US Strategy Weekly: Fed Watch

The Federal Reserve will meet next week on December 9 and 10 and after significant volatility in terms of expectations for this meeting, the CME Group’s FedWatch Tool now shows an 89% chance of a 25 basis point cut in the fed funds rate. Between now and the meeting the only new data will be September’s personal income report on December 5, 2025. This release will also include personal expenditures and the PCE deflator which is the Fed’s favorite inflation benchmark.

Keep in mind that the headline PCE deflator showed prices rising 2.7% YOY in August and the core PCE deflator showed prices rising 2.9% YOY. We do not expect any big surprises from this week’s PCE report since September’s CPI and PPI reports have already shown there was little change in inflation trends at the end of the third quarter. September retail sales have been reported as well, and while year-over-year growth was down from August’s pace, growth in total retail sales remained in line with the 4% YOY seen most of this year. From this report we infer that personal income growth was roughly in line with the 5% average seen most of this year.

Rescheduled government data releases indicate November’s job report will be announced on December 16 (there will be no October employment data), November CPI will arrive December 18, and the first estimate for third quarter GDP will be released on December 23. And since third quarter’s earnings season is ending, there will be little information to keep investors and traders busy through the end of the year. This lack of information could make markets edgy, and it does make December’s FOMC meeting even more important than usual. In fact, if the Fed fails to cut rates next week, it will be a big disappointment to the market, and stocks could move significantly lower, in part due to the disappointment with the Fed and in part due to the data vacuum that lies ahead. A 25 basis point cut in the fed funds rate would lower the range to 3.5% to 3.75% and we believe it would be prudent for the Fed to cut rates.

Given the absence of updated employment or inflation data, the November Beige Book is worth noting. November’s report noted that from early October to mid-November – despite the 43-day government shutdown – economic activity was little changed. In fact, the report reads much like the previous two reports. Most regions noted that consumer spending declined slightly and a few retailers suffered from the government shutdown. Employment fell a bit and some businesses indicated that artificial intelligence lowered the need for new hires. However, layoffs remained in check. In terms of expectations, businesses anticipate moderate upward cost pressures, although plans to raise prices in the near term were mixed. In sum, the Beige Book reflected an economy that continues to advance but remains fragile.

The ISM manufacturing index was relatively unchanged in November, easing from 48.7 to 48.2. Production rose from 48.2 to 51.4, a 9.9% YOY rise; but new orders fell from 49.4 to 47.4 and backlog of orders fell from 47.9 to 44.0. Prices paid rose from 58.0 to 58.5, and have been above 50 since the end of 2023, except for September of 2024. The index for imports and exports rose in November, yet both remain below the breakeven 50 level. See page 3. The employment index fell to 44.0 from 46.0, which means the ISM nonmanufacturing employment index needs to remain above 48.0 to keep the ISM employment index from returning to negative.

As we noted late week, the headline of September’s employment report appeared healthy with 119,000 new jobs added in the month. But this was deceiving. There were only 66,000 new jobs added in the month if all the negative revisions were included. And if the BLS continues in its normal pattern, one could expect that September’s 119,000 will be revised lower as well. Since jobs in the establishment survey were growing by a mere 0.8% YOY and the household survey showed job growth at 1.1% YOY, even small revisions could shift this skimpy growth to negative. Negative growth in jobs is the first, and most important signal of a recession. In short, the Federal Reserve should cut interest rates to help support the weakening job market.

And finally, Fed governors, or economists, who believe a fed funds rate cut is unnecessary should remember that the jobs data will be revised by the BLS in early February 2026 with the release of the January 2026 data. This annual benchmark revision is based upon the Quarterly Census of Employment and Wages (QCEW) which is derived primarily from state unemployment insurance tax records. Nearly all employers are required to file these records and pay taxes to their state workforce agencies. In September, the BLS stated that their preliminary benchmark revision would lower total nonfarm employment for March 2025 by 911,000, a decline of 0.6%. For the same period, total private sector jobs were revised down by 880,000, or a decline of 0.7%. (https://www.bls.gov/news.release/pdf/prebmk.pdf) This may not sound like much of a difference, but over the last ten years these benchmark revisions were typically 0.2% or less, and went relatively unnoticed. This will be the third consecutive year of annual revisions that are two or three times the norm and it creates doubts about the accuracy of the BLS. Nevertheless, given that it is known that revisions to current jobs data (already reported) will be lower by nearly one million jobs, we believe the Fed should lower interest rates.

Like this week’s lack of economic data, there was little change in our technical indicators. The 25-day up/down volume oscillator is negative 0.35, down slightly from last week, but still neutral. The last positive readings in this indicator were the one-day overbought readings of 3.15 on July 3 and 3.05 on July 25. See page 6. To confirm the recent advance, the oscillator should record an overbought reading of 3.0 or higher for a minimum of five consecutive trading days. At present, this indicator suggests advancing volume has been weaker than declining volume and the longer this disparity continues, the greater the risk is that equities experience a near-term pullback.

The 10-day average of daily new highs fell to 156 this week and new lows also fell to 121. This combination of daily new highs above 100 and new lows above 100 keeps this indicator neutral. On April 11, the 10-day new low index (823) was the highest since the September-October 2022 low (882). This was the sign of a major bull market in force. The NYSE cumulative advance/decline line made a new high on October 27, 2025, which confirmed the October highs in the indices. See page 7.

Last week’s AAII survey showed bullishness fell 0.6% to 32.0% and bearishness fell 0.9% to 42.7%. Bullishness is below average, bearishness is above average, and the neutral rating was low at 25.3%. The 8-week bull/bear is -4.8% and neutral, following three consecutive weeks in positive territory in late September. All in all, there are mostly neutral readings, and some technical indicators suggest there is risk of a near term correction. If so, we would be a buyer of weakness. The most bullish factor of the current advance is that S&P 500 earnings growth is currently over 13% YOY and well above the average of 8%. In sum, this rally is supported by solid fundamentals.

Gail Dudack

Click to Download