Strong pressure on the Fed

The macro point

Anyone who knows a little about China knows that there is not one but several Chinese economies. The latest statistics prove it.

December's export data shows that China's growth continued to rely on external demand - which is expected to remain the case in 2026. The loan data is dreadful, the worst ever recorded. Chinese economic players are not requesting any loans, and it’s even worse if we focus solely on private credit. This gives an idea of the state of domestic demand and its weakness. The Chinese government has clearly indicated its intention to support demand this year. Let's be clear, it looks challenging.

The same problems are always to blame. Real estate, which accounts for a major share of Chinese household wealth, is still sluggish. China has managed to plug the gaps to avoid a sharp collapse. However, a restart of the sector is wishful thinking at this stage. Furthermore, unemployment is beginning to become a social issue. For a year and a half, China has stopped publishing certain statistics, notably on youth unemployment. This certainly highlights how much the situation has deteriorated in recent years.

We have no doubt that China will confirm its growth target of 5% this year. However, this conceals significant pockets of fragility that also lead to geopolitical consequences. Since the Chinese economy is mostly dependent on exports, Beijing cannot afford an open trade war with Washington. It is also certainly for this reason that the Chinese government remained rather passive following the takeover of Venezuela – a country where China was nevertheless very well established, particularly in oil infrastructure.

Technical point

On the foreign exchange market, the euro is one of the big winners in the current geopolitical sequence opposing Europeans and Americans over Greenland. The single currency continues to benefit from the "debasement trade" - several European financial players confirmed last week their intention to reduce their exposure to dollar assets due to rampant American interventionism. American investor Ray Dalio speaks of a "capital war."

The Swiss franc, as a traditional safe-haven, has also benefited from this dynamic. However, beware, in general, institutional investors who sell their dollar assets tend to buy gold to cover themselves rather than other currencies. It is therefore likely that the Swiss franc's resurgence is temporary.

A notable exception in this landscape marked by the return of risk aversion: the Japanese yen. The currency remains in a downward trend. Why? The Japanese market has its own problems. Since the beginning of the year, there has been a surge in long-term bond rates that raises fears of the emergence of a financial risk that could weaken the Japanese currency. Under these conditions, it cannot play its role as a safe haven in the eyes of investors. We expect the yen to continue to fall, even if the geopolitical context deteriorates further.

Announcements to follow

The American Federal Reserve (Fed) meeting is the main point of focus this week. The consensus expects a monetary status quo. This is also our opinion. Why?

The American economy is holding up well. Certainly, economists are divided on the growth path in 2026. Some consider it will be a continuation of 2025, with a K-shaped economy, meaning an economy where there is a large dispersion between sectors and population categories. Some are booming, others in severe recession. For example, it was not good to be a civil servant or worker last year. Others see a re-acceleration of growth in the second half due to rate cuts, low energy prices, and fiscal stimulus measures - the famous checks to American households mentioned by the Trump administration at the end of last year. This is our central scenario.

As for the labor market, it is stagnating. But it's not collapsing. Therefore, the Fed has no reason to rush. Job creation in the private sector measured by ADP indicates an average increase of 11,750 positions per week over the four weeks preceding December 20. This figure is consistent with the monthly growth of 50,000 non-farm jobs in December announced earlier this month by the Department of Labor. This is less than a year ago. But it's not concerning. The labor market is not in recession.

The Fed therefore has plenty of time before lowering rates. It will certainly do so in the spring when it has more statistics on the state of the economy at the beginning of 2026. This will result in a new 25 basis point cut in the director rate. However, this may not please the White House, which should intensify the pressure on Jerome Powell in the meantime.

The information presented in this publication is provided to you for informational purposes only and does not constitute investment advice, nor an offer to sell, nor a solicitation to buy, and should in no way serve as a basis or be considered an inducement to engage in any investment.