Market Rallies on Optimistic Expectations for Fed Rate Relief and Economic Softness

Stock Indexes Recover on Policy Hopes

Equities are staging a recovery today with broad-based gains across major indices. The S&P 500 is posting +0.39% gains, while the Nasdaq 100 advances +0.50% and the Dow Jones Industrials climbs +0.27%. Futures markets show similar momentum, with December E-mini S&P contracts up +0.40% and E-mini Nasdaq futures adding +0.47%. This rebound follows last Friday’s sharp selloff, signaling renewed investor confidence.

The rally reflects market optimism surrounding the Federal Reserve’s potential shift toward a more accommodative stance. The 10-year Treasury yield has declined by 3 basis points to 4.16%, reflecting expectations for lower rates ahead. Fed Governor Stephen Miran’s recent dovish remarks—noting that current policy is excessively restrictive and highlighting benign inflation trends alongside labor market concerns—have bolstered the bull case for stocks.

Economic Data and Fed Policy Implications

Today’s economic releases reinforce dovish sentiment. The December Empire State Manufacturing Index contracted unexpectedly to -3.9, well below the anticipated 10.0 reading. This weakness in business conditions provides ammunition for rate-cut advocates and supports the growing anticipation that the Fed will pivot toward easing policy in the coming months.

China’s latest economic data added to the cautious outlook for global growth. Industrial production moderated to +4.8% year-over-year in November, undershooting the +5.0% forecast. Meanwhile, retail sales growth slowed to +1.3%, marking the weakest pace in 2.75 years. New home prices continued their downward trajectory, registering a 30th consecutive monthly decline. These figures raise questions about global demand dynamics heading into year-end.

Week Ahead: Critical Economic Calendar

Investors are bracing for a data-heavy week that will heavily influence market sentiment and Fed expectations. Today, the National Association of Home Builders housing index is projected to rise to 39. On Tuesday, the employment report takes center stage, with nonfarm payrolls expected to grow by 50,000 and the unemployment rate holding at 4.5%. Wage growth is forecast at +0.3% monthly and +3.6% annually. Separately, retail sales are anticipated to show modest gains of +0.1% month-over-month, with ex-automotive sales climbing +0.2%. The manufacturing PMI is expected to edge down to 52.0.

Thursday will bring initial jobless claims data, projected to fall by 11,000 to 225,000, alongside the crucial November inflation readings. Consumer Price Index inflation is expected at +3.1% year-over-year, with core CPI at +3.0%. The week concludes Friday with existing home sales data and an upward revision to consumer sentiment.

Currently, markets are pricing in only a 27% probability of a 25-basis-point rate cut at the January 27-28 FOMC meeting, though this pricing could shift based on the week’s data.

Treasury Markets and Yield Curve Dynamics

The Treasury market is responding to the dovish economic backdrop. March 10-year T-note futures are up 7 ticks, with yields declining 2 basis points to 4.165%. The weak manufacturing data provided a catalyst for bond strength, while dovish Fed commentary added support. However, equity market resilience is capping further Treasury gains.

A notable development is the steepening yield curve, which has accelerated since last Wednesday’s FOMC announcement of a new $40 billion monthly liquidity program via short-term Treasury bill purchases. This steepening—where investors buy shorter-dated securities and sell longer-dated ones—is creating headwinds for long-duration bond prices. Concerns about inflation persistence and potential threats to Fed independence are also weighing on longer-term Treasury valuations.

In Europe, government bond yields are declining. The 10-year German bund yield fell 1.7 basis points to 2.840%, while the 10-year UK gilt dropped 2.2 basis points to 4.494%. Eurozone industrial production expanded 0.8% month-over-month in October, meeting expectations. The ECB’s next policy decision on Thursday is not expected to include rate cuts, with swaps showing 0% probability of a 25-basis-point reduction.

Overseas Equity Performance

Global equity markets present a mixed picture. Europe’s Euro Stoxx 50 climbs +0.71%, while Asia-Pacific indices retreated. China’s Shanghai Composite fell -0.55%, and Japan’s Nikkei 225 declined -1.31%, reflecting divergent economic outlooks and policy divergences.

Sector Movers and Individual Stock Action

Semiconductor stocks are leading today’s rally, with KLA Corp surging more than 4% following a Jeffries upgrade to buy with a $1,500 price target. Micron Technology and Lam Research each gained over 2%, while Applied Materials, Advanced Micro Devices, NXP Semiconductors, Nvidia, and ASML Holding all advanced more than 1%.

Precious metals strength is benefiting mining equities. Gold and copper rose over 1%, while silver jumped more than 3%, lifting Barrick Mining, Newmont, Hecla Mining, and Freeport-McMoRan each by over 1%.

Notable gainers include Immunome, up more than 23% after announcing positive Phase 3 trial results for Varegacestat in desmoid tumors, and ZIM Integrated Shipping Services, climbing more than 5% on reports of a takeover bid. Akamai Technologies surged more than 4% after a KeyBanc double upgrade to overweight, while Teradyne jumped over 3% following a Goldman Sachs double upgrade to buy. Corebridge Financial, Doximity, and Charles River Laboratories each posted gains exceeding 2% on analyst upgrades and index inclusion news.

On the downside, ServiceNow is the S&P 500’s largest loser, falling more than 9% after a KeyBanc downgrade to underweight. ARM Holdings dropped more than 3% on a Goldman Sachs downgrade to sell. Additional declines were posted by Entegris, LyondellBasell Industries, Adobe, and Texas Instruments, each facing downgrades and price target reductions from major brokerages.

Earnings Calendar

Companies reporting today include Dakota Gold Corp, Lifezone Metals Ltd, Lionsgate Studios Corp, and Triller Group Inc.