
G3: Risks lurking underneath the US economy; policy divergence across G3. On the surface, the US economy has entered the final leg of 2025 with considerable strength. As per Atlanta Fed’s Nowcasting analysis, economic growth momentum is currently the highest seen this year. Durable goods orders, manufacturing PMI, retail sales, non-residential investment, and public spending trends point to above-trend GDP growth in 3Q25 and possibly in 4Q25. Our 2025 GDP growth forecast of 1.9% is characterised by substantial upside risk. The Fed may not be ultra-dovish (yet), but the market is confident that the path ahead includes lower rates and ample liquidity. But is the outlook paved with nothing but comfort? We are picking up several clues that suggest potential headaches ahead. First, labour market developments could pose risks to the consumption outlook. Second, financial sector stability issues could resurface in 2026. Lastly, inflation. Cost-of-living concerns dominated this year’s off-cycle elections and are unlikely to fade, especially if the Fed errs by keeping policy too loose. From tariff passthrough to immigration tightening that raises labour costs in services and construction, inflation could climb well past 3% and spoil the party in 2026.
Markets have shifted focus away from Powell’s comment that a December rate cut was not a forgone conclusion. Futures markets are now effectively pricing in an insurance cut as two factors converge. The latest ADP employment report –the final labour market indicator before the upcoming Fed meeting – showed a 32K job decline in November, compared to a revised 47K gain in October and a market consensus of 10K gain, underscoring further deterioration in the US labour market. Looking ahead, Trump is expected to nominate the next Federal Reserve chair in early 2026, with Kevin Hassett emerging as a leading contender. The prospect of a “shadow Fed” forming before Powell’s term ends in May 2026 raises concerns about policy continuity and central bank independence.
In contrast, markets are increasingly confident that the European Central Bank (ECB) has ended its easing cycle. Unlike the Fed, the ECB faces no equivalent leadership uncertainty. The Governing Council has emphasised that it is more comfortable pausing than risking premature easing after halving the deposit facility rate by 200 bps to 2%, a level broadly aligned with inflation slightly above target. Eurozone CPI inflation rose to 2.2% y/y in November from 1.9% in May, while the unemployment rate remained near record lows.
For Japan, Bank of Japan (BOJ) Governor Ueda hinted that December’s meeting is live. He appears less concerned about tariff impacts and is focusing more on how a weak JPY could boost inflation. Market participants were caught off guard and quicky raised the odds of a BOJ hike to above 80%.

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