WEEKLY MARKET SUMMARY
Global Equities: Markets were relatively subdued in anticipation of the December 9-10 Federal Reserve meeting, with major US indices posting modest weekly gains yet remaining below prior highs. The Nasdaq Composite was the best performer among major large cap domestic indices, gaining 0.9% on renewed AI optimism, and broader market breadth was encouraging with the S&P 500 up 0.4% in the weekly session and the Dow Jones Industrial Average advancing 0.6%. Interest rate-sensitive small cap stocks ended the week 0.8% higher as investors priced in a near-certain Fed rate cut. Foreign developed and emerging market stocks both ended the week with 0.8% gains.
Fixed Income: The 10-Year Treasury yield moved higher, reaching 4.14% on Friday, on investor concerns that the expected Fed rate cut will add fuel to the inflationary fire and make it more difficult for the Fed to issue subsequent cuts. Rising bond yields in Japan and the unwinding of the Yen carry trade also put upward pressure on yields. The 30-year Japanese bond yield surged dramatically, reaching a record high of 3.445% during the week.
Commodities: Oil prices drifted sideways most of the week before rising slightly on Friday to bring US West Texas Intermediate (WTI) prices back above $60/barrel. Gold prices moved little during the week, ending around $4,226/oz. A supply squeeze and demand for usage in data centers pushed copper prices to their highest level since July, while natural gas prices soared to a three-year high as colder weather hit the US.
WEEKLY ECONOMIC SUMMARY
Trump Makes his Pick: President Trump said he had finalized his pick for Fed Chair to succeed Jerome Powell, although the announcement is not expected until the new year. Director of the National Economic Council Kevin Hassett is widely considered to be the nominee, with online prediction markets giving him nearly 90% odds. There is some speculation that Trump teased the decision to gauge the reaction of the bond market because Hasset has been a vocal supporter of Trump’s economic policies and an advocate for aggressive rate cuts, sparking fears of a “puppet” Fed Chair for the President. Despite these concerns, Hassett has the requisite qualifications with a PhD in economics and bipartisan experience working under both the Clinton and Bush administrations. Furthermore, while the Chair is the most visible member of the Fed, the position represents just one vote alongside eleven other voting members.
Labor Market Weakness: With no official BLS jobs report for November, investors had to make do with the ADP private employment report to assess the US jobs market. The ADP data showed an unexpected loss of 32,000 jobs, the most in more than two years. Three of the last four ADP reports have been negative, and the most recent data showed small businesses are cutting heavily with 120,000 lost jobs, while larger businesses reported a net gain of 90,000 jobs. The poor data was countered by a better-than-anticipated weekly jobless report, although that data was possibly skewed by the Thanksgiving holiday since many newly laid-off workers delay filing for benefits during the holiday week.
Subdued September Inflation: The government shutdown caused the September Personal Consumption Expenditures (PCE) data to be released late, but investors still wanted to know the state of inflation in advance of the Fed meeting. The September PCE report showed the Fed’s official inflation measure Core PCE (ex-food and energy) at 2.8%, which should be good enough to ensure a rate cut. October Core PCE data will come out the week following the Fed meeting and is expected to accelerate to 2.9%, according to the Cleveland Fed’s Inflation Nowcasting model.
CHART OF THE WEEK
The Chart of the Week shows the Federal Reserve’s balance sheet holdings, which presently stand at $6.54 trillion. Up until December 1st, the Fed was engaged in quantitative tightening (“QT”), the policy of letting securities mature without replacement to reduce the level of balance sheet holdings. The Fed has now ended QT but will only reinvest proceeds to maintain the current asset level rather than actively buy new bonds, referred to as quantitative easing. The Fed is looking to pre-empt some recent weakness as bank reserves slipped below $3 trillion and were approaching the critical threshold of around $2.5-$2.7 trillion. Further evidence of banking sector strain was visible as the Fed lent $13.5 billion to banks via overnight repo agreements on December 1st, which was the second-largest single-day liquidity injection since the pandemic.
Commentary from VestGen Investment Management.