Sunset Market Commentary

Markets

The Fed is off the hook for January. December payrolls downwardly surprised, but from a market (and a Fed) point of view the situation on the labour market didn’t deteriorate. The economy added 50k jobs (vs 70k consensus) with a 76k downward revision to October/November numbers. Details showed a modest rebound in government payrolls (+13k) following heavy job cuts in October (-174k; delayed DOGE-effect). Job cuts were mainly centered in the goods-producing sector (-21k) while private services added 58k jobs. Within those broad services, retail trade remains an underperformer with three consecutive months of job losses. A lot of attention went to the unemployment rate which, partly because of seasonality and annual revisions for the household survey, dipped from a downwardly revised 4.5% in November to 4.4%. Household employment rose by 232k according to that survey with total household employment hitting an all-time high at just shy of 164mn. Average hourly earning rose by 0.3% M/M and accelerated from 3.6% Y/Y to 3.8% Y/Y, matching the fastest pace since July 2025. US money markets reduced remaining 25 bps rate cut bets for the January 28 FOMC meeting from 15% to only 5%. The next move is only fully discounted by the June FOMC meeting, suggesting the Fed is done cutting policy rates under Chair Powell. The US yield curve bear flattens slightly with yields adding 1.5 bps (30-yr) to 2.7 bps (2-yr). The dollar traded volatile after the release but EUR/USD 1.1650 remains name of the game. US equity markets opened with 0.2%-0.4% gains. A potentially big event risk is concentrated at the Supreme Court later today. It could issue an opinion on Trump’s reciprocal tariffs that may or may not result in actual rulings to either keep them in place or strike them down. The latter would undoubtedly introduce new uncertainty: What will happen to the current trade deals? What other tariff routes are there for the US government? How quickly can these get implemented and how different are the tariff rates going to be? Rising risk premia would probably lift long-term US bond rates but the jury remains out whether and how it’ll affect other US asset classes (equities, the dollar).

News & Views

The UN’s Food and Agricultural Organization (FOA) food index eased further by 0.8% m/m in December of last year as declines in the prices for dairy products, meat and vegetable oils more than offset (modest) increases in cereals and sugar. Overall, the index showed rather mild swings during 2025, but with divergent trends in the major subcategories. The index closed 2.3% below the level at the end of 2024. Still, despite the gradual decline in H2 2025, the index average over 2025 was 4.3% higher compared to the 2024 average. The end-2025 level was 22.4% below the peak reached in March 2022. Cereal prices added 1.7% m/m in December. For the whole of 2025, the cereal price Index was 4.9% below the 2024 level, marking the lowest annual average since 2020. Especially prices of rice declined sharply (-35.2% average). The vegetable oil price index decreased marginally (0.4% m/m). For the year 2025, vegetable oil prices rose 17.1% y/y marking a three-year high amid tight global supplies. The sugar price index rose 2.4% m/m after three consecutive monthly declines, but it remained 24% below its level a year ago. The average index over 2025 also marked the lowest level since 2020.

After three consecutive months of unexpected sharp rises in Canadian job growth (totaling 181k), the Canadian economy added a modest 8.2k jobs in December (vs -2.5k consensus). The unemployment rate rose from 6.5% to 6.8%, but Statistics Cananda indicated that this was due to a rise in the participation rate (65.4%) as more people were looking for work. The rise in the unemployment rate also is seen as partially reversing a cumulative decline of 0.6% over the previous two months. Overall, 1.6mn people were unemployed in December (+73k compared to November). Average hourly earnings eased slightly from 3.6% Y/Y to 3.4%. The market reaction was limited as it probably won’t change the policy assessment of the Bank of Canada. The BoC likely finished its easing cycle end October (2.25%). This level should be adequate to hold inflation near 2% while helping the economy through current period of structural adjustment. Markets err on the side of a first rate hike by the end of the year (50%), but this remains a highly conditional call. The loonie cedes marginal to trade near USD/CAD 1.388.