Equities Flirt With All-Time Highs

For the week ending 5 December

As of midday Friday, global equities have extended their recovery after a moderate drawdown in mid-November and are again approaching record highs. The yield on the US 10-year note has risen to 4.11% from the 4.04% level seen prior to the US Thanksgiving holiday while the price of a barrel of West Texas Intermediate crude oil added about $1.50 to $59.50. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 17.5 from 19. 

MACRO NEWS

Hassett seen as Fed frontrunner

Kevin Hassett, director of the White House National Economic Council, has emerged as the prohibitive frontrunner to replace Federal Reserve Chair Jerome Powell, whose term expires in May. President Donald Trump acknowledged Hassett as a potential Fed chair in a cabinet meeting this week but said an announcement on any nomination would likely wait until early 2026. In an interview Friday morning, Hassett said he expects the recent government shutdown to have a big negative impact on Q4 GDP but expects a strong rebound in Q1 and Q2 of next year. He said we could be looking at 4% productivity growth in 2026. In addition, Hassett expressed that he believes it’s a good time for the Fed to “cautiously” lower rates. The FOMC meets next Wednesday and is expected to lower rates 0.25%.

Labor picture mixed ahead of FOMC

Even as it prepares to meet on Tuesday and Wednesday next week, the Fed continues to fly blind as far as most official government economic data is concerned. With the October employment report canceled and the November data delayed until after next week’s FOMC, policymakers will be forced to rely on more anecdotal data, which have been mixed. On one hand, ADP’s measure of private sector jobs showed a decline of 32,000 in November, down from an upwardly-revised gain of 47,000 jobs in October. Most worrying was the reported 120,000 decline in jobs at small businesses, the major engine of US job growth. Conversely, weekly jobless claims fell to their lowest level since September 2022, tumbling to 191,000 from 218,000 the week before. However, economists caution that seasonal adjustments due to the Thanksgiving holiday last week may have caused this distortion. Leaving last week’s data aside, recent trends in jobless claims data don’t suggest any marked deterioration in labor markets. Layoff data from Challenger, Gray and Christmas came back down to earth in November after a big jump in October, suggesting that October may have been an outlier. Finally, Canadian job market tends to rhyme with the US; and Canada has posted exceptionally strong job gains in September, October and November, gaining an average of about 60,000 jobs per month — and in an economy roughly one-tenth as large as the US. Despite the mixed overall jobs picture, the market has priced in a 95% chance of a quarter-point cut on Wednesday.

BOJ sets stage for rate hike

With inflation running well above target and the yen weak against other currencies, Bank of Japan Governor Kazuo Ueda said this week that the bank will consider the pros and cons of raising rates at its December 19 meeting, which the market has taken as a clear indication that a hike is likely. Press reports also indicate that the government has acknowledged the likelihood of a rate hike and is willing to tolerate such a move. 

QUICK HITS

Global purchasing managers indices decelerated modestly in November, though the US and eurozone services sectors firmed up. 

According to Mastercard SpendingPulse_^™ data, Black Friday sales in the US increased by 4.1% compared to 2024, surpassing last year's growth rate of 3.4%. In-store sales rose 1.7%, while online sales gained 10.4%.

Richard Hughes, head of the UK's Office for Budget Responsibility, an independent fiscal watchdog, resigned after a “serious error” led to details of the budget leaking to the public an hour before the Chancellor of the Exchequer presented it on the floor of the House of Commons.  

US core PCE, the Fed’s preferred inflation measure, rose 0.2% month-over-month in September, and 2.8% year-over-year.

According to Crane Data, as of Monday of this week, US money market assets have surpassed $8 trillion for the first time.

A surge in AI-related investment prompted the OECD to raise its 2025 US GDP forecast to 2% growth, up from its September forecast of 1.8%.

The US is meeting next week with eight allied nations to create an initiative to strengthen supply chains for computer chips and critical minerals. The eight countries are Japan, South Korea, Singapore, the Netherlands, the UK, Israel, the United Arab Emirates and Australia.

China has loosened export-licensing requirements and has granted at least three rare-earth magnet exporters general license to ship the strategic materials to US buyers.

Shuttle diplomacy by US negotiators continues in an effort to end the war in Ukraine, but no agreement was reached this week after talks with Russian President Vladimir Putin.

Inflation in the eurozone ticked up to 2.2% in November from October’s 2.1% reading. Retail sales in the region were flat in October, though they are up 1.5% year-over-year. Q3 GDP growth was confirmed at 1.4% year-over-year.

Michael and Susan Dell will donate $6.25 billion to give 25 million American children $250 each as part of the US government’s new Invest America initiative, which provides all eligible US children with an investment account.

US industrial production rose 0.1% in September.

US Treasury Secretary Scott Bessent this week advocated for a residency requirement for presidents of Federal Reserve banks. The proposal would require all regional Fed presidents to have lived in their respective districts for at least three years, a criterion that many current regional Fed presidents do not meet. The goal is to ensure that Fed officials reflect their districts' interests citing the need to “break the New York hold” on interest rate decisions. Presumptive Fed chair nominee Kevin Hassett endorsed Bessent’s view on Friday.

The World Bank’s international debt report showed that the external debt of emerging markets countries grew to a record $8.9 trillion in 2024.

Ukraine has carried out strikes in international waters targeting Russia’s covert oil-tanker fleet. This action is a part of Ukraine’s broader efforts to undermine Russia’s energy infrastructure.

President Trump this week proposed rolling back Biden-era automobile fuel economy standards, saying that the 50.4 miles-per-gallon requirement set by the Biden administration (to take effect by model year 2031) would increase new car prices by as much as $1,000 each. Under the proposed changes, the government would instead require an average of 34.5 miles per gallon for vehicles by model year 2031. The move was welcomed by US automakers.

US Trade Representative Jamieson Greer said this week that President Trump could withdraw from the US-Mexico-Canada Agreement if the US cannot secure a “good deal.” The USMCA review period begins July 1, 2026. 

THE WEEK AHEAD

Monday: Japan final Q3 GDP; US New York Fed inflation expectations

Tuesday: Australia Reserve Bank meeting; US JOLTS data

Wednesday: US FOMC meeting, Bank of Canada meeting

Thursday: US trade balance

Friday: Japan industrial production; UK industrial production

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Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.