"Muddle Through" Economy Supports Risk Assets Amid Labor Cooling - Episode Hero Image

"Muddle Through" Economy Supports Risk Assets Amid Labor Cooling

Bloomberg Surveillance · · Listen to Original Episode →
Original Title: Bloomberg Surveillance TV: December 16th, 2025

TL;DR

  • A weakening labor market, indicated by a declining three-month moving average for non-farm payrolls, does not necessarily signal a broad economic pullback, supporting equity bids and risk assets into 2026.
  • The current "muddle through" economic environment, characterized by slow but stable growth and sticky inflation, supports the Federal Reserve's potential for further rate cuts, keeping rates in a favorable range.
  • Despite a strong retail sales number, the implications of a weakening job market for younger demographics suggest less consumer spending, which is a key narrative for economic direction in 2026.
  • The manufacturing sector's renaissance is unlikely to materialize significantly, as the US economy is predominantly service, technology, and financial services-driven, where job growth is currently strongest.
  • Fund manager cash allocations falling to a record low of 3.3% signals a highly contrarian, bearish indicator, historically preceding negative equity returns over the subsequent four to eight weeks.
  • Elevated equity valuations, particularly in AI-driven markets, may struggle to withstand potential increases in bond yields above 5%, despite investor focus on AI-driven productivity gains.
  • The energy sector remains a contrarian trade with significant underweight allocations by fund managers, suggesting potential value if growth surprises positively and drives oil prices higher.

Deep Dive

The US labor market shows signs of normalization, with slowing job growth and a rising unemployment rate, yet remains tight enough to support consumer spending and equity markets. This environment suggests a "muddle through" scenario for 2026, characterized by modest growth, manageable inflation, and continued corporate earnings strength, prompting a strategic shift towards risk assets.

The November jobs report indicates a cooling labor market, with the three-month moving average for non-farm payrolls at approximately 22,000, below the breakeven rate for maintaining the current unemployment level. The unemployment rate has risen to 4.6%, a level not seen this low in decades, but its increase is partly driven by new entrants rejoining the labor force, which suggests a lack of significant job destruction and sustained consumer spending capacity. This nuanced picture allows the Federal Reserve flexibility: it provides enough justification for potential rate cuts to stimulate the economy without signaling a severe economic downturn. Consequently, retail sales remain strong, particularly in the control group, reinforcing the idea that the economy is not experiencing a material slowdown. This resilience in consumer demand, coupled with robust corporate earnings and the prospect of Fed rate cuts, underpins current market optimism and supports bids for equities and other risk assets.

The current economic outlook, while positive for risk assets, presents several key tensions. Foremost is the divergence between the labor market's cooling but still-tight state and the potential for inflation to remain sticky, particularly in the services sector. This creates a challenge for the Federal Reserve's dual mandate, potentially favoring a dovish stance on employment while requiring a hawkish approach to inflation. Furthermore, while AI is widely expected to drive productivity gains and earnings growth, the high valuations of leading tech stocks raise concerns about sustainability. This is compounded by a contrarian signal from Bank of America's global fund manager survey, where cash allocations have fallen to record lows, historically indicating a bearish outlook for equities in the short to medium term. The market's focus on AI-driven growth and potential Fed easing may be overlooking the risk of higher bond yields, which could challenge these rich valuations. The energy sector, despite potential upside from increased growth, remains significantly underweight among fund managers, presenting another contrarian opportunity.

The prevailing "muddle through" environment, supported by ongoing fiscal expansion and potential Fed rate cuts, suggests a continued appetite for risk assets into 2026, with potential for broadening market leadership beyond tech. However, persistent inflation concerns, elevated equity valuations, and the historical contrarian signals from fund manager sentiment warrant cautious optimism. The Federal Reserve's balancing act between employment and inflation mandates, alongside the path of fiscal policy and the true impact of AI on productivity, will be critical determinants of market performance.

Action Items

  • Audit labor market data: Analyze 3-5 months of non-farm payrolls and unemployment rate trends to identify composition shifts (e.g., re-entrants vs. job losses).
  • Measure economic growth disconnect: For 3-5 sectors, calculate correlation between retail sales strength and labor market softness to assess spending implications.
  • Track inflation drivers: Monitor goods and services inflation components for 3-5 months to inform hawkish/dovish Fed bias assessment.
  • Evaluate AI adoption impact: For 3-5 AI-driven companies, analyze earnings upgrades against valuation metrics to assess bubble risk.
  • Assess currency carry trade sustainability: For 3-5 high-yielding currencies, measure correlation with USD strength over 3-6 months to identify opportunities.

Related Episodes

Key Quotes

"Frances Donald, Chief Economist at RBC, and Michael Collins, Fixed Income Executive Portfolio Advisor at PGIM Fixed Income, react to the November US jobs report. Terry Haines, Founder at Pangaea Policy, looks at the state of healthcare negotiations in Washington. Elyas Galou, Senior Investment Strategist at BofA Securities, shares the findings of Bank of America’s December global fund managers survey. Lucy Baldwin, Global Head of Research at Citi, discusses her bullish projections for 2026."

This quote provides a high-level overview of the key participants and topics discussed in the podcast episode. Frances Donald and Michael Collins focus on the US jobs report, Terry Haines addresses healthcare negotiations, Elyas Galou presents findings from a fund managers survey, and Lucy Baldwin offers projections for the upcoming year.

"Frances Donald, Chief Economist at RBC, and Michael Collins, Fixed Income Executive Portfolio Advisor at PGIM Fixed Income, react to the November US jobs report. Terry Haines, Founder at Pangaea Policy, looks at the state of healthcare negotiations in Washington. Elyas Galou, Senior Investment Strategist at BofA Securities, shares the findings of Bank of America’s December global fund managers survey. Lucy Baldwin, Global Head of Research at Citi, discusses her bullish projections for 2026."

This quote outlines the main segments of the podcast, indicating that the discussion will cover economic data (US jobs report), political developments (healthcare negotiations), investor sentiment (fund managers survey), and future market outlooks (projections for 2026).

"Frances Donald, Chief Economist at RBC, and Michael Collins, Fixed Income Executive Portfolio Advisor at PGIM Fixed Income, react to the November US jobs report. Terry Haines, Founder at Pangaea Policy, looks at the state of healthcare negotiations in Washington. Elyas Galou, Senior Investment Strategist at BofA Securities, shares the findings of Bank of America’s December global fund managers survey. Lucy Baldwin, Global Head of Research at Citi, discusses her bullish projections for 2026."

This quote serves as an introduction to the episode's contributors and their respective areas of expertise. It sets the stage for a multi-faceted discussion touching on economics, policy, market sentiment, and forward-looking investment strategies.

"Frances Donald, Chief Economist at RBC, and Michael Collins, Fixed Income Executive Portfolio Advisor at PGIM Fixed Income, react to the November US jobs report. Terry Haines, Founder at Pangaea Policy, looks at the state of healthcare negotiations in Washington. Elyas Galou, Senior Investment Strategist at BofA Securities, shares the findings of Bank of America’s December global fund managers survey. Lucy Baldwin, Global Head of Research at Citi, discusses her bullish projections for 2026."

This quote highlights the diverse perspectives that will be presented, with experts from RBC, PGIM Fixed Income, Pangaea Policy, BofA Securities, and Citi offering their analyses on current events and future trends.

"Frances Donald, Chief Economist at RBC, and Michael Collins, Fixed Income Executive Portfolio Advisor at PGIM Fixed Income, react to the November US jobs report. Terry Haines, Founder at Pangaea Policy, looks at the state of healthcare negotiations in Washington. Elyas Galou, Senior Investment Strategist at BofA Securities, shares the findings of Bank of America’s December global fund managers survey. Lucy Baldwin, Global Head of Research at Citi, discusses her bullish projections for 2026."

This quote acts as a roadmap for the podcast episode, detailing the specific topics and the individuals who will be providing commentary on each. It indicates a comprehensive review of economic and market conditions.

Resources

External Resources

Books

  • "The Big Beautiful Bill 2.0" - Mentioned as a potential legislative package for early 2026, including reforms to Obamacare subsidies, Medicaid, taxes, and manufacturing incentives.

Articles & Papers

  • Bank of America's December global fund managers survey - Discussed for its findings on macro optimism, cash allocations, liquidity conditions, and investor sentiment regarding AI and bond yields.
  • Bloomberg Audio Studios Podcasts Radio News - Mentioned as the source for the Bloomberg Surveillance podcast.
  • Bloomberg Surveillance TV: December 16th, 2025 - The episode title from which the transcript is derived.
  • Bloomberg Surveillance podcast - Referenced for its daily content on markets, economics, and geopolitics.
  • "The Big Beautiful Bill 2.0" (Graham) - Mentioned in relation to potential reforms including entitlement reform outside of Social Security, Medicaid, taxes, military spending, and onshoring manufacturing incentives.
  • "Trump's tariffs" (Poly market) - Referenced for its probability assessment of the Supreme Court ruling in favor of Trump's tariffs.
  • "US debt position" (City research) - Mentioned as a topic of a written piece on sustainability.

People

  • Frances Donald - Chief Economist at RBC, discussed regarding the US jobs report and its implications for the economy and labor market.
  • Michael Collins - Fixed Income Executive Portfolio Advisor at PGIM Fixed Income, discussed regarding the US jobs report, the "muddle through" economic environment, and Federal Reserve policy.
  • Terry Haines - Founder at Pangaea Policy, discussed regarding healthcare negotiations in Washington and the potential for legislative solutions.
  • Elyas Galou - Senior Investment Strategist at BofA Securities, shared findings from Bank of America's December global fund managers survey.
  • Lucy Baldwin - Global Head of Research at Citi, discussed bullish projections for 2026, earnings growth, and the tech leadership in the market.
  • Jonathon Ferro - Host of the Bloomberg Surveillance podcast.
  • Lisa Abramowicz - Host of the Bloomberg Surveillance podcast.
  • Amaryllis Horter - Host of the Bloomberg Surveillance podcast.
  • Damian - Discussed market movements and economic data.
  • Max Leiten - City's Global Head of Commodity Research, discussed his bearish view on gold for 2026.
  • Dan Teven - City's FX strategist, has an out-of-consensus bullish call on the dollar.
  • Andrew Hollenhorst - City's US Chief Economist, expects two more Federal Reserve cuts.
  • Adam Picket - Part of City's macro strategy team, discusses a "year of three thirds" for the dollar.
  • Willa - Part of City's macro strategy team, discusses a "year of three thirds" for the dollar.

Organizations & Institutions

  • RBC (RBC) - Employer of Frances Donald, Chief Economist.
  • PGIM Fixed Income - Employer of Michael Collins, Fixed Income Executive Portfolio Advisor.
  • Pangaea Policy - Company founded by Terry Haines.
  • BofA Securities (Bank of America Securities) - Employer of Elyas Galou, Senior Investment Strategist.
  • Citi (Citigroup) - Employer of Lucy Baldwin, Global Head of Research.
  • JPMorgan Asset Management - Mentioned for its active fixed income ETFs and its brand name.
  • JPMorgan Chase & Co. - Parent company of JPMorgan Asset Management.
  • JPMorgan Distribution Services Inc. - Issued a communication for JPMorgan Asset Management.
  • Okta - Mentioned for securing AI agents' identities.
  • Chase for Business - Mentioned for managing business finances and providing digital tools and online resources.
  • Adobe Acrobat Studio - Mentioned for AI-powered PDF features.
  • Federal Reserve (Fed) - Discussed in relation to monetary policy, interest rate cuts, and its dual mandate.
  • PJM (PJM Interconnection) - Mentioned in relation to power competition for data centers.
  • International Monetary Fund (IMF) - Mentioned in relation to potential fiscal stimulus.
  • New England Patriots - Mentioned as an example team for performance analysis.
  • Pro Football Focus (PFF) - Data source for player grading.
  • National Football League (NFL) - Primary subject of sports discussion.
  • US Securities and Exchange Commission (SEC) - Mentioned in relation to registered advisors.
  • Financial Industry Regulatory Authority (FINRA) - Mentioned as a member of JPMorgan Distribution Services Inc. and Open to the Public Investing Inc.
  • Securities Investor Protection Corporation (SIPC) - Mentioned in relation to Open to the Public Investing Inc.
  • Mastercard - Mentioned for its adaptive approach to B2B acceptance and commercial payment solutions.
  • Blackrock Investments - Prepared information for iShares.
  • iShares - Mentioned for its Volley ETF.

Tools & Software

  • AI Agents - Discussed in relation to identity security and business applications.
  • Adobe Acrobat Studio - Mentioned for AI-powered PDF features.
  • Chase Mobile App - Available for select mobile devices.

Websites & Online Resources

  • omnystudio.com/listener - Provided for privacy information.
  • jpmorgan.com/getactive - Website to learn more about JPMorgan Asset Management's active fixed income ETFs.
  • chase.com/business - Website to learn more about Chase for Business.
  • adobe.com/dothatwithacrobat - Website to learn more about Adobe Acrobat Studio.
  • public.com/market - Website to learn more about Public's generated assets and portfolio transfer bonus.
  • public.com/disclosures - Website for complete disclosures related to Public's services.
  • mastercard.com/commercialacceptance - Website to discover Mastercard's solutions for B2B payments.
  • mypolicyadvocate.com - Website to learn more about policy transparency services.
  • www.ishares.com - Website to view the prospectus for iShares ETFs.

Podcasts & Audio

  • Bloomberg Surveillance podcast - Mentioned for daily content and subscription options.

Other Resources

  • AI-led bull market - Described as the dominant theme in the December 2025 fund manager survey.
  • "Run it hot" policies - Investor expectation regarding Federal Reserve and fiscal policy.
  • Liquidity conditions - Rated as the most positive since 2021 in the fund manager survey.
  • "Muddle through" environment - Economic scenario with slow but okay growth and sticky inflation.
  • "Goldilocks economy" - Phrase not recently heard, but implied by current economic conditions.
  • "Goldilocks fat drop" - Scenario of good growth and inflation largely under control.
  • "Jobless boom" - A boom that does not significantly impact employment.
  • "Everything boom" - Characterization of 2025, with strong performance in equities, credit, and gold.
  • "Debasement trade" - Trade related to currency devaluation, discussed in relation to gold.
  • "Carry trade" - FX strategy involving buying high-yielding currencies against low-yielding ones.
  • "EM FX" - Emerging market foreign exchange.
  • "Black swan event" - An outlier event with significant impact, discussed in relation to AI and fiscal risks.
  • "AI boom" vs. "AI bubble" - Debate on the nature of AI's market impact.
  • "Credit expansion" - Shift from fiscal expansion to credit expansion as a driver of the economy.
  • "Fiscal expansion" - Government spending to stimulate the economy.
  • "Monetary conditions" - The overall state of money supply and credit availability.
  • "Rate differentials" - Differences in interest rates between countries.
  • "Funding currencies" - Currencies used to fund investments in higher-yielding assets.
  • "Pain trade" - An investment strategy that profits from market reversals or unexpected events.
  • "Generated Assets" - Investable indexes created with AI based on user prompts.
  • "B2B card payment landscape" - Evolving landscape for business-to-business payments.
  • "Virtual card" - A type of payment card used for invoices.
  • "Policy advocate" - Service that explains insurance policy terms.
  • "Monthly income and growth potential" - Features of the iShares Volley ETF.
  • "Derivatives" - Financial instruments that can increase risks and volatility.

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