RECAPPING LAST WEEK
The Federal Reserve lowered its benchmark interest rate by 25 basis points while signaling a
pause in further reductions as they look for clearer signals on inflation and the labor market. U.S.
equity indices delivered mixed performance that culminated in Friday’s sharp selloff. Equal–
weight, small cap, and value indices outperformed, indicating a rotation away from large–cap
growth stocks. The Russell 2000 index rose 1.2% while the Nasdaq Composite fell 1.6% and the
S&P500 slid 0.6%. Basic materials were the standout sector, rising 2.4% as the metals and
mining subsector jumped. Precious metals rallied sharply, with silver rocketing higher by more
than 10% before giving up nearly half the gains on Friday, while gold rose 2.4%, nearing its record
high from October. Technology fell 2% after earnings reports from Oracle and Broadcom renewed
concerns over artificial intelligence capital outlays. The U.S. Treasury yield curve steepened after
the Fed decision, with the two–year yield inching lower while the 10–year rose to near 4.2% on
expectations for firmer growth and steady inflation. The division within the FOMC was apparent as
two members dissented in favor of keeping rates unchanged, while a total of six had indicated no
cut according to the “dot plots”. The Fed’s median outlook sees just one quarter–point cut in 2026,
but with a wide dispersion of views. In its Summary of Economic Projections, the Fed saw longer–
term rates remaining higher than expected and bumped its 2026 GDP growth estimate up to 2.3%
from 1.8%. Projections for inflation were revised lower but expected to remain above the Fed’s 2%
target for several years. The Fed also announced it would begin buying Treasury bills to help
steady short–term funding markets. In other economic news, the delayed JOLTS report—a
combination of September and October’s numbers—showed an increase in both job openings and
layoffs. The Employment Cost Index for Q3 was little changed, suggesting that labor costs are not
contributing to inflation risks, though tariff–related price pressures remained elevated. On the
international side, oil prices tumbled even as geopolitical tensions escalated with the U.S. seizure
of a Venezuelan tanker. Prospects of a global supply surplus outweighed concerns of disruption
from a sanctioned exporter. The Reserve Bank of Australia essentially ended its easing cycle,
holding rates steady for a third straight meeting and stating that price risks have “tilted to the
upside”. The Bank of Canada also kept its policy rate unchanged as inflation hovered near the 2%
target and the country’s economic growth has proved resilient despite U.S. trade measures.
Finally, higher food prices pushed China’s CPI to a 21–month high, but a continued fall in producer
prices suggested that overall domestic demand remained weak. With a month still remaining in
the year, China became the first country to reach an annual accumulated trade surplus of $1
trillion. Despite exports to America falling by nearly 20% due to tariffs, China continued to sell
three times as much to the U.S. as it buys. Sales to other countries have ramped up considerably,
leading to the record surplus.
THE WEEK AHEAD
This is the last full trading week of the year, and it is paired with a crowded agenda that includes
more central bank meetings and long–delayed U.S. jobs and inflation data. Tuesday’s non–farm
payrolls report will include the past two months’ data and expectations are for a significant
decline from September’s 119,000 increase, although economists do not anticipate job losses as
were seen in the most recent ADP private payrolls report. The October CPI report was cancelled,
so Thursday’s release will reflect November and is expected to come in at +3.0% YoY, the same
pace as September. These data points could strongly influence the Fed’s thinking on monetary
policy going forward, but after last week’s meeting, there is a higher speed limit for growth in the
eyes of policy makers. Even though its median projection suggests only one rate cut next year, fed
funds futures are currently pricing in two, with the first expected in April at the earliest. Other U.S.
economic releases will include retail sales, flash manufacturing and services PMIs, and a revised
consumer sentiment reading. On the international calendar, the UK, Europe, and Japan have rate
decisions this week. Bank of Japan Governor Ueda’s recent comments have markets almost fully
pricing in a 25–basis point hike on Thursday evening. After that, speculation will turn to how the
bank may proceed in 2026. The Bank of England is expected to cut rates by a quarter–point on
Thursday after last week’s disappointing GDP numbers, while the European Central Bank is likely
to stand pat as the region’s economic growth projections tilt upward. Other global releases to
watch include the flash PMI results and China’s industrial production and retail sales figures
(Schwab)
