Top of the Morning: December Jobs Report & U.S. macro update

Hi, everyone. Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel.

For the purposes of our conversation today, we will focus in on a U.S. macroeconomic update, including some near-term thoughts on the recently released December jobs report, which came out just about an hour ago. So, with that, joining me here, his first appearance on Top of the Morning for 2026. I'm glad to welcome back asset allocation strategist for the Americas, Paul Schau.

With that, Paul, good morning to you. Welcome back, and thank you for spending some time today with our listeners and their clients. Good morning, Dan.

Nice to be here. Happy New Year. Hot off the press, we do have the December jobs numbers came out this morning at 8.30 So, I'm curious to hear about your initial thoughts, reflections on the data.

And further, can you provide our listeners with a bit of a health check on the state of the U.S. labor market? Yeah, I think it's important to give a certain context to the jobs numbers that we got out today. So, if we take a look at 2025 as a whole, we saw nonfarm payrolls and other metrics at the labor market deteriorate, a much cooler labor market than expected.

You just can see that in some of the headlines. But for recession watchers, it wasn't too concerning yet because the unemployment rate, while edging higher, still remained quite stable and amongst historical lows. And more importantly, initial jobless claims, which is a measure of newly unemployed, remained actually quite stable.

We did have the government shutdown at the end of 2025, which delayed a lot of jobs data. So, there were a lot of question marks about how the labor market would respond to the building effects of tariffs, as well as the broader and broader adoption of AI. So, I think there was a lot of attention paid on this labor market report.

And so, for December, closing out the year, we just got the jobs numbers. And while jobs did gain 50,000, it was less than the 70,000 expected by the consensus on Bloomberg. And we actually had the prior numbers also revised slightly lower.

And we take the three-month moving average of private payrolls, which tend to be a little more stable since it tends to be volatility in government numbers. It slowed to around below 30,000, which is something that I think the Fed will be watching out for. But sort of adding to the confusion, so we have nonfarm payrolls growing at a slower rate than expected.

But the unemployment rate, the headline unemployment rate, ticked down, which was quite surprising, to 4.4% from the prior headline, which was also revised down to 4.6%. That's probably something that a lot of economists did not expect. And the average hourly earnings was a little better than expected, rising from 3.5% in November to 3.8% year-on-year in December.

So, overall, I'd say a mixed bag for this labor market report that we just got. Broadening out our conversation a bit, Paul, aside from the labor market, can you provide our listeners, our clients, with a refresher on CIOs' expectations for U.S. economic conditions and growth in 2026? Yes.

I think, looking back at last year, we did expect somewhat of a deceleration from the very two strong years we've had of GDP growth in 2023 and 2024. And last year, we expected growth to remain mostly on trend. And I think that was actually a pretty big win, given the policy volatility that we've seen earlier, to start in April, let's say, because of tariffs, as well as the deteriorating labor market.

And for this year, we also expect GDP to remain broadly on trend, supported by a still healthy consumption market, even though a lot of consumers are complaining about higher prices, as well as we're hoping that the unemployment rate, as well as the unemployment level, stay relatively benign. So we do have nonfarm payrolls growing a little less than expected, but taken in addition with other labor market indicators. Jobs opening is a bit lower, but the elements of unemployment, like the quits rate and layoffs, remain at healthy levels.

So it's still a no-hire, no-fire labor market, which can be frustrating for some job seekers out there, but for the overall broader economy, it's still supportive of growth about being on trend. That all said, in June, the first half of 2026, we should get a somewhat fiscal boost just due to the effects of the OAAA that does free up some cash for a lot of businesses and some households in the first half of 2026, and it could be a quite sizable refund. And in addition to that, later this month, we have the Supreme Court ruling on the legal basis of tariffs, and we already see some companies preparing to sue for additional refunds based on the Supreme Court decision, which could free up some more cash for these companies too, which overall means, I think, the first half of 2026 to be relatively well supported in terms of GDP growth.

So against that macroeconomic backdrop, Paul, and we're coming off of a string of rate cuts here in late 2025, now that we're looking ahead, what should we expect to see from the FOMC when it comes to monetary policy? Taking a look at the futures market right now, we did see the odds for rate cuts slightly diminish for January and for March. It's still not above 50 percent.

Just based, I think, on the headlines, we did see job growth increase, the unemployment rate decrease, and wages still remain pretty well supported. So I think for the markets, the quick digestion of markets would mean less odds. But we still do think that there are reasons for the Fed to cut in the first half of 2026.

We're pretty, we're still maintaining that call just based on overall softness in the labor market, and also that we think that the current target rate at three and three quarters is still higher than what the Fed considers to be neutral territory. So there's still, policy is still, in our opinion, relatively tight. So any easing moves would be closer to where the Fed would consider to be neutral if they are, if they are expecting, if they are worried about the labor market.

Well, Paul, very timely commentary. Thank you for dropping by top of the morning today to keep our listeners and clients informed. And looking forward to other conversations with you in the months ahead here on top of the morning.

Thanks very much, Dan. Glad to be back. And again, today we have been joined by Paul Hsiao, Asset Allocation Strategist for the Americas with the UBS Chief Investment Office for a macro update from UBS Studios.

I'm Dan Cassidy. Thank you for joining us. Thank you.

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