Global Markets Kickstart: After the Hawkish Cut
After the Hawkish Cut
Chart of the Week:
Yield Curve Normalization Raises Questions About Restrictive Policy, Potential Rate Cut Reduction
Following the end of the 2Y-10Y yield curve inversion in September, the Fed’s December 25 bps rate cut further lowered short term rates, with 3-month yields now below 10-year Treasury yields. The normalization reflects contributions from both ends: short-term declines due to rate cuts and long-term rate increases driven by stronger-than-expected economic data, persistent inflation, and the impact of “Red Wave” policies.
Market Recap:
U.S. Stocks Rebound From Lows;
Labor Market Resilient, Inflation Sticky
Strong Dollar Weighs on Gold;
Ukraine Blocks Russian Gas Transit, Driving Prices Higher
Last week, markets largely digested the Fed’s hawkish rate cut, with long-term Treasury yields stabilizing. December’s historically strong equity performance helped lift U.S. stocks from the prior week’s lows. All three major indexes posted notable gains, with semiconductor stocks leading. The S&P 500’s 11 sectors all ended higher, and Apple (AAPL) reached a record high.
What’s Trending:
China’s Monetary Easing and U.S. China Rate Differential Likely to Persist, Yuan Remains Soft
China’s inflation remains subdued, with core inflation growth staying below 1% YoY for nearly two years. Weak consumer and investment sentiment has kept retail sales growth in low single digits, limiting business production and pricing power.
In Focus:
Inflation Risks Remain Elevated; Monitor Inflation and Bond Portfolio Sensitivity
U.S. November overall and core PCE inflation rose by 2.4% and 2.8%, respectively, slightly below expectations but still above the 2% target. Inflation progress appears to be stalling, with the Fed revising its 2025 inflation forecast higher, suggesting monetary policy may not be as restrictive as anticipated.
