant increase in US tariffs on European goods. Germany, which used to have a trade surplus with China in capital goods, now has a deficit as China has boosted its competitiveness in this area. In November, Chinese automobile exports were up 16.7% from a year earlier. The result is growing support in Europe for restrictions on Chinese imports.

Meanwhile, China’s imports grew modestly in November, up 1.9% from a year earlier.  Imports from the United States were down 13.2%, likely because of declining imports of inputs needed to produce exports to the country. At the same time, imports were down modestly from ASEAN and the European Union. Commodity imports were down sharply while imports of more advanced products were up strongly. For example, coal imports were down 33.5% in November from a year earlier while refined oil imports were down 19.3%; natural gas imports were down 14.3%. In part, this reflected lower prices. On the other hand, imports of automatic data equipment were up 18.2% while imports of high-tech products were up 8.8%. The latter two categories contributed to China’s growing production of high-tech products.

The rising Chinese trade surplus—which has generated criticism by many of China’s trading partners—largely reflects increasing Chinese investment overseas. Essentially, China is a high-saving country, saving more than it invests and sending the surplus overseas. The trade surplus is the counterpart to this overseas investment. That is, when China exports more than it imports, it accumulates foreign currency that can only be invested overseas. If China reduced its savings, it would import more and have a lower trade surplus. The result would be less net investment overseas.

The Chinese government is evidently aware of this process and is likely concerned about foreign governments potentially imposing restrictions on Chinese trade. As such, China’s president recently said that “it is essential to adhere to domestic demand as the main driver, building a strong domestic market.” Among the ways to make this happen are appreciation of the renminbi, which would reduce the cost of imports, fiscal support for households, and structural reforms meant to encourage more spending and less saving.  For example, improving the social safety net could have this effect. China has taken some steps in this direction. At the same time, it continues to promote exports of high value–added goods, in which Chinese competitiveness is growing. This includes information technology and clean-energy products.

Mexico restricts trade with China

• Mexico is keen to maintain a friendly economic relationship with the United States, especially as negotiations to renew the free-trade agreement between the two countries begin. As such, it is working hard to avoid the possibility of Chinese goods being transshipped from China to the United States through Mexico. Thus, Mexico has announced tariffs of up to 50% on imports of Chinese automobiles and other goods.  Moreover, to avoid the appearance that China is being singled out, Mexico also implemented tariffs on imports from other countries with which Mexico does not have a trade agreement. In all, imports of 1,400 products will face higher tariffs. 

Mexico is the biggest trading partner of the United States. But Mexico has also had a growing relationship with China, with Chinese imports hitting US$130 billion last year—up 75% since 2020. China is now Mexico’s second largest trading partner. In fact, in the first half of 2025, Mexico was the biggest purchaser of automobiles exported from China.  

Now, with steeper tariffs, it is likely that Mexican exports to China may decline significantly. Mexican consumers are expected to face higher prices for cars, some appliances, and other goods. Yet Mexico evidently wants to demonstrate to the United States that it is trying to avoid transshipment. Still, by including tariffs on other trading partners for whom there have been no complaints about unfair trade practices (such as South Korea and Brazil), Mexico may risk undermining trading relations with those countries.

Under the terms of the United States–Mexico–Canada (USMCA) agreement—the free-trade agreement between the three countries that succeeded NAFTA, negotiated by the first Trump administration—the deal will be reviewed in 2026 and could wind up significantly different. Mexico hopes to mostly retain free access to the US market but might worry that the United States may seek to reduce the trading relationship. Currently, about 90% of Mexican exports to the United States are tariff-free. Yet goods not covered by the USMCA are now subject to a 25% tariff. Meanwhile, there has been talk about the United States ditching the USMCA and negotiating separate bilateral trade deals with Mexico and Canada.

Not surprisingly, China is not pleased with Mexico’s actions. The government urged Mexico to “correct its erroneous practices of unilateralism and protectionism as soon as possible.” In addition, the Chinese government said that Mexico is “under coercion to constrain China.” Regardless, it looks like this year’s major shift in US trade policy is already having a spillover impact on other countries’ trading policies.

Week of December 8, 2025

• Some comments on the ‘safe haven’ role of the US dollar
• Potential global impact of Japanese monetary policy
• More signs of US job market weakness
• The fiscal impact of US tariffs
• Eurozone inflation accelerates slightly

Some comments on the ‘safe haven’ role of the US dollar

• In early April, there was a narrative from some economists and investors around a “capital flight” from the United States, following the US administration’s announcement of steep tariffs.  Immediately after the announcement, US bond yields increased while the value of the US dollar declined. Normally, a relative rise in US bond yields would have pushed up the value of the dollar.  Instead, there was investor concern about the sharp shift of US trade policy toward tariffs, the uncertainty about the future of the policy, and concerns about the trajectory of US fiscal policy.  Many investors became wary of holding assets denominated in US dollars and started to shift toward other assets such as the Japanese yen, the Swiss franc, and gold.

However, in the months that followed the April tariff announcement, investors returned to dollar-based assets, largely because of the attractiveness of US equities and expectations of further easing of US monetary policy. As a result, bond yields declined from their peak, while the value of the US dollar rebounded slightly. This mostly reflected enthusiasm regarding investment in artificial intelligence. Still, many foreign investors in US equities reportedly engaged in hedging strategies to manage currency risk.

On the other hand, a new report from the Bank for International Settlements (BIS)—the banker to the world’s central banks—suggests that the traditional safe-asset role of the US dollar has diminished compared to other favorable assets. The BIS noted that “historically, as safe-haven assets, US Treasuries tended to exhibit positive correlations with other safe assets—for example, bonds issued by highly rated sovereigns or gold—as well as with gauges of uncertainty and risk appetite such as the VIX [volatility index]. However, these correlations have approached zero since April, possibly indicating a weakening of US Treasuries’ safe-haven properties. By contrast, the prices in other core bond markets have not been subject to similar shifts.”

If this analysis is correct, it bodes poorly for the US government’s ability to issue large amounts of debt with impunity. Until now, investors tended to dismiss concerns about the burgeoning debt of the US government, confident that the safe-haven properties of US Treasuries would offset the impact of excessive debt. That might no longer be the case. Going forward, US bond yields could rise sharply if fiscal concerns intensify.

Still, use of the US dollar in international transactions is now higher than during the past quarter-century, accounting for almost half of all transactions. And despite the increased role of the Chinese renminbi, it still only accounts for 3.2% of all transactions. Thus, while investor preferences may be shifting, the US dollar’s central position in global transactions does not appear to be under threat.

Potential global impact of Japanese monetary policy

• As investors await a decision from the Bank of Japan (BOJ) to raise the benchmark interest rate, they are concerned that the yen-carry trade could shut down, thereby disrupting global financial markets.  The BOJ has already indicated a likelihood of raising the benchmark interest rate, given concerns about persistent inflation. Futures markets are now pricing a two-thirds probability that the BOJ will raise the rate at its next policy committee meeting later this month.

For a very long time, the benchmark interest rate was very low, even negative for a while. This fact encouraged investors to borrow cheaply in yen and purchase high-yielding assets in other currencies.  This was known as the yen-carry trade. It was very profitable, so long as the value of the yen did not rise sharply—and it didn’t.

Yet now, in anticipation of higher short-term rates, Japanese bond yields have risen sharply, offering investors better returns on yen-denominated assets. This, in turn, has contributed to higher bond yields in the United States and Germany as Japanese demand for foreign bonds has diminished. As such, a further tightening of Japanese monetary policy could have global implications.

Of particular concern would be emerging market (EM) assets. The yen-carry trade partly involved investors borrowing in yen to purchase EM assets. This, in turn, put downward pressure on EM bond yields. If the carry trade shuts down or diminishes, EM governments could face higher borrowing costs.

More signs of US job market weakness

• Because of the recent US government shutdown, the next official report on labor market conditions due in November will not be published until Dec. 16, 2025, after the Federal Reserve’s policy committee meets to set interest rates. Thus, Fed leadership will have to rely on other pieces of information to assess the state of the job market. One such piece is the estimate of private sector employment published by ADP, a payroll-processing company. The ADP report is often, but not always, a good predictor of official numbers.

Last week, ADP released its estimate for November. It said that the number of private sector jobs fell by 32,000 from October to November—the biggest decline since March 2023. Moreover, ADP estimates that private sector employment fell in four of the last six months. This report led investors to boost their expectations of a rate cut from the Fed this month. For futures markets, the implied probability of a rate cut in December increased from 88% on the day the data was published to 89% the day after. As such, the yield on the government’s two-year bond fell.

The chief economist at ADP commented that “Hiring has been choppy of late as employers weather cautious consumers and an uncertain macroeconomic environment. And while November’s slowdown was broad-based, it was led by a pullback among small businesses.” Indeed, numbers show that, in November, employment fell sharply for establishments with fewer than 50 employees. This was partly offset by strong growth in establishments with 50 or more employees.

Meanwhile, ADP estimated that employment fell sharply in manufacturing, information, and professional and business services. On the other hand, employment grew at a healthy pace in education and health services as well as in leisure and hospitality. This is similar to the pattern seen in the government’s jobs report for October.

Overall, this report is consistent with the view that the US job market has softened. Yet it is unclear if that is only due to weak demand. Rather, the shift in immigration policy has slowed labor force growth. Consequently, it is likely that the job growth slowdown partly reflects both weakening supply and demand in the labor market. Unless there is an offsetting acceleration in labor productivity, slower employment growth will result in slower economic growth.

The fiscal impact of US tariffs

• How much revenue has the US government collected since tariffs were substantially increased? And how does the revenue compare with the value of imports? These are important questions and, thankfully, we have answers from a Peterson Institute analysis.

First, the analysis says that the US government generated US$149 billion in tariff revenue from January through August of this year—a significant increase from the previous year when tariffs rates were very low. In the same period, the federal government’s budget deficit was US$1,865 billion.  This means that tariffs had only a modest impact on the budget deficit.

At a recent meeting in Paris on the sidelines of the OECD’s annual meeting, I heard the administration’s interim chairman of the Council of Economic Advisors, Pierre Yared, state that tariff revenue is reducing the budget deficit, thereby removing any concern about the fiscal effects of the One Big Beautiful Bill. Yet, if tariffs lead to a further reduction in imports, revenue will decline, reducing the fiscal impact. The administration has also suggested that tariffs can lead to reshoring of manufacturing, which implies a reduction in imports of manufactured goods. That, in turn, suggests a decline in tariff revenue.

Meanwhile, the Peterson Institute also states that tariff revenue is about 10.2% of the value of imported goods. This is lower than the 17% tariff rate estimated by the Yale Budget Lab. But the Peterson Institutes also accounts for exemptions, exclusions, delays, and other offsets. Still, this effective tariff rate is historically high. Moreover, it is having variable effects depending on the country from which imports arrive, and the types of products imported.

The report says that, in August, tariff revenue was 16% of the value of imported consumer goods.  The figure was 11.5% for industrial intermediate goods, 6.7% for capital goods, and 1.3% for raw materials. However, the report notes that, in August, most companies had not yet passed on most of the cost of tariffs to their customers. Thus, the impact on consumer prices was modest. In part, this is because companies are not marking up old inventory. However, it is likely that there will be greater passing through of costs in the months to come, thereby leading to higher inflation.

Also, the report found that the effective tariff rate in August was 37.1% for imports from China, 16.4% for Japan, 9.2% for the European Union, 4.7% for Mexico, and 3.7% for Canada. The very high tariff on Chinese imports is already leading to a substantial diversion of trade away from China.  The low rates for Mexico and Canada reflect the exemption for goods covered by the free trade agreement between the United States, Mexico, and Canada, which will be renegotiated in 2026.

Eurozone inflation accelerates slightly

• Inflation in the Eurozone accelerated slightly in November, although it remains low and close to the target of the European Central Bank (ECB). The European Union reports that, in November, consumer prices in the Eurozone were up 2.2% from a year earlier. This is up from 2.1% in October.  On the other hand, the European Union reports that prices fell 0.3% from October to November.

When volatile food and energy prices are excluded, core prices were up 2.4% in November from a year earlier. This was the same as in September and October. However, core prices fell 0.5% from October to November, suggesting that inflation is starting to weaken.

Most notable was the acceleration in services inflation. In November, the price of services was up 3.5% from a year earlier—the highest since April 2025. However, service prices were down 0.8% from October to November. Services inflation is important because services represent the largest share of consumer spending. Moreover, services tend to be labor-intensive and are sensitive to labor market conditions.

The fact that annual services inflation accelerated in November will likely be of concern to the European Central Bank (ECB). The ECB policy committee will meet on Dec. 18, 2025. ECB President Lagarde recently stated that the rates “we settled on at the last meetings are, in my view, set correctly.” Meanwhile, futures markets signaled a probability of 30% for a rate cut by June; in other words, investors believe that the ECB likely has no reason to ease policy further, especially if inflationary pressures remain.

By country, inflation in November was 2.6% in Germany, 0.8% in France, 1.1% in Italy, 3.1% in Spain, 2.6% in the Netherlands, and 2.6% in Belgium.