US stocks climb as inflation data strengthens rate cut outlook
United States (US) stock markets ended the week on a positive note, supported by soft inflation data that reinforced expectations of a rate cut at this week’s Federal Open Market Committee (FOMC) meeting. For the week, the Nasdaq 100 finished 1% higher, the S&P 500 rose by 0.31%, and the Dow Jones gained 238 points (+0.50%).
Ahead of Thursday’s FOMC meeting, the core Personal Consumption Expenditures (PCE) price index – the Federal Reserve’s (Fed) preferred gauge of underlying inflation – rose a tame 0.2% month-on-month (MoM) in September and 2.8% year-on-year (YoY), in line with forecasts. Yet despite the benign print, US Treasury yields rose 4 basis points (bp) across the curve, taking their lead from Canadian bond yields, which gained after a hotter-than-expected jobs report.
US 10-year yields show strongest weekly rise since April
This resulted in US 10-year yields finishing the week 12 bp higher, marking their strongest weekly increase since April, to be eyeing the neckline of a potential inverted head-and-shoulders pattern at 4.17 – 4.19%. A clear breakout above this level would open the way for US 10-year yields to rise towards 4.50%.
While this is likely more of a story for 2026, a rise of this magnitude could impact equities if it unfolds rapidly. Potential catalysts for rising US bond yields include:
- The impending fiscal boost from the ‘One Big Beautiful Bill’
- The Fed cutting rates into resilient growth
- The broader reflationary momentum now rippling through global long-end bond yields.
Key data release before Thursday’s decision
Looking ahead, the only notable data release before Thursday’s FOMC decision is Wednesday morning’s October Job Openings and Labor Turnover Survey (JOLTS) report, useful context, but already somewhat stale.
FOMC interest rate decision
Date: Thursday, 11 December at 6.00am AEDT
At the last FOMC meeting in October, the Fed cut rates by 25 bp into a target range of 3.75% – 4.00%.
It was the central bank’s second consecutive rate reduction and was approved by a 10 – 2 vote. Fed Governor Stephen Miran voted against the decision in favour of lowering rates by 50 bp, while Kansas City Fed President Jeff Schmid dissented in favour of holding rates steady.
Fed Chair Jerome Powell told reporters at the post-meeting news conference that a December cut was not a ‘foregone conclusion’. The minutes of the meeting released on 19 November showed disagreement about the path forward, with the Board divided over whether a stalling labour market or stubborn inflation were bigger economic threats.
The hawkish minutes resulted in the odds of a 25 bp rate cut at this week’s meeting falling to about 30%. However, since then, dovish Fed commentary and soft tier-two labour market data now sees the interest rates market pricing in an 87% chance of a 25 bp rate cut to 3.50% – 3.75% at this week’s meeting.
The commentary will likely have a hawkish element, with Fed Chair Powell noting that the bar for further cuts is higher, and he will likely point out the views of participants who opposed a cut.
Looking ahead, the rates market is pricing in another two full 25 bp rate cuts in 2026, with a 50% probability of a third 25 bp rate cut in 2026.