By Rabobank
2-year Treasury yields closed 4.4bps higher at 3.53% on Friday after December non-farm payrolls showed the unemployment rate falling to 4.4% and wage growth accelerating despite slower-than-expected hiring. Fed-dated OIS has seen a modest upward re-pricing in the market-implied path of the Fed Funds Rate, though two 25bp cuts by the end of the year remain in the curve with the first fully priced by June.
Breaking news that the Fed has just been issued subpoenas by the Department of Justice relating to statements made by Powell in testimony to Congress could see further recalibration in expectations of the future rate path. Powell has made a statement saying that concerns over his congressional testimony is simply a pretext and that “the threat of criminal charges is a consequence of the Fed setting rates based on our best assessment of what will serve the public, rather than following the preferences of the President.”
In essence, Powell is correct, the real target of the administration is central bank independence which renders the price of money immune to the democratic process and to coordination with other levers of national policy to achieve national policy goals. Independent central banking is a neoliberal shibboleth, but the neoliberal era is clearly over. For further evidence of that (as if it was necessary), look no further than the US’s recent moves towards capital controls and financial repression such as the ban on dividends and stock buybacks for weapons manufacturers, the banning of international wire transfers for welfare recipients, the proposed capping of credit card interest at 10% and the $200bn purchase of mortgage-backed securities designed to pressure lending rates lower. We’re sensing a pattern...
This week will bring the release of the December CPI report on Tuesday. That will give markets another chance to play the game of “up a little bit, down a little bit” even while the global economic and security architecture is being re-made around us in real time. Following comments from President Trump that the United States intends to acquire Greenland “the easy way” (i.e. by buying it) or “the hard way” (via military annexation), Danish PM Mette Frederikson said on Sunday that “we are ready to defend our values – wherever it is necessary – also in the Arctic. We believe in international law and in peoples’ rights to self-determination.”
Frederiksen’s comments recall Mark Twain’s observation that “it ain’t what you don’t know that gets you into trouble; it’s what you know for sure that just ain’t so.” In this case, some might argue that the international law that Denmark believes in is a polite fiction and that it has only been a thing in the past to the extent that it was enforced by the weight of US arms. Volodymyr Zelenskyy articulated as much at the United Nations last year when he said “...that’s the reality. Not international law, not cooperation – weapons decide who survives”. How can international law conceivably be enforced against US arms rather than by them? Who will do the enforcing?
So, while Frederiksen might say that Denmark is ready to defend its values, the reality is that it is not ready to defend Greenland. If the United States is truly determined to acquire the territory one way or another, it will ultimately prove successful. Frederiksen said last week that a US annexation of Greenland would spell the end of NATO, which is probably correct. This then becomes a problem for the entire European Union, who arguably need NATO much more than the Americans do. Are France and Germany happy to run that risk so that Denmark can keep Greenland?
Only a few short years ago the idea that the United States would be willing to risk what Zbigniew Brzezinski called its “democratic bridgehead” on the Eurasian continent by threatening the collapse of NATO seemed unthinkable. However, the critical tone taken towards Europe in the US’s new national security strategy and the ongoing evidence of appetite for rapprochement with Russia in an effort to isolate China calls those old assumptions into question.
So, is the US just playing Europe hot and cold or has something really changed? Europe’s lack of military and monetary sovereignty (see yesterday’s FT here) means that it cannot afford to gamble one way or the other, so the probability of capitulation to Trump over Greenland in a similar manner to how Europe capitulated over tariffs should not be dismissed. With EURUSD still trading above 1.16 at time of writing on a somewhat superficial rearmament narrative, it would seem to me that these risks are not in the price.
While the US plays hardball with Europe over the future of Greenland, the potential for a new democratic bridgehead on the Eurasian continent is appearing. Pro-democracy mass demonstrations in Iran are continuing despite reports that government crackdowns have resulted in the deaths of more than 500 protesters. President Trump has repeatedly warned the Iranian regime that the US may seek to intervene if protestors are harmed and the Wall Street Journal today reports that Trump will be briefed on Tuesday about possible US actions that could include distributing Starlink systems to counteract a shutdown of the internet, or even military intervention. Reza Pahlavi, the Iranian Crown Prince in exile, has called for protestors to continue to occupy public spaces and hinted at a return to the country. Did anybody have the restoration of the Shah on their 2026 bingo card?
The Iranian turmoil and developments in Yemen have contributed to a rise in oil prices in recent days that has more than wiped out the price falls that came in the aftermath of the US’s capture of Venezuela’s Nicolas Maduro. While this is mostly short-term market noise, the impact of US actions on supply chains is much more substantive.
Economics students are told that economics is the study of scarcity and taught to solve constrained optimization problems. However, these problems are generally academic abstractions, and by the time students finish their PhDs and head off to work for Treasury or a central bank they seemingly forget about real factor constraints and proceed to make simplifying assumptions that supply will be available when needed. In reality, the detail surrounding the availability (or otherwise) of physical stuff matters. Denmark will discover this if they care to test the theory that Greenland can be defended without the presence of physical military materiel.
Craig Tindale excellently describes this dawning realization for Western policymakers as ‘the return of matter’. Our own Michael Every has articulated the idea as “what is GDP *for*”. In a nutshell, what is being described is supply chain sovereignty and this will continue to be the conversation going forward as Western powers pivot away from financialization and back toward industrialisation. Once more for the people in the back: *the neoliberal period is over*.
In the case of Venezuela, we find expression of this idea in the fact that it isn’t the size of the country’s oil reserves that is most critical, but the fact that those reserves are of a heavy grade suited to US gulf refineries and now prevented from flowing to Chinese refineries that were established on the assumption that supply would be forthcoming. This raises the prospect of Chinese refineries becoming stranded assets – threatening China’s energy security. That threat is compounded if supplies from Iran – where ~90% of oil exports go to China – are also interrupted by changes on the geopolitical chessboard.
So, while it is certainly a worry that the United States may appear content to burn the democratic bridgehead in Europe to suit its own interests, it is also burning China’s bridgeheads in the Western Hemisphere and the Middle East. Is this net bullish or bearish for Pax Americana? The answer to that question ought to be helpful in directing capital flows in 2026.
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WHAT HAPPENED: Senator Mark Kelly (D-AZ) is suing the War Department and War Secretary Pete Hegseth over actions to demote him and cut his retirement pay.
WHO WAS INVOLVED: Sen. Mark Kelly, War Secretary Pete Hegseth, the Navy, the Department of War, and Navy Secretary John Phelan.
WHEN & WHERE: The lawsuit was filed in Washington, D.C., with recent actions stemming from a November video released by Kelly and fellow Democrats.
KEY QUOTE: “Six weeks ago, Senator Mark Kelly—and five other members of Congress—released a reckless and seditious video that was clearly intended to undermine good order and military discipline.” — Secretary of War Pete Hegseth
IMPACT: The Department of War contends that Kelly’s current status as a U.S. senator does not exempt him from accountability.
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