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• Fed surprises with hawkish cut, raising terminal rate outlook.

• Stocks tumble, Treasury yields and USD soar post-Fed move.

• BoE holds off on rate cuts amid inflation fears

Let’s dissect

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Markets Snapshot

Macro and Fixed Income Markets

• US: The The Federal Reserve's rate announcement following its Wednesday policy meeting dominated sentiment this week. Policymakers delivered the expected 25-basis-point rate cut, bringing the total reduction since September to 100 basis points and the current target rate range from 4.25% to 4.5%. However, the tone turned hawkish as Fed Chair Jerome Powell highlighted persistent inflation risks. Core inflation forecasts for 2025 were revised upward to 2.5% from 2.2%, with Powell emphasizing a more cautious approach to future adjustments: “We have lowered our policy rate by a full percentage point from its peak and can now be more cautious.”

• The Fed now projects only two rate cuts in 2025, down from four anticipated in September, reflecting concerns over the longer timeline to achieve the 2% inflation target. This marked a shift from the September focus on labor market risks. The hawkish stance sent the S&P 500 tumbling nearly 3% on Wednesday, its second-worst day of the year. The USD Index (DXY) reached 108.4 last week, its highest level since November 2022, before dipping below 108.

• For the second consecutive week, bond prices fell sharply, driving yields higher. The yield on the 10-year U.S. Treasury note hit a nearly seven-month high of 4.59% on Thursday before settling at 4.53% on Friday, up from 4.15% two weeks ago and a recent low of 3.62% on September 16. Investor confidence was also shaken by political uncertainty, as multiple attempts to pass legislation to avoid a government shutdown failed, including a proposal backed by President-elect Donald Trump that was rejected Thursday night.

• In economic updates, the Commerce Department revised third-quarter GDP growth upward to an annualized 3.1%, beating the prior estimate of 2.8%, driven in part by stronger consumer spending. GDP growth has now topped 2.0% in eight of the last nine quarters. Retail sales also showed strength, rising 0.7% in November compared to 0.5% in October. Labor market data remained solid, with initial jobless claims at 220,000 and continuing claims at 1.87 million, both lower than the previous week.

• The week concluded with the PCE inflation report, a key metric for the Federal Reserve. Core PCE inflation rose 2.8% year-over-year in November, matching October’s pace and slightly below expectations. The relatively mild inflation reading helped lift stocks on Friday, allowing major indexes to recover some losses and close the week off their lows (see the next section)

• UK: The Bank of England (BoE) held its key interest rate steady at 4.75%, as anticipated. However, three of the nine Monetary Policy Committee members voted for a 0.25% cut, citing sluggish demand and a weaker labor market. Despite this, the majority highlighted rising wages and prices as increasing the risk of persistent inflation. Governor Andrew Bailey emphasized a cautious approach, while noting that economic uncertainty prevents committing to specific timing or scale of rate reductions. Annual headline inflation accelerated to 2.6% in November from 2.3% in October, driven by higher gasoline and clothing costs. Core inflation pressures persisted, with average weekly earnings (excluding bonuses) rising 5.2% in the three months through October, surpassing the consensus forecast of 5%.

Equity Markets

• US: The U.S. stocks fell over the week, though a Friday rally helped limit losses. Declines were broad-based, with smaller-cap indexes hit hardest. Major indexes, including Dow and Nasdaq dropped around 2%, while bond yields surged following the Federal Reserve's signal on Wednesday that interest rate cuts in 2025 may be more limited than anticipated. Notably, Thursday marked the S&P 500’s 14th consecutive session with more decliners than gainers—the longest streak since 1978—raising questions about the sustainability of the recent rally.

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