EU Will Be AIsimilated

By Bas van Geffen, Senior Macro Strategist at Rabobank

Resistance is futile. You will be AIsimmilated. The Trump administration really wants the rest of the (Western?) world to embrace American-made artificial intelligence and technology. Last week, the US suspended the US-UK Technology Prosperity deal, reportedly because the Trump administration was frustrated about the lack of progress on trade talks.

But the Telegraph reported that this may be due to concerns that the UK’s Online Safety Act could slow development of US artificial intelligence – as the US races to stay ahead of China. That makes sense: the US government has been unhappy with European regulation in many fields, including digital services providers.

The US Trade Representative argues that this creates an unequal playing field for US companies, whereas European companies are allowed to operate freely in the US. Yesterday, Greer warned the European Union that the US could use every tool at its disposal to counter “unreasonable” regulations, naming about a dozen of European companies that might be affected.

The EU may be looking at cutting red tape in several areas, but it has so far shown little appetite for hollowing out privacy laws, for example. Meanwhile, the Trump administration has shown its willingness to coerce governments by other means. Could Brussels’ insistence on these rules lead to a new trade dispute with the US?

These threats cast new doubt over EU-US relations, after the US have also called into question the country’s commitment to Article 5 of the NATO treaty. The trade agreement reached earlier this year has clearly failed to pacify the US government, despite Brussels’ pledges to invest more in the US, and buy more American energy and defense equipment.

In the latest iteration in the Ukraine-Russia peace talks, the US is now offering Ukraine “guarantees similar to those under Article 5 of the NATO treaty.” It’s an attempt to bridge the Ukrainian demand for strong security guarantees with Russia’s demand that Ukraine does not become a NATO member.

It’s a take-it-or-leave-it offer, and one can certainly wonder whether “similar guarantees” are sufficient for Ukraine to sign up to any deal – especially after Treasury Secretary Bessent undermined Article 5 when he stated that the US would not send troops to Europe, but only sell weapons, if Russia were to attack.

Nonetheless, oil markets have been drifting lower as peace talks continue and a global glut hangs over the market. WTI fell almost 6% in the past four sessions, hitting $55 per barrel for the first time since February 2021. However, oil prices came off their fresh lows after President Trump ramped up pressure on Venezuela with a blockade of tankers.

Yesterday also saw a busy data calendar as US statistics offices are still working through their backlog of data, after the shutdown disrupted many official data releases.

This made for a very unusual Employment Report, and not only because it was released on a Tuesday. The BLS made up for missing the October report. So, we learned that non-farm payrolls declined 105,000 in October and that payrolls recovered by 64,000 in November. This means that the labor market has shown little net change since April.

Average hourly earnings for November were softer than expected, and the unemployment rate rose to 4.6% from 4.4% in September. So the overall picture remains one of a weaker labor market. That supports further monetary easing, but probably not in January. These two months of data were not so weak to instill more urgency in the FOMC.

Moreover, some of the data come with slightly bigger margins of error, as a result of the shutdown. Lack of an October report may have left traders without their entertainment on the first Friday of November. But it left statisticians with bigger problems, such as missing the usual statistical weights for the current report – which are based on prior months. So, they had to adjust their methodology for weighing individual responses into the aggregate employment statistics. Add to that a lower response rate than usual.

By contrast, the response rates for the establishment survey were higher than usual. The collection periods for the October and November surveys were extended due to the shutdown, giving employers more time to respond. This could lead to somewhat smaller revisions to yesterday’s non-farm payroll estimates in the coming months.

Meanwhile, European PMIs were a little weaker than expected. Eurozone activity has been more resilient than expected, and these data suggest that some of this resilience may now be fading. We’ve been expecting a soft patch before Eurozone growth regains momentum in the course of 2026. Nonetheless, the PMI report took some of the sting out of the market’s recent expectations of a potential rate hike by end-2026. That decline in short-term rates caused a modest steepening of the European yield curve.

Rate cut expectations are building in more earnest in sterling money markets. UK inflation undershot expectations again in November. Headline CPI slowed to 3.2% y/y. That’s below the Bank of England’s projection of 3.4% and the weakest print in eight months. Underlying inflation eased too. Core inflation fell to 3.2% y/y, the slowest in nearly two years, while services inflation declined to 4.4% y/y. The Bank also watches food price inflation closely, given its influence on household inflation expectations, and this slowed from 4.9% to 4.2% y/y.

Combined with weak activity data since the summer, rising unemployment, and a slowdown in private sector wage growth, the disinflationary narrative appears to dominate MPC discussions. And risks of persistence are easing. Overall, the data suggest the BoE has been behind the curve.

Tomorrow’s 25bp cut looks to be locked in, and further easing as early as February is starting to look very plausible. We had already penciled in a subsequent cut in February, and we see some downside risks to our forecast of a 3.25% terminal rate for next year, especially if the UK economy fails to recover from the weakness seen in the second half of this year.