Markets Brace for Fed Cut (01 - 05 December)

Global financial markets closed the first week of December with renewed confidence in an imminent Federal Reserve rate cut, as soft U.S. data and dovish Fed commentary lifted risk assets and precious metals. The dollar remained steady, Treasury yields eased, and commodities diverged on geopolitical headlines. European inflation surprised slightly higher, while Japan’s economic strength added pressure on bond yields amid aggressive fiscal stimulus.

Market Drivers & Catalysts

• Fed Cut Odds Rise: Markets now price an 87% probability of a 25bps Fed rate cut in December, supported by dovish remarks from Fed officials Waller and Williams, weak retail sales, and declining jobless claims.
• Gold Hits Monthly High: Bullion rallied past $4,220/oz, driven by falling real yields, rate-cut pricing, and strong demand from central banks and ETFs.
• Japan's Macro Upside: Strong retail sales, industrial production, and inflation boosted speculation of a BOJ rate hike, pushing bond yields near 17-year highs.
• UK Budget & Tax Hikes: Chancellor Rachel Reeves introduced the highest tax burden since WWII, aimed at raising £26 billion. Markets welcomed the fiscal restraint, pushing gilt yields lower.

Fixed Income

• U.S. 10-Year Treasury: The yield rebounded above 4%, recovering from early-week lows, though it ended the month nearly 5 bps lower. Traders returned from the Thanksgiving break with renewed confidence in a December rate cut after weak economic data and supportive Fed commentary.
• UK 10-Year Gilt: Gilt yields fell to 4.44% after the Autumn Forecast Statement, which included major tax hikes and stricter borrowing controls. Market confidence in the UK’s fiscal discipline grew, while inflation easing to 3.6% further boosted expectations of a BoE rate cut.
• Japan 10-Year Government Bond: The yield surged past 1.81%, approaching a 17-year high as economic data beat forecasts and inflation remained firm. The ¥21.3 trillion stimulus package raised fiscal concerns, with bond issuance set to increase by ¥11.5 trillion.
• Germany 10-Year Bund: Bund yields hovered just below 2.7% as mixed macro signals kept ECB rate expectations stable. While inflation remained at 2.3%, the EU-harmonized rate ticked up to 2.6%. Germany’s 2026 budget pointed to heavier borrowing.

Commodities

Gold soared above $4,220/oz, posting its fourth consecutive monthly gain and hitting the highest level in over a month. A dovish Fed outlook, soft macro data, and central bank demand powered the rally. Real yields fell, and ETF flows turned positive.

Silver spiked above $56/oz, reaching record highs as Chinese inventories dropped to decade lows and exports surged. Supply tightness, rate cut pricing, and rising investor demand amid uncertainty drove prices up over 10% in two weeks.

Currencies

• U.S. Dollar: The DXY steadied near 99.6, ending the month flat. While weaker data and dovish Fed remarks pressured the dollar earlier in the week, a risk-off tone in global markets and expectations for slower global growth offered support.
• Euro: The euro slipped below $1.16, hurt by soft German data and a rising dollar. Retail sales missed (-0.3%), and although inflation held at 2.3%, the ECB remains cautious. The EU-harmonized CPI rose to 2.6%, but ECB minutes signaled no urgency to ease.
• British Pound: The pound ended the week at $1.322, up 1%, which is the strongest weekly performance since August. The Autumn Budget drove optimism around fiscal responsibility, though markets see limited upside as the BoE prepares to ease policy.
• Japanese Yen: The yen held near 156.3 per dollar, ending the week flat despite strong economic prints. Inflation, industrial output, and retail sales all surprised to the upside. However, fiscal concerns tied to the stimulus package and additional bond issuance pressured sentiment.

Economic Data Highlights

• U.S. Initial Jobless Claims (Week ending Nov 22): Fell to 216,000, tying the lowest level since February. Continuing claims rose slightly to 1.96 million, signaling a slowing but still resilient labor market.
• U.S. Retail Sales (Sep 2025): Rose 0.2% MoM, below forecasts. Gains were led by gas stations and miscellaneous retailers, while core sales fell 0.1%, suggesting soft consumer demand.
• U.S. Durable Goods Orders (Sep 2025): Increased 0.5% MoM, beating expectations. Core capital goods (non-defense ex-aircraft) rose 0.9%, showing firm business investment momentum.
• UK Autumn Forecast Statement: Tax hikes totaling £26 billion were announced. Measures include a higher minimum wage, extended fuel duty cuts, and changes to pensions and child benefits. GDP growth forecast at 1.5%, inflation seen easing to 2% by 2027.

Macro Calendar Highlights

• U.S. Non-Farm Payrolls (Nov)
• U.S. Unemployment Rate (Nov)
• Eurozone Q3 GDP Final
• Japan Core CPI (Nov)
• U.S. ISM Services PMI (Nov)
• UK Industrial Production (Oct)