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Despite a volatile geopolitical backdrop and lingering uncertainties, markets held up surprisingly well in the first full trading week of the year. Investor sentiment was influenced by several unresolved issues – notably a Supreme Court challenge to President Trump’s trade tariffs and the need for clearer employment and inflation data. The Court was expected to rule on the tariff case on Friday, but events in Minnesota may have delayed it. Legal analysts assign a 75% probability that the Court will curb the President’s unilateral tariff power – not as a political judgment, but whether it stands the constitutional test. Trade and taxation are Congressional prerogatives, and the judiciary has historically upheld that boundary. Should the Court reaffirm this, it could reduce a lingering tail risk looming over global supply chains, particularly in Asia and Europe, helping explain the market’s resilience despite noisy headlines.
Thrown into the mix over the weekend was the opening of criminal investigation into Fed Chair Jerome Powell over the cost and scope of $2.5bn renovation of the Fed’s headquarters. As Powell pointed out in video statement that this is just further political pressure to influence monetary policy.
The December employment by contrast, made more of a statement about the state of the economy. While headline unemployment dipped to 4.4% from 4.5%, underlying data suggest a job market in limbo: hiring and voluntary quits declined, hours worked plateaued, and wage growth softened. Revisions to already published employment data stripped out a large chunk of the previous year’s reported job gains, painting a picture of an economy that isn’t contracting but isn’t accelerating either. There’s little urgency for immediate rate cuts, and the Fed is likely to hold steady at its next meeting.
Chart 1: US Unemployment Rate Slips Lower
Unemployment rate (%)
Source: Bloomberg
Drifting, not Breaking
Many US firms appear to be in a wait-and-see mode, hesitant to invest or hire amid increasingly erratic policy signals. With constantly shifting fiscal stances, litigated trade rules, and uncertainty caused by AI, reshoring, and geopolitics, management teams are understandably cautious. Economists call this the “option value of waiting.” In practice, it means delayed decisions, subdued hiring, and minimal capital expenditure – an economy drifting, not breaking.
Still, there are some reasons for cautious optimism in the near term. US tax cuts are starting to positively influence household finances, with the Ways and Means Committee estimating $120 to $150 billion in additional disposable income in the first half of the year. Historically, even modest cuts in effective tax rates have supported discretionary spending and corporate earnings. For households, the extra cash may help offset rising costs in housing, healthcare, and insurance. For corporates – particularly in tech – the tax structure supports R&D and investment, with accelerated allowances and expanded interest deductions expected to deliver $120 to $130 billion over the year in relief, much of it front loaded.
This fiscal backdrop may offer tech a renewed catalyst in the upcoming earnings season. The sector has taken a breather, not because the narrative defining it has broken, but because expectations ran ahead of fundamentals. If upcoming results show AI-related investments are generating visible revenue rather than just capex, leadership could reassert itself quickly.
Still, recent political developments at home are difficult to ignore. The events in Minnesota have been unsettling, highlighting deeper strains on social cohesion. Meanwhile, policy rhetoric in Washington continues to challenge the boundaries of legality and economic logic – from talks of extracting a $200 billion windfall from mortgage agencies to calls to force banks to cut credit card rates. On the geopolitical front, threats of confrontation with countries ranging from Greenland to Mexico and Colombia may play well domestically but quietly unsettle allies.
West to East—Two Perspectives on Power
Viewed from the Middle East, leadership is often cast in a different light – it is more about custodianship than control. Power is seen as something entrusted and preserved, not simply wielded. The symbolism of the keys to the Kaaba in Mecca is instructive: authority passed down with reverence, not seized. From this vantage point, the discomfort in Western democracies seems less about specific policies and more about a fading sense of stewardship. In a world where dependence is optional and alternatives exist, those who forget they hold the keys in trust may find others quietly preparing doors of their own.
Next week’s December US inflation data will serve as a key test of the disinflation narrative that supported markets late last year. With the government shutdown disrupting October CPI, the upcoming release will fill a critical gap. Consensus expectations are for headline and core CPI to hold near 2.7% year-on-year, but risks are slightly tilted to the upside, particularly from sticky services prices, shelter costs, and wage-driven pressures. A hotter print could delay rate cuts, steepen the yield curve, and support the dollar. Conversely, a softer read would buoy risk assets and support current easing expectations. In a data-dependent Fed regime, even modest surprises could shift both tone and trajectory.
Chart 2: US inflation – Little Likely Change
% change year-on-year
Source: Bloomberg
Advantage East
While focus on the US is understandable, Eastern markets continue to outperform. The Korean KOSPI gained 6% and Japan’s Nikkei 225 rose 3% on the week. India, by contrast, continues to lag. Foreign outflows persist, the rupee remains under pressure, and a much-talked-about trade deal with the US remains elusive. If the US Supreme Court strikes down the Trump tariffs, Indian equities could bounce. Elsewhere, the pace of diplomatic engagement is notable. Last week, South Korea’s President Lee Jae Myung met with China’s leadership; Lee is scheduled to be in Japan this week. Canadian Prime Minister Mark Carney is also due in Beijing this week. These talks coincide with China’s National People’s Congress, where the next five-year plan will be approved. Meanwhile, German Chancellor Friedrich Merz is visiting India, and the Philippine President is set to sign a major trade deal with the UAE
Chart 3: KOSPI and TOPIX Outpace US Equity Market, India Stumbles
Indices rebased to Dec1 2025=100
Source: Bloomberg
Gary Dugan – Investment Committee Member
Bill O’Neill – Non-Executive Director & Investor Committee Chairman
12th January 2026
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