It's late October: US stock markets are trading at record highs, the Fed has resumed its rate-cutting cycle after a nine-month hiatus, and investors are holding their breath awaiting the third-quarter results of the "big tech" companies, expected to set the tone for the end of the year, which is supposed to be dominated by Artificial Intelligence (AI). Since then, and despite earnings reports generally exceeding expectations, there's been little to no news. The S&P 500 is still hovering around the same levels, after a brief respite in November that was quickly filled, without any real catalyst emerging.
This rebound is fueling hopes for an extension of the year-end rally. But the markets seem to be running out of steam, as if the AI theme alone is no longer enough to sustain the momentum. Macroeconomic realities have quietly reasserted themselves, with the Fed blowing hot and cold and US economic indicators proving difficult to interpret. Investors are therefore adopting a more cautious approach, torn between a certain optimism for 2026 and a very pragmatic desire to preserve the generally good performance expected in 2025.
However, the main source of volatility last week came from Japan. Comments by Kazuo Ueda, Governor of the Bank of Japan, triggered a significant increase in global long-term interest rates by confirming that another hike in key interest rates would be explicitly considered at the meeting on December 19. With more persistent inflation than anticipated, accelerating wage growth, and a persistently weak yen, the BoJ can no longer reasonably remain the only major central bank in "zero interest rate" mode. The Japanese government, despite favoring an accommodative monetary policy, does not appear inclined to hinder this normalization. A logical consequence: Japanese investors, among the largest holders of foreign debt, may be tempted to repatriate some of their holdings to domestic bonds expected to become more profitable. A move that would mechanically reduce their appetite for foreign sovereigns… and contribute to a rise in their yields.
In the United States, the economic situation remains paradoxical: the economy is losing momentum, but stubbornly refuses to stall. Activity indicators still paint a picture of an economy caught between two worlds. The ISM Manufacturing Index remains in contraction territory at 48.2, below expectations, with new orders declining, a weaker employment component, but prices still trending upward, reflecting the persistent effects of the trade war and tariffs on business inputs. Conversely, services continue to drive most of the growth, with the ISM Services Index remaining above 50. Consumption, too, remains surprisingly robust: Thanksgiving weekend saw Black Friday and Cyber Monday spending exceed last year's levels (including inflation), proof that American household demand remains strong despite declining sentiment. The labor market, on the other hand, confirms its gradual deterioration: ADP surveys point to a slowdown in job creation, concentrated in small businesses and cyclical sectors, while unemployment claims remain subdued. For the Fed, the picture remains difficult to decipher, especially since PCE inflation figures, published with a delay after the shutdown, serve as a reminder that the price war is far from over: both headline and core inflation are at 2.8% year-over-year.
While the Fed maintains a false sense of suspense around its next decisions, the ECB is subtly hardening its stance. While members of the Governing Council reiterate that there is "no urgency to ease," Isabel Schnabel went a step further, stating that she is "comfortable" with market expectations that factor in an upcoming rate hike. We still find this position surprising given the expected modest growth in Europe.
