By Michael Every of Rabobank

Over the weekend, the half-century-long Assad dynasty in Syria fell. Islamists now hold Damascus. Syria can no longer be assumed to hold together as an entity. Dangerous military equipment and even chemical weapons are waiting to be seized by different sides.

As the arbitrary lines imposed by the Sykes-Picot Agreement of a century ago collapse, along with U.K. and European geopolitical influence, what new state/statelets could arise in the roiling Middle East? Backed by whom? Or will it just be chaos and civil war that destabilises the region further, perhaps even flooding Europe with millions more refugees that this time it won't be saying "Wir schaffen das!" about?

In the bigger picture, Iran has lost another key proxy, and Hezbollah a key supply route for rearming. Russia may have permanently lost its key airbase and warm water port there, following on from its loss of control of the Black Sea, weakening it in the Middle East and Africa. In short, this is a larger setback for the ‘Axis of Resistance’ than the U.S. retreat from Afghanistan - and with the West having done as little in most respects.

Indeed, what we just saw was the mere ripple effect of Russia being tied down in Ukraine and Israel striking back vs Iran and its proxies. Those Middle East countries thinking of anyone but a US/Abraham Accords defense umbrella as protection are left with bad options and none.

As a result, reports also have it that Iran appears to be doubling down on a nuclear route in response; are Russia, North Korea, and China are prepared to help there? If so, what will the West do about it?

Syria may seem far removed from normal business and markets, but again this represents a staggering geopolitical chess move; one that opens up what was flagged as The Great Game of Global Trade as far back as 2017 to new offensive strategy even before the U.S. gets serious about economic statecraft and realpolitik again - which it will. (As one speaker at the Reagan National Defence Forum just put it, US enemies "should go to bed afraid and wake up afraid.")

Indeed, as the U.S. psyches itself up for Trump 2.0, anyone peeking at the fall of Assad should be saying "Oh!" Especially if they are bearish the U.S. and the dollar.

On a more immediate note for markets, US stocks hit fresh all-time highs on Friday as the November non-farm payrolls report set the scene for another 25bp cut from the Fed next week. The S&P500 gained 0.25% to 6,090 and the NASDAQ added 0.81%. The Dow closed down 0.28%, dragged down by Chevron and United Health Care, whose CEO was recently murdered in New York.

US 10y Treasury yields fell 2.3bps to 4.15% on Friday, while 2-year yields fell by 4bps to result in a small bull-flattening of the Treasury curve. Brent crude was down by 1.4% following the agreement struck between OPEC+ producers to extend production cuts through to September next year.

Employment grew by 227,000 in November according the establishment survey. That was broadly in-line with expectations, and a net upward revision of 56,000 over September and October added some extra stodge for traders to digest.

The household survey painted a less rosy picture. There, the unemployment rate lifted to 4.2% (despite a two tick fall in participation) and the employment change was negative 355,000. According to the household survey, employment growth has been averaging -3,800/month in 2024 while growth in the labor force has averaged +75k/month over the same period.

Obviously, this raises further questions about which report to believe. Other labor market indicators released over the course of last week didn’t provide a definitive signal. The JOLTS survey showed a healthy lift in job ads, but the ADP employment survey showed employment growth slowing to 146,000 in November. That’s a touch below the 155,000 monthly average this year.

Weekly initial jobless claims printed 9,000 higher than expected, Challenger job cuts ticked a little higher in November and the employment sub-index of the ISM manufacturing report lifted 3.7pts to 48.1 while the equivalent services employment index fell from 53 to 51.5.

The overall impression seems to be a labor market that is continuing to soften, but hasn’t fallen off a cliff. Given the lagged nature of labor market indicators, and the cracks that are showing in the household survey, it makes sense that the FOMC would seek to take their policy rate closer to neutral sooner rather than later to maximise optionality. Perhaps this is especially the case given rich valuations evident in equity markets, the uncertainties surrounding fiscal policy next year and the looming wave of debt refinancing that is due to hit in 2025 & 2026.

Consequently, market implied probability of a Fed rate cut next week has risen from ~70% to ~85%, despite recent signs of stickiness in inflation that we will get an update on later this week, and the consensus view that the Trump platform is going to be inflationary inside the United States.