It has been an interesting 2 weeks in terms of price action, as despite the positive fundamental news, we are seeing some consolidation of positioning and by default lower equity markets; a traditional market operating in a “buy the rumor, sell the fact” perspective.
President Trump signed legislation to end the longest closure in US history, but it could take some more time before all government functionality is obtained. As per the White House, the October jobs report will skip the unemployment rate, and this has created some uncertainty with regards to the upcoming FED meeting on the 10 th of December. As of now, the market is pricing 51.9% probability of a 25bps cut, much lower than what was expected a few weeks ago (see below table). Let me remind you of the dot plot projections that still point out 3 cuts in 2025 and if that was to come true then we should see a December cut. In terms of FED speakers, we are seeing a mixed picture so far pointing out the resilience of the economy so far but at the same time the worrying trajectory we are seeing in the labor market. In other news, Atlanta Fed President Raphael Bostic will retire by late February 2026, opening another spot for replacement in the committee. Bostic was positioned in the middle of the pack with a hawkish bias towards rates as he has pointed out multiple times that moderate inflation risks outweigh employment concerns.
In terms of price moves, heavy selling resumed in Wall Street as hawkish statements from Fed officials ahead of upcoming data have spurred traders to sell risk assets. Moreover, traders are concerned that the omission of key data due to the government shutdown may bolster arguments for officials to stand pat. High overall equity valuations have also caused a wave of positioning consolidation with tech stocks underperforming. Investors seem to be rotating out of tech stocks into value sectors such as industrials, financials and healthcare. Month to date the S&P index is 1.87% lower with US tech stocks trailing 3.85% lower as well. In Europe, the market seems to be a bit more stable as it is catching up with the previous month’s US strength. On the rates side, US 10yr government bonds are trading around 4.13% yield with German 10yr government bonds trailing at 2.7%, both slightly wider week on week. Gold was the winner of this week, trading 4.5% higher at $4170 per ounce. EUR USD continues its tight trading range around the 1.16 level. In terms of credit issuance, reverse Yankees keep coming to the market especially on the AI side, as they need to refinance the forward capital expenditure needed for the development of data centers.
Looking ahead…
The most important point for the next few weeks is to see the awaited unemployment and inflation data out of the US. The earnings season shows a strong growth perspective on an idiosyncratic level, what remains to be seen is if the economy is continuing its strong momentum and it has not been affected by the government shutdown. Productivity due to AI has started to be questioned and how this will impact on the level of unemployment. We have so far seen a few mega scalers announcing large layoffs but in my humble opinion, I believe this is next year’s trade/worry. It has been a long year with huge volatility and it seems this momentum will continue until the last day of the trading year!
Written by: Michael Konstantinou, Senior Portfolio Manager
Source: Bloomberg
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