What Happened Last Week
Hawkish Cut: The Fed cut 25 bp and pointed to a pause in their cutting cycle in January; economic projections and Powell’s messaging skewed hawkish.
Stocks Declined: Stocks fell on uncertainty over the Fed’s inflation stance and a potential politicization of policymaking.
Chaos in D.C.: GOP infighting nearly triggered a government shutdown, causing doubt over Trump’s ability to enact his policy agenda next year.
What We’re Over The Holidays
Price Action: Markets recovered a bit last Friday but still feel shaky; how long until investors incorporate last week’s news into their portfolio positioning?
Fed Messaging: Fed officials are expected to clarify their stances after Powell’s unclear press conference roiled markets.
Japan Inflation: Friday’s inflation data will impact global bond sentiment as the 10-year U.S. yield pushes above 4.5%.
Investment Management Team’s Views
- It was a rollercoaster week for markets as a supposedly sleepy Federal Reserve meeting turned out to be anything but. At first glance, the results were as expected by both us and the market – the Fed delivered a hawkish 25 bp cut and Powell’s presser affirmed a pause to their cutting cycle in January. But the risk-off reaction in the final hours of Wednesday’s trading indicated that this expectation was not fully baked into actual portfolio positioning. Small caps had their worst trading day of the year, while the S&P 500 almost matched its steep declines from early August. Stocks recovered some to end the week, but the price action remains shaky as investors grapple with two new risks for 2025.
- The first new risk for investors is grappling with the mixed messaging around when the Fed will cut next. Chair Powell sowed confusion over the Fed’s reaction function by shifting focus away from the labor market and toward inflationary dynamics in the press conference, an unpleasant reminder of how the Fed viewed policy in 2022. The Fed’s risk assessment around the inflation side of their mandate also shifted in a hawkish direction as some committee members sought to incorporate the potentially inflationary impact of the incoming administration’s policy goals. Market participants may have difficulty navigating both greater uncertainty from the Fed and the potential for politics to interfere with monetary policy in 2025.
- A lack of policy cohesion in Washington was the other risk that emerged last week. Investors got a taste of the disagreement amongst Republicans as the government flirted with a weekend shutdown. Avoiding such an unforced error was a relatively low bar, and clearing it was more difficult than it should have been, calling into question Trump’s ability to enact some of his bigger policy goals next year. Trump’s fiscal policies are likely supportive of risk assets over the medium-term, but this newfound uncertainty and holiday liquidity may generate market volatility in the coming weeks.
