Weekly Market Wrap: Investors are betting on further Fed rate cut

Financial markets ended last week in a state of uncertainty following the release of what were arguably the most consequential U.S. data sets for global trading: employment figures and inflation readings. These developments are the focus of this week’s market summary.

U.S. labor‑market data reflected a continued deterioration over the past two months, while inflation showed only a modest decline in November. Together, these indicators left investors on edge, struggling to make confident investment decisions.

This data arrived roughly a week after the Federal Reserve cut interest rates by 25 basis points, bringing the target range down to 3.75%–3.50%, marking the third rate cut since September.

Key Economic Data

U.S. employment figures for October and November revealed a mixed picture of labor‑market conditions, a combination that could produce an unusual reaction in financial markets.

Both months’ reports were released on the same day due to the longest government shutdown in U.S. history.

• Nonfarm payrolls fell by 105,000 jobs in October, compared with a previous increase of 108,000.
• Average hourly earnings rose 0.4% month‑on‑month, up from 0.2% in September.
• Annual wage growth slowed to 3.5% in October, down from 3.8% in September.

In contrast:

• Nonfarm payrolls rose by 63,000 in November, beating expectations of a 50,000 increase.
• The unemployment rate climbed to 4.6%, up from 6.4% previously and above market expectations of no change.
• Average hourly earnings increased 0.1%, down from 0.3% in October.
• Annual wage growth held steady at 3.5%.

Overall, the data skewed decisively negative, signaling weakening job and wage growth — a combination that placed significant downward pressure on the U.S. dollar.

On the inflation front:

• Headline CPI rose 2.7% year‑on‑year in November, down from 3.0% a year earlier and below expectations of 3.1%.
• Core CPI increased 2.6%, also below expectations and down from 3.0% the previous year.

The conflicting signals — a weakening labor market but easing inflation — limited the gains the dollar might otherwise have achieved.

Federal Reserve Commentary

John Williams noted that the U.S. economy is growing between 1.5% and 1.75% this year, with expectations of stronger growth next year. He added that there is “no urgent need” for further policy action, arguing that prior rate cuts have positioned the economy well.

More dovish remarks from Fed Governor Christopher Waller added further pressure on the dollar. Waller emphasized that the Fed can continue cutting rates, as current levels remain 50–100 basis points above neutral.

Additional downward pressure came from the Fed’s announcement of $40 billion per month in short‑term Treasury purchases to boost liquidity — a move with an easing effect equivalent to two additional rate cuts.

Gold and Monetary Policy

Gold benefited not only from geopolitical tensions in Venezuela, but also from the Fed’s increasingly dovish tone.

Waller’s comments — suggesting the Fed still has roughly 100 basis points of room to cut — boosted demand for precious metals as a store of value.

Financial concerns in Japan also supported gold after Kyodo reported that the Japanese government is considering a record budget exceeding ¥120 trillion ($775 billion) for fiscal year 2026.

Another supportive factor came from the Bank of Japan, which raised interest rates to their highest level in nearly three decades. This pushed Japanese bond yields higher relative to U.S. Treasuries.

Because gold typically moves inversely to U.S. 10‑year Treasury yields, falling yields helped lift gold prices.

U.S. Equities and Treasury Yields

U.S. equities and Treasury yields — which often move in opposite directions — were influenced by several key factors, with monetary policy being the most significant driver.

The performance of AI‑infrastructure companies was the second major force shaping market movements.

Waller’s call for further rate cuts supported equities but weighed on Treasury yields, as lower rates typically reduce returns on benchmark bonds.

The semiconductor sector began its current rally after Micron Technology, the largest U.S. memory‑chip producer, issued strong quarterly guidance. The company cited rising demand and supply shortages, enabling it to raise prices — sending its stock up more than 14%.

Earlier in the week, equities had slumped on concerns that AI‑infrastructure firms might sharply reduce spending. But Micron’s outlook calmed investors, turning losses into gains within a single session.

Weekly Gains for the Yen After Rate Hike

In a landmark move, the Bank of Japan raised short‑term interest rates by 25 basis points to 0.75%, the highest level since 1995. This marks a major step toward normalizing monetary policy after years of negative rates, which Japan had maintained since 2016 — the longest such period globally.

Markets had largely priced in the decision.

The BoJ cited several factors:

• Inflation has exceeded the bank’s target for 44 consecutive months, prompting action to prevent it from spiraling.
• Consumer prices rose 2.9% in November, reflecting persistent inflationary pressures.
• Real wages have fallen for 10 straight months, meaning price increases continue to outpace wage growth — a key justification for tightening.
• The bank expects inflation (excluding food and energy) to fall below 2% between April and September 2026 due to slower food‑price increases and government support measures.
• The BoJ also anticipates improved corporate performance, which could enable companies to raise wages soon.

ECB Helps Limit Euro Losses

The euro ended last week with very modest losses, despite the European Central Bank’s decision to leave interest rates unchanged.

This slight decline came even as the ECB maintained its growth forecasts and ECB President Christine Lagarde praised the eurozone’s “remarkable resilience” in the face of recent crises.

Still, the euro weakened amid persistent uncertainty and cautious optimism, themes highlighted in the ECB’s policy statement.

Lagarde expressed concerns about global trade, warning that protectionist policies and trade restrictions could harm the EU economy by disrupting supply chains, reducing exports, and weighing on consumption and investment.

She stressed that future economic progress will depend on fiscal sustainability, strategic investment, and structural reforms.

A Bloomberg report on Thursday indicated that ECB officials now believe the rate‑cutting cycle is likely over, based on updated growth and inflation projections.

Additional pressure on the euro came from Germany’s announcement that it will increase federal debt issuance by 20% next year to a record €512 billion to finance higher government spending.

On the positive side, the ECB kept the deposit rate at 2.00% and raised its 2025 GDP growth forecast to 1.4%, up from 1.2%. Core inflation expectations for 2025 were left unchanged at 2.4%.

Looking Ahead

As markets head into the final weeks of the year, uncertainty remains the dominant theme. Investors are increasingly betting that weakening U.S. labor conditions and easing inflation will prompt the Federal Reserve to continue cutting rates in 2026. Until clearer signals emerge, volatility is likely to persist across currencies, commodities, and equities alike.