RECAPPING LAST WEEK
U.S. equity indices posted modest gains as investors’ expectations for an interest rate cut this
month continued to rise. The Nasdaq Composite and Russell 2000 indices each rose nearly 1%,
while the S&P500 added 0.3%. Sector performance was mixed, with gains in technology (+2.4%)
and energy (+1.5%) offsetting pullbacks in utilities (–4.5%) and healthcare (–2.8%). Crude oil
prices jumped 2.8% after OPEC agreed to leave output levels unchanged for the first quarter of
2026, but the move wasn’t enough to reverse the technical downtrend that has continued for the
second half of this year. Gold and cryptocurrencies were down slightly for the week. U.S. Treasury
yields rose despite employment and inflation data that strengthened the case for the Federal
Reserve to lower rates this month. Bond traders may have been wary of a surge in new monthly
U.S. corporate debt issuance, while the prospect of Japan raising rates later this month could
renew volatility concerns over the carry trade unwind. The U.S. labor market remained a mixed
picture, as private payroll data was soft, yet weekly jobless claims reached a three–year low. The
ADP employment report showed a surprise loss of 32,000 jobs in November. However, historically
that estimate has diverged from official government data, which won’t be released until December
16. The Chicago Fed estimated that the U.S. unemployment rate was unchanged in November at
4.4%, though that figure may rise given the elevated level of continuing jobless claims. There was
positive news on the inflation front, as September’s long delayed core PCE price index was lower
than expected at 0.2% MoM and 2.8% YoY. Consumer sentiment rose for the first time in five
months, reflecting improved inflation expectations and more optimism in the outlook for personal
finances. Americans now see one–year inflation at 4.1% and 3.2% annualized for the next five to
ten years, the lowest levels since January. In other economic news, consumer spending on Black
Friday was seen as eclipsing last year’s results, driven by a 9% surge in online shopping. U.S.
manufacturing activity shrank again in November, with the ISM PMI index remaining in contraction
territory for a ninth straight month. Services PMI was little changed at 52.6, with employment
subdued and prices for inputs elevated. Overseas, China’s government and private sector PMI
surveys both slipped into contraction as lackluster domestic demand persisted. Britain’s central
bank announced initiatives to ease capital requirements for lenders in an effort to stimulate the
economy, the first such reductions since the global financial crisis. Finally, the Bank of Japan
offered its strongest hint yet that a rate hike is in the offing, causing money markets to raise the
odds of a move on December 19 to near 80%.
THE WEEK AHEAD
The Federal Reserve’s interest rate decision on Wednesday takes center stage this week, and it
may be one of the most contentious meetings in years. While fed funds futures are pricing in a
near–90% likelihood of a 25–basis point cut to the 3.50%–3.75% range, there is significant division
among policymakers as to the Fed’s path ahead. Five of the twelve FOMC voting members have
voiced skepticism over further easing due to elevated inflation, while three members of the
influential Board of Governors favor a cut. This meeting will also feature an updated Summary of
Economic Projections and “dot plot” of long–range rate estimates. Financial markets may be
underpricing the risk of the FOMC keeping rates unchanged, which could throw cold water on the
recent rally in risk assets and trigger heightened volatility if there is a pause. There is also the
specter of a potential “shadow Fed Chair” situation influencing monetary policy if the White
House announces Powell’s replacement soon. U.S. economic data releases are sparse this week,
with the delayed September JOLTS job openings report expected on Tuesday followed by 10– and
30–year Treasury auctions later in the week. Oracle and Broadcom, major players in the artificial
intelligence space. report earnings this week:. On the international side there are two central
bank meetings to consider. Market participants anticipate the Reserve Bank of Australia will hold
rates at 3.60% after recent GDP and inflation numbers indicated that the county’s economy is
running too hot to consider a cut anytime soon. The Bank of Canada is expected to keep rates flat
at 2.25% as last week’s employment data suggested a resilient labor market despite the impact
of U.S. tariffs. China’s inflation and trade balance figures round out the overseas agenda
(Schwab)
