Soft labor market keeps Fed cut in play
Market take
Weekly video_20251201
Nicholas Fawcett
Senior Economist, BlackRock Investment Institute
Opening frame: What’s driving markets? Market take
Camera frame
The Federal Reserve looks poised to cut interest rates for the third time next week. We think it’s warranted. Why? September payrolls and recent jobless claims data highlighted some cooling in the labor market.
Title slide: Soft labor market keeps Fed cut in play
1: No hiring, no firing stasis
The Fed has a harder time understanding the economy given data delays tied to the long government shutdown.
But the September jobs report and other data show the labor market in a no hiring, no firing stasis. Both demand for workers and the supply of workers have fallen, with the latter due to a sharp slowing of migration.
2: A deluge of delayed data
The delayed data includes both October and November jobs numbers. They’re likely to be noisy and will come after the Fed meets on December 10.
Markets are mostly pricing in a quarter-point cut next week. We agree and think a softening labor market gives the Fed reason to cut further. That’s different from earlier this year when the Fed was facing calls to cut rates even with data showing strong job gains. Those calls highlighted the policy tension between tackling sticky inflation and keeping US debt sustainable.
3: The UK’s positive budget surprise
Part of this tension stems from persistently large US budget deficits. The opposite is happening in the UK: the government is trying to reduce its deficit and even achieve a surplus on a five-year horizon in the latest budget.
The UK Chancellor delivered a positive surprise with various revenue raises boosting the buffer between government revenues and spending by more than expected.
Outro: Here’s our Market take
We stay neutral on UK gilts as the new budget front-loaded spending and back-loaded much of the tax gains.
We think a Fed rate cut this month is in play as other indicators show the labor market softening. That backdrop, along with the AI theme, underpins our pro-risk stance.
Closing frame: Read details: blackrock.com/weekly-commentary
More labor market cooling
Recent signs of US labor market softening tee up a third-straight Fed rate cut next week. We eye confirmation of this ongoing cooling in US data this month.
Market backdrop
The S&P 500 rallied during a short trading week as the AI theme bounced back. US 10-year Treasury yields fell as Fed rate cuts were priced back in.
Week ahead
US initial jobless claims remain key as markets await backlogged payrolls figures. Consumer sentiment is also a focus after weak retail sales data.
The Federal Reserve looks poised to cut interest rates again next week while awaiting a backlog of US economic data after the government shutdown. We think this is warranted given a cooling labor market, reflected in the September payrolls and recent jobless claims data. A soft labor market allows Fed policy easing, one reason we stay pro-risk. We see a risk of revived tensions between sticky inflation and debt sustainability in the US The UK shows how fiscal pressures are global.
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Slower hiring
Monthly change in US payrolls and breakeven estimate, 2023-2025
Forward-looking estimates may not come to pass. Source: BlackRock Investment Institute, with data from US Bureau of Labor Statistics, November 2025. Note: The chart shows monthly changes in US nonfarm payroll employment and the three-month moving average. The dashed green line shows our estimates of payroll growth consistent with slowing population growth and elevated migration.
The Fed has cut rates twice already this year and put a weakening labor market at the center of its decisions. The central bank worries that the labor market could weaken further, so “risk management” rate cuts were needed. The Fed has a harder time understanding the state of the economy given the data delays tied to the long government shutdown heading into next week’s meeting. The September jobs report and other data show the labor market in a “no hiring, no firing” stasis. Job gains have slowed since the start of the year. See the chart. Both labor demand and supply has slowed, the latter due to a sharp slowing of migration. That has pulled down the “breakeven” level of payrolls gains that keep the unemployment rate steady. It could also explain why wage growth has also proved steady, and the unemployment rate has only risen slightly this year – and is still historically low.
The delayed data – including both the October and November payrolls data on Dec. 16, but no October unemployment data – is likely to be noisy. The October data will include deferred federal government layoffs that will likely cause a sharp drop in overall employment that month – something the Fed would have already taken into account in earlier decisions. And this data will be released after its Dec. 10 policy decision. Markets are mostly pricing in a quarter-point cut next week. We agree and see a “no hiring, no firing” stasis giving the Fed room to keep trimming policy rates in 2026. That’s different from earlier this year when the Fed was facing calls to cut rates even with the labor data appearing strong, raising policy tensions between sticky inflation and debt sustainability. The Fed now has a path to cut rates without raising questions around these policy tensions, even as inflation holds well above its 2% target. If inflation were to accelerate next year due to stronger activity or renewed hiring, those tensions could re-emerge and drive long-term bond yields higher.
Slower hiring
Part of this tension stems from persistently large US budget deficits. The opposite is happening in the UK: the government is trying to reduce its deficit and even achieve a surplus on a five-year horizon in the latest budget. The UK Chancellor delivered a positive surprise with various revenue raises boosting its so-called “fiscal headroom” – the buffer between government revenues and spending – by more than expected. This shows how the UK needed to strike a balance on market and political credibility and has done so for now, even if the tax revenue as a share of GDP is set to hit a record 38% in 2030.
We stay neutral on UK gilts as the new budget front-loaded spending and back-loaded much of the tax gains. Yet we have a relative preference for gilts on a strategic horizon of five years or longer, thanks in part to a lower neutral rate – one that neither stimulates nor hurts growth – than other developed market (DM) government bond markets. We had upgraded long-term US Treasuries to neutral as the Fed resumed rate cuts but need to be nimble given the simmering policy tensions – and expect those tensions to persist. Our updated tactical views in our 2026 Global Outlook are due out tomorrow, Dec. 2.
Our bottom line
We think a Fed rate cut this month is in play as data keep showing the labor market cooling. That backdrop and the AI theme support our pro-risk stance. We stay neutral UK gilts but prefer them on longer horizons over other DM bonds.
Market backdrop
US stocks bounced back during the holiday-shortened week, with the S&P 500 gaining almost 4% as the AI theme returned. The Nasdaq gained about 5%. That helped erase most losses for the month, apart from the Nasdaq, during which AI stocks, shares popular with retail traders and bitcoin came under pressure. Bitcoin recovered over the week but was still down about 17% on the month. US 10-year Treasury yields fell back near 4.00% as Fed cuts were priced back in.
The US ISM index will give a read on the health of the struggling manufacturing sector. US jobless claims remain a key focus on the labor market as markets await the resumption of the US payrolls data in mid-December. The University of Michigan consumer sentiment survey – which has showed much weaker sentiment relative to other surveys – may get more focus given the softer retail sales data, though for September, seen last week.
Week ahead
Past performance is not a reliable indicator of current or future results. Indexes are unmanaged and do not account for fees. It is not possible to invest directly in an index. Sources: BlackRock Investment Institute, with data from LSEG Datastream as of November 27, 2025. Notes: The two ends of the bars show the lowest and highest returns at any point year to date, and the dots represent current year-to-date returns. Emerging market (EM), high yield and global corporate investment grade (IG) returns are denominated in US dollars, and the rest in local currencies. Indexes or prices used are: spot Brent crude, ICE US Dollar Index (DXY), spot gold, spot bitcoin, MSCI Emerging Markets Index, MSCI Europe Index, LSEG Datastream 10-year benchmark government bond index (US, Germany and Italy), Bloomberg Global High Yield Index, J.P. Morgan EMBI Index, Bloomberg Global Corporate Index and MSCI USA Index.
Dec. 1
US ISM manufacturing PMI
Dec. 2
Euro area unemployment; Euro area flash inflation
Dec. 4
US initial jobless claims
Dec. 5
US consumer sentiment
Read our past weekly commentaries here.
Big calls
Our highest conviction views on six- to 12-month (tactical) and over five-year (strategic) horizons, December 2025
| Reasons | ||
|---|---|---|
| Tactical | ||
| US equities | A softening labor market gives the Fed space to cut, helping ease political tensions from higher interest rates. We think rate cuts amid a notable slowing of activity without recession should support US stocks and the AI theme. | |
| Using FX to enhance income | FX hedging is now a source of income, especially when hedging euro area bonds back into US dollars. For example, 10-year government bonds in France or Spain offer more income when currency hedged than US investment grade credit, with yields above 5%. | |
| Seeking alpha sources | We identify sources of risk taking to be more deliberate in earning alpha. These include the potential impact of regulatory changes on corporate earnings, spotting crowded positions where markets could snap back and opportunities to provide liquidity during periods of stress. | |
| Strategic | ||
| Infrastructure equity and private credit | We see opportunities in infrastructure equity due to attractive relative valuations and mega forces. We think private credit will earn lending share as banks retreat – and at attractive returns. | |
| Fixed income granularity | We are overweight short-term inflation-linked bonds as US tariffs could push up inflation. Within nominal bonds, we favor developed market (DM) government bonds outside the US over global investment grade credit, given tight spreads. | |
| Equity granularity | We favor emerging over developed markets yet get selective in both. Emerging markets (EM) at the cross current of mega forces – like India – offer opportunities. In DM, we like Japan as the return of inflation and corporate reforms brighten the outlook. | |
Note: Views are from a US dollar perspective, December 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast of future events or a guarantee of future results. This information should not be relied upon by the reader as research or investment advice regarding any particular funds, strategy or security.
Tactical granular views
Six- to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2025
We have lengthened our tactical investment horizon back to six to 12 months. The table below reflects this and, importantly, leaves aside the opportunity for alpha, or the potential to generate above-benchmark returns – especially at a time of heightened volatility.
| Asset | Tactical view | Commentary | ||||
|---|---|---|---|---|---|---|
| Equities | ||||||
| United States |  |
We are overweight. Policy-driven volatility and supply-side constraints are pressuring growth, but we see AI supporting corporate earnings. US valuations are backed by stronger earnings and profitability relative to other developed markets. | ||||
| Europe |  |
We are neutral. Greater unity and a pro-growth agenda across Europe could boost activity, yet we are watching how the bloc tackles its structural challenges before turning more optimistic. We note opportunities in financials and industries tied to defense and infrastructure spending. | ||||
| UK | |
We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term. | ||||
| Japan | |
We are overweight given the return of inflation and shareholder-friendly corporate reforms. We prefer unhedged exposures as the yen has tended to strengthen during bouts of market stress. | ||||
| Emerging markets | |
We are neutral. Valuations and domestic policy are supportive. Yet geopolitical tensions and concerns about global growth keep us sidelined for now. | ||||
| China | |
We are neutral. Trade policy uncertainty keeps us cautious, and policy stimulus is still limited. We still see structural challenges to China’s growth, including an aging population. | ||||
| Fixed income | ||||||
| Short US Treasuries | |
We are neutral. We view short-term Treasuries as akin to cash in our tactical views and we remove this overweight to turn neutral long-term Treasuries. | ||||
| Long US Treasuries | |
We are neutral. Yields could fall further as a softening labor market gives the Fed space to cut without its independence being called into question – even if the pressures pushing up yields persist. | ||||
| Global inflation-linked bonds | |
We are neutral. We see higher medium-term inflation, but cooling inflation and growth may matter more near term. | ||||
| Euro area government bonds | |
We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to US Treasuries. Peripheral bond yields have converged closer to core yields. | ||||
| UK Gilts | |
We are neutral. Gilt yields are off their highs, but we expect more market attention on long-term yields through the government’s November budget, given the difficulty it has had implementing spending cuts. | ||||
| Japanese government bonds |  |
We are underweight. We see room for yields to rise further on Bank of Japan rate hikes and a higher global term premium. | ||||
| China government bonds | |
We are neutral. Bonds are supported by looser policy. Yet we find yields more attractive in short-term DM paper. | ||||
| US agency MBS | |
We are overweight. We find income in agency MBS compelling and prefer them to US Treasuries for high-quality fixed income exposure. | ||||
| Short-term IG credit | |
We are overweight. Short-term bonds better compensate for interest rate risk. | ||||
| Long-term IG credit | |
We are underweight. Spreads are tight, so we prefer taking risk in equities. We favor Europe over the US. | ||||
| Global high yield | |
We are neutral. Spreads are tight, but corporate fundamentals are solid. The total income makes it more attractive than IG. | ||||
| Asia credit | |
We are neutral. We don’t find valuations compelling enough to turn more positive. | ||||
| Emerging hard currency | |
We are underweight. Spreads to US Treasuries are near historical averages. Trade uncertainty has eased, but we find local currency EM debt more attractive. | ||||
| Emerging local currency | |
We are neutral. Debt levels for many EMs have improved, and currencies have held up against trade uncertainty. We prefer countries with higher real interest rates. | ||||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a US dollar perspective. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Euro-denominated tactical granular views
Six to 12-month tactical views on selected assets vs. broad global asset classes by level of conviction, December 2025
| Asset | Tactical view | Commentary | ||
|---|---|---|---|---|
| Equities | ||||
| Europe ex UK | |
We are neutral. Greater unity and a pro-growth agenda across Europe could boost activity, yet the bloc must tackle its structural challenges before we turn more optimistic. We note opportunities in financials and industries tied to defense and infrastructure spending. | ||
| Germany | |
We are neutral. Earnings growth is supportive relative to peers, and increased defense spending could benefit the infrastructure sector. But prolonged geopolitical uncertainty and fading euphoria over China’s stimulus could dent sentiment. | ||
| France | |
We are neutral. Ongoing political uncertainty could weigh on French companies, whose relative earnings have lagged the broader market. Yet major French firms rely on domestic activity for only a small share of their revenues and operations, shielding them from internal weakness. | ||
| Italy | |
We are neutral. Valuations are supportive relative to peers. Yet past growth and earnings outperformance largely stemmed from significant fiscal stimulus in 2022-2023, which is unlikely to be sustained in the coming years. | ||
| Spain | |
We are overweight. Valuations and earnings growth are supportive compared to other euro area stocks. Financials, utilities and infrastructure stocks stand to gain from a strong economic backdrop and advancements in AI. High exposure to emerging markets and easing Fed policy could boost equities further. | ||
| Netherlands | |
We are neutral. The Dutch stock market’s tilt to technology and semiconductors – key beneficiaries of rising AI demand – is offset by less-favorable valuations and a weaker earnings outlook compared to European peers. | ||
| Switzerland |  |
We are neutral, consistent with our broader European view. Earnings have improved, but valuations remain elevated compared to other European markets. The index’s defensive tilt may offer less support if global risk appetite stays strong. | ||
| UK | |
We are neutral. Political stability could improve investor sentiment. Yet an increase in the corporate tax burden could hurt profit margins near term. | ||
| Fixed income | ||||
| Euro area government bonds | |
We are neutral. Yields are attractive, and term premium has risen closer to our expectations relative to US Treasuries. Peripheral bond yields have converged closer to core yields. | ||
| German bunds | |
We are neutral. Potential fiscal stimulus and bond issuance could push yields up, but we think market pricing reflects this possibility. Market expectations for near-term policy rates are also aligned with our view. | ||
| French OATs | |
We are neutral. France faces continued challenges from elevated political uncertainty, high budget deficits and slow structural reforms, but these risks already seem priced into OATs and we don’t expect a worsening from here. | ||
| Italian BTPs | |
We are neutral. The spread over German bunds looks tight given its large budget deficits and growing public debt. Domestic factors remain supportive, with growth holding up relative to the rest of the euro area and Italian households showing solid demand to hold BTPs at higher yields. Domestic political pushback likely prevents defense spending from rising to levels that would resurface fiscal stability concerns. | ||
| UK gilts | |
We are neutral. Gilt yields are off their highs, but we expect more market attention on long-term yields through the government’s November budget, given the difficulty it has had implementing spending cuts. | ||
| Swiss government bonds | |
We are neutral. Markets are expecting policy rates to return to negative territory, which we deem unlikely. | ||
| European inflation-protected securities | |
We are neutral. We see higher medium-term inflation, but inflation expectations are firmly anchored. Cooling inflation and uncertain growth may matter more near term. | ||
| European investment grade | |
We are neutral on European investment grade credit, favoring short- to medium-term paper for quality income. We prefer European investment grade over the US Quality-adjusted spreads have tightened significantly relative to the US, but they remain wider, and we see potential for further convergence. | ||
| European high yield | |
We are overweight. The income potential is attractive, and we prefer European high yield for its more appealing valuations, higher quality and less sensitivity to interest rate swings compared with the US Spreads adequately compensate for the risk of a potential rise in defaults, in our view. | ||
Past performance is not a reliable indicator of current or future results. It is not possible to invest directly in an index. Note: Views are from a euro perspective, December 2025. This material represents an assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future results. This information should not be relied upon as investment advice regarding any particular fund, strategy or security.
Meet the authors
Jean Boivin
Head – BlackRock Investment Institute
Wei Li
Global Chief Investment Strategist – BlackRock Investment Institute
Glenn Purves
Global Head of Macro – BlackRock Investment Institute
Nicholas Fawcett
Senior Economist – BlackRock Investment Institute
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