Macro
The U.S. economy delivered mixed signals. Initial jobless claims fell for the third consecutive week, but continuing claims rose to a three-year high. The Philadelphia Fed manufacturing index returned to contraction, but the composite PMI reached its highest level since April 2022, buoyed by strength in services. Housing data painted a mixed picture: October housing starts missed expectations, partly due to weather, but NAHB sentiment climbed to a seven-month high, and existing home sales improved amid better inventories.
Standard economic theory suggests that Republican policies such as tax cuts, deregulation, and tariffs could elevate the budget deficit, drive up inflation expectations, and weaken the dollar by lowering real interest rates. However, the new administration appears focused on fiscal responsibility, with debates on Social Security cuts reflecting an effort to manage government spending. Plans to reduce the federal workforce of 2.3 million and bring regulatory agencies under tighter control signal a drive for greater efficiency.
The establishment of the Department of Government Efficiency (DOGE), led by Elon Musk and Vivek Ramaswamy, reflects the administration’s efforts to manage the budget deficit and control inflationary pressures. This counters concerns that Republican policies might increase the deficit through tax cuts and deregulation. DOGE focuses on efficiency and cost reduction by streamlining government operations by reducing bureaucracy, cutting unnecessary expenditures, and restructuring federal agencies.
In the Eurozone, inflation rose from 1.7% to 2% in October, signalling renewed price pressures. Consumer confidence dropped from -12.5 to -13.7, reflecting ongoing pessimism about growth and political stability. This follows weak PMI data from the previous week, adding to concerns about the region’s economic outlook.
In the UK, CPI increased sharply from 1.7% to 2.3%, while core inflation increased from 3.2% to 3.3%. Weak PMI figures and sluggish retail sales weighed on sentiment, pushing the pound to a six-month low.
Japan also showed signs of slowing, with CPI declining from 2.5% to 2.3% in October, running counter to the Bank of Japan’s direction for higher rates. The yen continued to weaken, hitting 155 per USD, extending its downward trend since September.
Geopolitical tensions intensified as Ukraine escalated missile strikes, and Russia responded with advanced hypersonic weapons. Domestically, uncertainty surrounding leadership appointments in the Treasury Department added another layer of complexity. Despite these headwinds, markets showed resilience, supported by corporate performance and shifting rate expectations.
Rates
Treasury performance was mixed this week, characterized by a flattening yield curve. Demand at the $16 billion 20-year Treasury auction fell short of expectations, reflecting softer investor interest. Meanwhile, the U.S. dollar strengthened against major currencies, particularly the euro, with the DXY index rising 0.8%. This marked its eighth consecutive weekly gain—the longest streak since September 2023.
The 10-year Treasury yield climbed to 4.4%, a significant increase from the 3.6% level observed before the Federal Reserve began cutting rates back in September. This 80-basis-point rise represents the largest increase in the 10-year yield during a Fed rate-cutting cycle in over 40 years.
Economic indicators suggest the Fed may refrain from cutting rates in December. The U.S. economy continues to expand at a healthy pace, inflation remains above 3%, and the incoming administration may implement additional fiscal stimulus. These factors support ongoing growth and reduce the urgency for immediate rate cuts. Currently, less than 25 basis points of cuts are priced in over the next two meetings.
Reflecting these developments, market expectations for a December pause have risen to roughly 47%, compared to 27% just a week earlier. At the same time, expectations for substantial rate cuts in 2025 have moderated as investors reassess the policy outlook. Both the front and long ends of the yield curve have repriced higher, as the market contemplates potential policy shifts under the new administration, including the pace and scope of fiscal measures.
Beyond domestic policy, geopolitical risks and further fiscal measures could introduce new inflationary pressures, particularly if new tariffs or stimulus packages are enacted. Meanwhile, the dollar’s ongoing eight-week rally underscores concerns over trade dynamics, growth prospects, and the likelihood that the Fed will be slower to cut rates than previously anticipated.
Credit
A supportive economic growth environment, manageable macroeconomic risks, and sustained high demand for yield continue to support tight credit spreads. The credit market remains robust, with U.S. investment-grade issuance exceeding USD 36 billion this week. November’s total volume now stands at USD 84 billion, and is expected to surpass USD 100 billion before month-end. This brings year-to-date issuance to USD 1.44 trillion—the second highest on record after the USD 1.75 trillion reached in 2020.
Amid this strong appetite, valuation constraints are becoming increasingly severe as investors continue to buy credit for its yield and embedded duration. Signs of exuberance are particularly evident in the lowest-rated bonds, where the gap between CCC and B spreads has tightened from 540 basis points in June to just 275 basis points now, marking the narrowest differential since 2022.
Throughout the year, a barbell strategy—pairing Treasuries, which provided solid yields, with riskier credit exposures that offered generous spreads—has worked well. However, as yield differentials compress, credit investors might need to look for more specyif exposure.
One area of potential opportunity may be real estate-related debt, where heightened uncertainty has led to increased fear and potentially better entry points. Another one is the spread between syndicated bank loans and high-yield bonds. For instruments with a similar credit quality there is wide yield gap of around 200 basis points. Another way to capture relative value are mortgage-backed securities (MBS) which appear attractive relative to investment-grade corporates.
Still, downside risks linger. Tariffs and the potential escalation of trade tensions could threaten growth, emerging as a key tail risk that investors must keep in mind when navigating the credit markets.
Equities
U.S. equity markets rebounded this week, recovering from the prior week’s declines, although the S&P 500 and Nasdaq remained below their post-election peak levels. Large-cap tech stocks saw mixed performance, with notable declines in Alphabet (-4.5%) and Amazon (-2.7%). However, the equal-weighted S&P 500 outpaced the standard index, with the RSP gaining 2.5%. Outperformers this week where Consumer Staples +3.10%, Materials +2.95%, Real Estate +2.61%, Utilities +2.56%, Industrials +2.46%, Energy +2.32%, Financials +1.68%.
The S&P 500 has already seen substantial gains. The index is up 25% in 2024, following a 24% increase in 2023, marking the first consecutive years of over 20% gains since the late 1990s. Booming markets and optimism following Trump’s election contributed to a frenzy in leveraged ETFs. On Thursday, these instruments purchased a record $2.1 billion in U.S. stocks in a single day.
This week’s earnings season spotlight fell on Nvidia, which reported better-than-expected sales. Although its Q4 revenue guidance didn’t surpass the most optimistic forecasts by as large a margin as in previous quarters, analysts remained positive. They cited strong demand for Hopper datacenter GPUs and management’s encouraging comments about upcoming Blackwell shipments as reasons for their optimism.
Going into earnings, Nvidia’s call options were richly priced, with very high implied volatility. After the earnings announcement, Nvidia’s call option volatility declined sharply. For example, $150 calls dropped from 120% to just 42% within a day. It has become harder to significantly surprise the market because Nvidia’s forward guidance since Q2 2023 has been more predictable, remaining within the 5–10% range. Nvidia’s report also influenced broader market volatility; the VIX, which had climbed to 19 ahead of Nvidia’s earnings, retreated to 12 afterward, reflecting a volatility reset.
Retail also garnered attention with mixed results. Walmart (WMT) surged 7.4% after exceeding aggressive expectations for U.S. comps (ex-fuel), while Target (TGT) tumbled 17.8% due to missed metrics, soft discretionary demand, and a shift toward more promotional customer behavior. TJX gained 1.3% on a beat and raise, aided by international strength, though future guidance was only reaffirmed. Ross Stores (ROST) rose 3.8% on margin strength, and Gap (GAP) rallied 15.6% due to share gains and positive growth at Athleta.
Google (GOOGL) slid 4.5% as the Justice Department advocated for a Chrome divestiture to address antitrust concerns. If Chrome ends up under different ownership—especially an AI-focused rival—it could challenge Google’s position. The most significant threat, however, is the potential separation of Android, Google’s foothold in the mobile ecosystem. Tesla (TSLA) climbed 9.9% on reports of a potential federal framework for self-driving vehicles. Intuit (INTU) added 6.9% on better-than-expected results, though guidance reflected anticipated marketing expense pull-forwards. Comcast (CMCSA) edged up 1.4% as it confirmed plans to spin off NBCUniversal.
Other key highlights include Snowflake (SNOW, +32.9%), which beat expectations and cited positive demand trends; Keysight (KEYS, +14.0%), highlighting AI-driven growth in its wireline business; and Deere (DE, +12.0%) on strong margins and improved dealer destocking. Palo Alto Networks (PANW, +0.9%) also beat and raised guidance, but faced questions about declining billings. Overall, the week presented a mixed bag of earnings and outlooks, with sector-specific drivers shaping performance.
A concern remains that, despite the market reaching all-time highs, not much liquidity is flowing into it. Margin balances have flattened and the Fed’s balance sheet is shrinking. Additionally, the market has not yet reacted to the recent spike in interest rates.