Weekly Newsletter: December 8, 2025
Playing the role of Santa this year will again be Fed Chair Powell. Last year, he cut rates by 25bp a week before Christmas, which did little to put investors in a happy mood going into year-end as the SP500 fell the following two weeks. He will try again this year to mollify the boys and girls of Wall Street with another rate cut. The last eight months of the year have been nothing but sweet for investors as the recovery from the tariff announcements in March is a distant memory. The recent government shutdown has postponed many key economic reports that Fed officials have on their wish list to feel a bit better about deciding to cut rates. It seems that they are more concerned about the labor market weakness than sticky inflation above their target. Coming out of their October meeting, Powell said that future rate cuts are not “a foregone conclusion”. Here we are with an 85+% chance of another rate cut this week. The weekly jobs data has been caught up and indicates hiring/firing remains within historical ranges, indicating a healthy jobs market. The inflation data remains an enigma, as only producer prices have been released; consumer prices are two months behind, and the PCE data remains at 2.8%. Catch-up economic data will be coming out the week before Christmas, so traders will have to postpone spiking the eggnog for a few days.
Without the usual diet of economic data, investors continue to grasp at various bits of information that may not have the long track record of the normal releases. There remains a vigorous debate about the jobs market: is it strong, weak, or just right? The ADP report this past week shows layoffs when job gains were expected. However, the weekly jobless claims figures are at multi-year lows. Which is a better indicator of the health of the jobs market? For historical references, the ADP data goes back to 2010, meaning it was not around during the financial crisis or the dot-com era. The weekly jobless data stretches back to 1967 and captures the various twists and turns in the economy over the past nearly 60 years. For comparison purposes, the non-farm payroll data goes back to 1939 and should be fully caught up before the Christmas-New Year’s lull. The inflation part of the Fed’s mandate (stable prices) is a bigger issue. Survey data over the past few months have indicated consumers are frustrated with higher prices and feeling like they are falling behind, yet the monthly data is showing an inflation rate that continues to fall from very high levels post-Covid. The consumer is not wrong, and it is a longer look at the impacts of even brief periods of high inflation. Although wages since 2024 have been rising a bit faster than inflation, wage growth was below the rate of inflation for two years from 2021 to 2023. The balancing act between job growth and inflation will be hard to maintain into 2026.
During each of the prior interest rate-cutting cycles since 1980, the interest rate on the 10-year treasury has declined from the beginning of the cycle. This time is different. Rates on the 10-year, also a key input to mortgage rates, are higher today than when the Fed began its rate cuts a year ago. Why? Many point to the huge issuance of debt to cover the Federal spending over the past decade. While it may have been prudent to borrow large sums at low rates, now that rates are higher, much of that debt is getting refinanced at ever higher interest rates. Today, the interest on the debt is now 14% of all federal spending, larger than the defense budget and growing as those low debt bonds continue to refinance at higher rates. So while the Fed may be cutting rates, other forces in the market could keep interest rates uncomfortably high in the years ahead.
The Santa rally got started as the calendar flipped to December and investors returned after their huge turkey feasts. In what could be dubbed an “everything rally”, large, mid, small, and international stocks have all stepped into December singing a happy tune. Typically, much of the economic data will have hit Wall Street by this point, and the Fed meeting has marked the end of the excitement for the month as traders wrap up early for the Christmas season and trading slows to a trickle. This year will be different as the Fed meeting is merely the beginning of the “data dump” that should allow all the various government agencies to return to a normal reporting cycle in 2026. Trading desks may be a bit thin during the holiday season, so the markets could react strongly (in either direction) to the various economic reports that are due the week before Christmas. Not exactly what Wall Street was looking for in their stockings this year.
The Fed meeting highlights a light economic calendar this week. Expect a rate cut, but the focus will be on the voting of the governors and Chair Powell’s press conference that follows.
The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable but are opinions and do not constitute a guarantee of present or future financial market conditions.