【MACRO Alert】The Fed’s interest rate decision and market expectations , the key impact of the Decemb

Analysts generally believe that if the core CPI rises by 0.5% or more month-on-month, the Fed may reconsider its December interest rate decision. Currently, the decline in the Fed's policy rate, lower inflation, and rising corporate profits are likely to drive the rise of US stocks by the end of the year. However, investors should pay close attention to the upcoming November Consumer Price Index (CPI) data, as this may be the last uncertainty that may break the Fed's expectations of a December rate cut.

Thomas Heinlein, senior investment strategist at Bank of America Asset Management Group, said that last Friday's job market data did not bring any surprises, and corporate profits did not decline, which provided a supportive environment for risk assets such as stocks and cryptocurrencies. Jay Hatfield, CEO of Infrastructure Capital Advisors, pointed out that although the market was skeptical about the Federal Reserve's interest rate cut in December a few weeks ago, people are now returning to reality.

According to the Chicago Mercantile Exchange (CME) Fedwatch tool, federal funds futures traders expect the Fed to cut interest rates by 25 basis points in December with an 85% probability, up from 66% a month ago. November employment data showed that the US economy added 227,000 jobs, exceeding expectations. But at the same time, warning signs such as rising unemployment and longer job search times should not be ignored.

Hatfield said that if the CPI data unexpectedly rises, it may cause U.S. Treasury yields to rise and value stocks to fall, but this decline may be offset by the rise of technology stocks and growth stocks. Heinlein predicts that the Federal Reserve will cut interest rates by 25 basis points at the December meeting and may cut interest rates again in early 2025.

Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, believes that the change in the core CPI monthly rate is more important. If the core CPI rises by 0.5% or more month-on-month, the market may make a major reassessment of the results of the Fed's December meeting, which may cause investors and the Fed to reconsider the December rate cut decision. Such high core data may push the market's expectations for a December rate cut to 50% or less, and he does not rule out the possibility that the Fed will decide to pause the rate cut this month.

The resilience of the U.S. economy and rising geopolitical tensions around the world are prompting asset managers to reconsider their expectations for a weaker dollar. As of Dec. 3, investors net short dollar positions halved to $2.05 billion from a week earlier, the lowest since April 2017, according to data from the Commodity Futures Trading Commission (CFTC). Hedge funds have been bullish on the dollar since October, increasing their bullish bets by 9.3%, the data showed.

The Bloomberg Dollar Index has risen about 5% since falling to an eight-month low in late September as traders brace for higher U.S. inflation under Trump's second term. The dollar has also been supported by the possibility that the Federal Reserve will scale back its rate cuts and safe-haven demand amid geopolitical tensions. Still, some Wall Street banks are predicting a lower dollar trend next year. Last week, some Fed officials were cautious about cutting rates, which supported the dollar.

"It is clear from comments from Fed officials last week that officials are concerned about persistent inflation and are therefore preparing for a pause in rate cuts," strategists at Brown Brothers Harriman & Co. wrote in a note. "This week's inflation data will be key, and any signs of accelerating price pressures would upend the narrative for a December rate cut and help boost the dollar."

Traders raised their expectations for a Fed rate cut this month to 80% after Friday's mixed jobs report, and will be watching November inflation data this week as Fed officials go quiet before their Dec. 18 rate decision. Meanwhile, the fall of Syria's Assad regime, political uncertainty after South Korea imposed martial law last week and a recent no-confidence vote against the French government have also fueled demand for the dollar.

Details of the CFTC data show that the euro dominates the positions of asset managers, with their bullish bets reaching $23.4 billion, although this has fallen from a peak of $64 billion in May 2023. These investors are bearish on the Canadian dollar, British pound and Swiss franc. On the other hand, leveraged funds hold $14.4 billion worth of long U.S. dollars, mainly based on bearish bets on the euro and Canadian dollar.

“How the rest of the world views the dollar in 2025 and how it performs relative to gold, bitcoin or the euro is critical for all markets that are funded in dollars, traded in dollars and have value tied to the dollar,” said Bob Savage, head of market strategy and insights at Bank of New York (BNY).