Markets Pare Back Bets of a December Rate Cut

INTEREST RATE MARKET FUTURES

Yields are lower across the curve, reversing course from yesterday’s sell-off as a decline in the equities led to some large buying and as shorts were covered.

Yields shot higher on Thursday alongside a broader market sell-off as markets significantly trimmed bets of a December rate cut by the Fed. Meanwhile, JP Morgan’s weekly client survey on duration showed the most longs since April, totaling more than $51 billion. The White House said it is not likely that previously delayed reports will be published in the aftermath of the shutdown, creating even more of a fog for a read on the economy. If this holds, markets will have to sit and wait for future data releases, which may also be unreliable until early January, as collection efforts will likely have been hampered as a result of the shutdown. Additionally, labor market figures could be distorted due to the shutdown as well.

Speculation as to the effects of a lack of data on the Fed in regard to its decision in December appears to be a toss-up. There is little evidence to prove that labor market conditions have improved, reinforcing support for another 25 bp cut. While on the other hand, previous data has shown that price pressures remain above the Fed’s 2% target and have likely not fallen dramatically. As to the state of the labor market, uncertainty as to whether the labor market is stable, given a reduction in the supply of and demand for workers has only complicated things further. These dynamics could support the case for another hawkish rate cut from the Fed, as the bank has said it expects inflationary effects from tariffs to have more of a pass-through effect on prices, while private data and recent news of layoffs have sparked worries over the labor market.

Yesterday’s Fedspeak was cautious; San Francisco Fed President Mary Daly emphasized uncertainty, saying it’s too early to commit to either a rate cut or no cut. She prefers a balanced stance for now and wants more data before deciding, noting risks to both inflation and employment goals. Minneapolis Fed President Neel Kashkari highlighted that inflation remains elevated at around 3%, while the economy shows mixed signals; some sectors are strong, but parts of the labor market are under pressure. His tone suggested caution about easing too soon. Lastly, St. Louis Fed President Alberto Musalem warned against aggressive easing, citing limited room before policy becomes overly accommodative. He stressed the need to keep leaning against above-target inflation while still supporting the labor market. Today’s Fed speakers will be Kansas City President Schmid (voter, hawkish), Dallas President Logan (nonvoter, hawkish), and Atlanta President Bostic (nonvoter, hawkish).

Yesterday’s 30-year bond auction caught average demand, fetching a yield of 4.694%. Indirect and direct bidders combined for an above-average award of 85.5% take vs. an average of 84.6%, leaving dealers with 14.5% vs. the average 15.4%. The bid-to-cover ratio was below average at 2.29 vs. the 2.38 six-auction average.

The spread between the two- and 10-year yields rose to 51.30 bps from 50.30 bps on Thursday, while the 2-year yield, which reflects interest rate expectations, fell to 3.560%.

STOCK INDEX FUTURES

The indexes continued lower, with the Nasdaq leading losses as markets lose faith in a December rate cut, pressuring riskier assets like big tech. Among tech leaders, Tesla shares fell 4% in premarket to below $400, while Nvidia moved 3% lower. Friday’s originally scheduled data releases, the October Producer Price Index, retail sales, and September business inventories were not released, as data collection efforts need time to get back to normal. Future data releases are likely to be pushed back or only partially complete for some time, while other reports are still up in the air after the White House said it was unlikely that some reports will be released.

A sell-off gripped markets on Thursday, with all major indexes giving up sizeable losses. The Nasdaq suffered the brunt of it, falling 1.9% as AI-linked stocks continued to take a beating, while dampened expectations of a rate cut out of the Fed in December also soured sentiment. During trading on Thursday, Fed Funds futures were pricing less than a 50% chance of a rate cut next month, down from 95% about a month ago. The repricing of rates led to a wave of profit-taking amid the broader market decline. Megacaps including Nvidia, Broadcom, Oracle, and Palantir led tech losses, sliding between roughly 3.6% and 6.5%, while Disney plunged 7.8% after mixed fourth-quarter results.

CURRENCY FUTURES

US DOLLAR: The USD index was lower, continuing with yesterday’s decline, which was spurred by a rebuilding of short positions. In recent weeks, investors have gradually been covering short positions against the dollar, which was reflected in recent strengthening, but yesterday’s events saw investors rebuild those short positions. Typically, higher US yields and an equity market sell-off would see investors rush to the greenback, but given all the position readjustment, reactions to economic events in the dollar have strayed from precedent. Fed Funds futures are currently pricing a 53.3% chance of a December rate cut, down from 64.4% this time yesterday. The White House said that US unemployment data for October may never be available, since it is dependent on a household survey that was not conducted during the shutdown, further complicating efforts to get a read on the economy.

EURO: The euro moved higher against the dollar, nearing its strongest level in over two weeks as markets reduced bets of a rate cut from the Fed along with some positive economic data out of the eurozone. The second estimate of third-quarter GDP for the eurozone was revised slightly higher to 1.4% annualized growth from an initial 1.3% in the first estimate and a slight step down from the 1.5% seen in the second quarter. Spain led the major economies, expanding 2.8%, while Italy, France, and Germany clocked growth readings of 0.4%, 0.9%, and 0.3%, respectively. On the employment front, fresh data showed that the number of employed persons in the eurozone rose by 0.1% from the previous quarter, maintaining its growth rate from the earlier period and in line with forecasts. For the ECB, a period of low unemployment and inflation makes it unlikely that it will move interest rates anytime soon, offering some underlying support for the euro. On Monday, ECB Vice President Luis de Guindos reinforced that policy rates are currently appropriate given economic conditions.

BRITISH POUND: The pound fell against the dollar after a report that British Prime Minister Keir Starmer and Finance Minister Rachel Reeves have abandoned plans to raise income tax rates. The report comes after improved forecasts from the Office for Budget Responsibility, which cut the expected fiscal shortfall from roughly £35 billion to around £20 billion. Reeves is not expected to break Labor’s pledge on headline income-tax rates, instead likely using indirect methods, like freezing thresholds and reducing tax breaks, to increase government income. Markets slightly pared bets on Bank of England rate cuts to 75% from 80%. For the BoE, a recent sluggish GDP reading, at just 0.1% for the third-quarter owed, in part, to a cyberattack on Jaguar Land Rover, and rising unemployment have set up conditions for the bank to lower rates in December. Unemployment is at 5.0%, its highest level since February 2021, after starting 2025 at 4.4%, while wage growth shows signs of slowing. Subdued labor market conditions, slowing wage growth, and a pullback in economic activity present downside risks for inflation.

JAPANESE YEN: The yen rose higher thanks to a weaker dollar. No new data out of Japan today will lead markets to speculate over whether or not the Bank of Japan will raise interest rates in December. The central bank could raise rates come December if certain financial conditions are met, mainly, a steady and sustainable increase in wages. Currently, markets are pricing around a 25% chance of a quarter-point increase to the key rate in December. Concerns that the new government will seek to influence the BoJ to delay future rate hikes have weighed on the currency alongside expectations of debt-funded increased fiscal spending. Given the sharp decline in the currency recently, speculation has also grown as to whether or not the government will intervene to support the currency. Finance Minister Satsuki Katayama said on Wednesday that the government would continue to monitor movements in the yen, potentially signaling an intervention if the yen depreciates further. However, her comments did little to move the yen, suggesting that it will take an actual intervention by Japanese authorities to provide the yen substantial support.

AUSTRALIAN DOLLAR: The Aussie is little changed against the dollar. The Aussie fell yesterday, in line with a broad market sell-off, where it gave up all of its post-jobs gains. The Australian dollar is often seen as a proxy for global risk sentiment, although rising expectations that the Reserve Bank of Australia might be done easing have helped provide a floor for losses. Job’s data lowered bets of a December rate cut to practically 0%. Australia’s unemployment rate fell back to 4.3% from a four-year high of 4.5% in September, thanks to a strong wave of new jobs being added. The data led the National Australia Bank, alongside many analysts, to call the end of the RBA’s easing cycle. The jobs report also added to a slew of upbeat data this week, which suggested there is little urgency for the RBA to ease policy and signals that its policy rate of 3.6% may not be as restrictive as once thought.

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