Macro
U.S. labour market data may be overstating underlying strength at a time when hiring momentum has already slowed materially. With reported job gains now close to stall speed, even relatively small statistical distortions can turn apparent growth into outright job losses, raising the risk that labour conditions are weaker than headline figures suggest. Model-based estimates used to account for business formation and closures have added to this uncertainty and have historically required meaningful downward revisions, undermining confidence in real-time payroll data. Alternative indicators broadly reinforce this picture. ADP reported net job destruction of 32,000 in November, almost entirely offsetting the October rebound of +47,000. While the series is volatile on a monthly basis, the contrast between the first and second half of the year remains clear. The softness appears broad-based, with business services shedding labour at a faster pace, while the expected industrial and reshoring impulse has yet to translate into meaningful manufacturing hiring. Qualitative evidence aligns with this assessment. The Fed’s Beige Book reports declining employment across a large share of districts, with weaker labour demand increasingly cited. Firms continue to favour hiring freezes and replacement-only hiring rather than widespread layoffs, pointing to gradual cooling rather than a sharp correction. Survey data are consistent with this view, with activity holding up better than employment and hiring indicators sitting only marginally in contraction territory.
At the same time, incoming labour data remain mixed rather than uniformly weak. Initial and continuing jobless claims have drifted lower, tempering fears of an abrupt deterioration. Challenger job cuts rose on a year-on-year basis but declined sharply month on month, with year-to-date announcements elevated but still concentrated in telecom and technology. These layoffs appear driven largely by firm-specific adjustments rather than broad-based retrenchment, supporting the view that labour market cooling remains uneven rather than systemic. Taken together, the evidence points to a labour market that is softening but not collapsing, consistent with a slowing economy rather than an imminent recession.
Importantly, this backdrop is unlikely to materially alter the Fed’s medium-term policy projections. While labour market softness is becoming more visible, inflation dynamics, particularly in services, continue to limit the scope for a more dovish shift. Price pressures have eased at the margin but remain inconsistent with an aggressively accommodative stance. The upcoming dot plot should therefore continue to signal a cautious path for 2026, with limited cumulative easing beyond the near term. Previous projections already reflected this conservatism, with the median participant pencilling in only modest easing in 2026 and a meaningful share expecting no cuts at all beyond the current cycle. We do not expect that balance to change materially. As a result, the Fed can justify a near-term cut on labour market softening while maintaining a meeting-by-meeting framework that preserves optionality, an outcome that is likely to read as a hawkish cut.
Market pricing broadly aligns with this interpretation. Investors are confident in the delivery of near-term easing but are not pushing expectations for a materially lower terminal rate. Forward curves imply faster delivery of cuts rather than a larger total quantum of easing, consistent with a normalisation narrative rather than renewed stimulus. This has supported risk appetite, particularly in U.S. equities, even as underlying growth signals remain mixed. At the same time, the configuration limits the scope for an outsized market reaction to policy decisions themselves, supporting duration while leaving reflationary or aggressive curve-steepening trades without strong conviction.
The rates market continues to signal more caution than equities. Government borrowing costs are drifting higher across major economies, with recent auctions in the U.S., Europe and Asia clearing at elevated yields despite ongoing policy easing. This reflects growing sensitivity to fiscal deficits, heavy issuance and rising term premia rather than a reassessment of near-term growth alone. Concerns around debt sustainability and the expanding role of highly leveraged non-bank financial intermediaries have added to this pressure, even as central banks move towards lower policy rates. The divergence between buoyant equity markets and firmer long-end yields highlights an underlying tension between liquidity-driven risk appetite and structural constraints. Notably, despite cumulative rate cuts of 75 basis points this cycle, interest-sensitive sectors such as housing remain subdued, suggesting monetary transmission is weakening and reinforcing the case for measured, incremental policy adjustments.
Recent policy and trade developments reinforce the view that global macro conditions are becoming increasingly fragmented. While the policy bias remains towards easing, resistance is emerging from both hawkish and dovish camps, signalling a diminishing consensus on how to respond to slowing growth, persistent inflation pressures and uncertainty around data quality. This internal friction raises the risk of a less predictable policy path ahead, particularly as leadership changes and voting rotations approach, increasing the importance of communication and credibility in anchoring expectations.
At the same time, global trade tensions are intensifying as China continues to redirect excess supply towards markets outside the U.S. China’s trade surplus has surpassed $1 trillion for the first time, driven by strong shipments to Europe, Africa and emerging markets, even as exports to the U.S. contract sharply. This shift has heightened political and economic pressure in Europe, where policymakers increasingly frame Chinese imports as a structural threat to domestic industry. Similar dynamics are emerging across emerging markets, with countries such as Mexico imposing new tariffs to protect local production. Together, these trends point to a global environment in which weaker domestic demand, policy easing and aggressive export strategies collide, raising the risk of trade friction, capital misallocation and increasingly uneven growth outcomes across regions.
Rates
U.S. rates stayed anchored to the Fed, with the front end heavily guided by near-term easing expectations while the long end remained constrained by inflation persistence, supply, and term-premium risk. A 25 bp cut this week is priced with very high conviction at about 98% in forwards, leaving the market far more sensitive to the Fed’s communication than to the move itself. That pricing is notable given Chair Powell’s prior warning that a cut was not “a foregone conclusion” and given a relatively sparse data flow. Even so, dovish signalling from key FOMC voices, notably New York Fed President John Williams, helped steer markets toward a cut. The key issue now is how Powell justifies the easing and what concessions he offers hawks, with the dot plot and tone likely to determine whether this is interpreted as a straightforward cut or a “hawkish cut.”
Beyond the decision, the market is trying to reconcile a modest easing path with growing uncertainty around committee dynamics and perceived independence. Betting markets still show dispersion, but the more important anchor is the Fed’s own projected trajectory. In the September SEP, the median FOMC member pencilled in only ~20 bps of cuts in 2026, and 8 of 19 participants projected no cuts at all in 2026 from the likely December level. We do not expect a major shift in the new dot plot, particularly given that price pressure remains.
Curve-wise, the setup remains asymmetric. Markets price easing “faster, not larger,” which is consistent with a shallow path for terminal cuts and a relatively sticky long end. As of Friday, 5 December, the December 2026 Fed funds forward implied roughly 3%, close to the September median dot for December 2027, suggesting investors are not paying up for a materially deeper easing cycle, even if they expect the Fed to get there sooner and then stabilise, with forwards also implying a small rebound in 2027. This helps explain why the long end can remain firm even as the front end anticipates cuts, particularly when supply and term premium remain in focus.
Finally, rate markets are increasingly compelled to incorporate political and institutional complexities into the policy outlook. The 2026 path is complicated by personnel changes, including the rotation of regional Fed presidents as voting members in January 2026, even before a potential Powell successor arrives in May 2026. In that context, speculation around Kevin Hassett matters less as an immediate “dovish switch” and more as a credibility variable and a term-premium input. The 2026 voting rotation also looks somewhat hawkish: while Jeffrey Schmid (who dissented against the October cut) will not vote in 2026, several incoming presidents have recently leaned cautious, including Hammack and Kashkari expressing disagreement with the October cut, Logan suggesting it would “likely be appropriate to hold rates in December,” and Paulson also sounding cautious. Separately, the Supreme Court’s Lisa Cook case is a key institutional swing factor, with oral arguments scheduled for January 21, 2026 and a decision expected before the end of the Court’s term in June 2026, adding another layer of uncertainty around governance and perceived independence.
Credit
Credit markets are closing the year with a surge in issuance. December is shaping up to be one of the busiest on record, with $27 bn priced in the first full week, the largest early-December total since 2021, exceeding the combined volumes of the past four Decembers and sitting close to the eight-year average. Large investment-grade issuers such as Merck and GE Healthcare led supply, while falling yields have also reopened high-yield markets, where 12 borrowers raised more than $12 bn, including Hilton. The rebound reflects easing financial conditions rather than a return to indiscriminate risk-taking, with investors increasingly focused on relative value and structure.
The supply outlook remains heavy. Annual gross issuance is expected to run at $1.0–$1.6 trillion, though refinancing limits the immediate impact, with net issuance down roughly 10% year-to-date. That said, net supply could rise sharply if large M&A and AI-related funding materialise, potentially lifting net issuance by up to 40%. A key example is the $72 bn Netflix–Warner Bros. transaction, with Netflix reportedly lining up a $59 bn bridge facility, typically refinanced in bond markets. Despite these numbers, strong demand has so far absorbed supply smoothly, keeping market conditions orderly.
Spreads are expected to widen only modestly. Over the past six months, investment-grade spreads have experienced the slowest peak-to-trough widening in decades, highlighting the depth of available capital. Market participants suggest that incremental supply can add 10 bps to spreads, rather than trigger a repricing shock. Even in fast-moving sectors such as technology, recent issuance in healthcare and telecom has required concessions of around 30 bps, reinforcing that pricing discipline remains intact. Selection, rather than beta exposure, is increasingly decisive.
AI-driven capex is emerging as both an opportunity and a source of future stress. Investors expect 2026 to be a robust issuance year, driven by hyperscaler spending, data centres, and related infrastructure. Base rates of 3–4% make mid-capital-structure exposure attractive, but clearing prices for data-centre assets are becoming more challenging. The consensus view is that the next downturn will be characterised by secular rather than cyclical distress, with AI monetisation risk, technological obsolescence, and capital intensity at the core. Oracle stands out as a preferred credit due to its free-cash-flow profile, but concentration risks are non-trivial: a downgrade to high yield would make Oracle roughly 10% of the HY market, far exceeding typical 2% single-issuer limits, likely triggering volatility rather than systemic stress.
Liquidity in public markets is at cycle highs, allowing active managers to hedge, rotate, and exploit overshoots. Volatility is increasingly viewed as a source of opportunity, reinforcing the view that the coming credit cycle will be normal, selective, and ultimately cleansing, rather than disorderly.
Equities
US equities advanced for a second consecutive week, extending momentum from November, when the S&P 500 recorded its seventh straight positive month. For the week, the Dow rose 0.50%, the S&P 500 added 0.31%, the Nasdaq gained 0.91%, and the Russell 2000 advanced 0.84%.
Large-cap technology contributed to gains, though performance across megacap names was mixed. The equal-weight S&P 500 lagged the cap-weighted index. Strength was most evident in small-caps, higher-beta exposures, and growth-cyclical themes, including AI enablers, semiconductors, robotics, space, airlines, China tech, cosmetics, banks, and industrial metals. In contrast, defensives and structurally challenged areas underperformed, notably crypto-related names, solar, utilities, healthcare services, defense, waste, tobacco, high-performance computing hardware, and food producers.
Sector performance reflected a clear cyclical tilt. Energy (+1.40%) and Technology (+1.38%) led gains, while Communication Services (+0.81%) and Consumer Discretionary (+0.80%) also advanced. Financials (+0.62%) and Industrials (+0.54%) posted more modest increases. Defensives and rate-sensitive sectors underperformed. Utilities (-4.52%) and Healthcare (-2.73%) saw the sharpest declines, followed by Materials (-1.52%), Real Estate (-1.50%), and Consumer Staples (-1.42%), highlighting continued rotation away from defensive exposures.
Sentiment improved meaningfully, reinforcing the equity bid. The AAII bull–bear spread swung sharply positive, marking one of the largest weekly sentiment reversals this year. The shift reflected cleaner positioning following recent consolidation, supportive seasonal dynamics, and growing confidence that downside policy risk is limited in the near term. Notably, the improvement in sentiment translated into stronger performance in higher-beta segments and small-caps rather than a broad rotation into defensives.
At the stock and sector level, performance continued to reward earnings visibility and structural growth themes. Results and guidance from select large-cap technology names were received constructively, while ongoing AI-related partnerships and commercial announcements supported confidence in medium-term revenue opportunities across semiconductors, infrastructure, and enabling platforms. In contrast, defensives and rate-sensitive areas remained under pressure, underscoring the market’s continued preference for growth durability and earnings momentum over macro hedging.
Earnings reactions during the week reinforced this dynamic. In software and semiconductors, Salesforce (+13.0%) rallied sharply as investors focused on accelerating commercial momentum, with net new AOV growth exceeding overall AOV growth for the first time since FY22 and improved forward visibility tied to AI-enhanced offerings. Marvell (+10.6%) advanced after raising long-term guidance, with commentary pointing to sustained demand into FY27 and constructive early signals for FY28, reinforcing confidence in custom silicon and AI networking exposure. CrowdStrike (+0.5%) delivered broadly solid results, though upside was capped by a high valuation bar and an in-line Q4 revenue outlook, while Snowflake (-8.9%) declined despite upbeat commentary as investors reacted to a clear deceleration in product revenue growth. SentinelOne (-10.4%) lagged following a softer guide and a CFO transition, adding to execution concerns.
Consumer and retail earnings skewed more positively, particularly where traffic momentum and value positioning stood out. Dollar General surged 20.9% after beating expectations and raising guidance, supported by solid traffic gains and resilient demand in discount retail. Dollar Tree (+10.5%), Ulta Beauty (+11.6%), American Eagle (+13.2%), and Five Below (+5.1%) also advanced on better-than-feared trends, with strong comps and brand momentum driving upward revisions. By contrast, Kroger (-6.8%) fell after missing on revenue and comparable sales, while Macy’s (+2.2%) saw a muted reaction despite a beat-and-raise quarter as a light Q4 outlook tempered enthusiasm. HPE (+6.7%) gained despite softer revenues, with management citing timing effects in enterprise demand and lower government spending rather than structural weakness.
Beyond earnings, company-specific headlines continued to shape leadership across large-cap tech and AI-linked names. Nvidia (+3.1%) reiterated confidence in its long-term Blackwell and Rubin roadmap, highlighting a potential $500bn pipeline opportunity, lifting ecosystem beneficiaries such as Synopsys (+11.7%). Meta (+3.9%) advanced on reports of a roughly 30% reduction in metaverse spending, reinforcing a capital discipline narrative. Microsoft (-1.8%) dipped on reports of customer pushback related to new software pricing and quotas, though the company pushed back on the characterization. Elsewhere, Tesla (+5.7%) benefited from speculation around a potential U.S. executive order supporting robotics next year, while Warner Bros. Discovery (+8.7%) rose on a Netflix-linked acquisition agreement. Regulatory developments also drove sharp moves, with Boeing (+6.8%) advancing after reports tied to required divestments in the Spirit AeroSystems transaction, while Parsons (-21.3%) fell sharply after losing a major FAA modernization contract.