A High-Stakes Week Ahead: Key Market Drivers Before the Next FED Decision

Scott Bessent

News of President-elect Donald Trump nominating hedge-fund manager Scott Bessent as Treasury Secretary created a ripple in financial markets. While there’s a sense of relief, the reaction has been relatively muted. Both the dollar and yields have dipped, but skepticism lingers over whether Bessent will significantly impact the policies driving recent yield increases.

Dollar and Yields Slip

The dollar edged lower, and yields followed suit after the announcement of Scott Bessent’s nomination. However, the declines were modest, reflecting a tempered market response. This suggests that while markets welcomed some clarity on the nomination, the move wasn’t enough to spark a significant shift in sentiment.

Week Ahead: Key Market Drivers

This week, financial markets are on edge, anticipating a series of pivotal data releases that could either solidify or challenge current expectations ahead of the Federal Reserve’s (FED) upcoming rate decision on December 18th. With the debate split between holding rates steady or a potential 25bp cut, the stakes are high. The implied probability is electrifying: a 44.6% chance of a 25bp cut and a projected -0.111bp adjustment. Let’s dive into what could shake the markets this week!

Tuesday: Housing Market and Consumer Confidence in Focus

The week kicks off with the October new home sales report, expected to align with forecasts at 725k, a slight dip from the previous 738k.

Adding to the anticipation, the Consumer Confidence Index for October is set to climb, with projections of 111.8 compared to the prior 108.7. These figures will provide critical insights into consumer sentiment as we head into the holiday shopping season.

Wednesday: A Crucial Day Packed with Market Movers. Wednesday will be the highlight of the week, with several key economic indicators on the agenda:

• 3Q Annualized GDP: Growth is expected to hold steady at 2.8%, mirroring last quarter’s performance.

• 3Q Personal Consumption: Forecasted to remain robust at 3.7%, consistent with consensus estimates.

• Initial Jobless Claims: Predictions point to a slight increase of 3k, bringing the total to 216k, up from 213k in the previous release. The November 21 report surprised markets by falling to its lowest level since April, highlighting the resilience of the labor market. However, looming layoffs by companies like General Motors, which plans to cut 1,000 jobs globally, mostly in the U.S., could temper this optimism. States like California, Georgia, Texas, and New Jersey have already experienced notable declines in job figures.

Europe: A Quieter but Significant Week

Across the Atlantic, the focus will be on inflation and economic activity. The CPI aggregate report (November 29) is expected to show a slight monthly decline of -0.2%, while the core annual CPI is projected to rise by 2.8%.

Meanwhile, EU PMI data is anticipated to dip below the previous reading of 45.2, signaling ongoing challenges in weaker European economies. These developments will remain a critical topic of discussion in the days ahead.

Small Caps Reach Record Highs: Are the Gains Here to Stay?

Small-cap stocks are stealing the spotlight, reaching record highs as momentum continues to build. However, beneath the surface, sluggish earnings growth poses a challenge that could temper this election-fueled rally. Let’s explore what’s driving these gains and why they may prove short-lived.

A Historic Climb for Small Caps

The Russell 2000 Index, a key benchmark for small-cap stocks, surged over 2%, reaching a new intraday high after failing to break through earlier this month. The rally reflects renewed optimism, bolstered by a mix of election-driven enthusiasm and recent policy developments.

Trump Effect and Treasury Optimism

The momentum traces back to the aftermath of Donald Trump’s election victory, which ignited a surge of “animal spirits” in the market. Investors were further encouraged by Trump’s pick for Treasury Secretary, sparking a relief rally that has propelled small caps higher.

Realistic Outlook: Slow Earnings Growth

Despite the excitement, a closer look reveals a potential hurdle: subdued earnings growth among small-cap companies. While optimism is driving the current rally, the fundamentals may not support sustained gains. Without a significant shift in earnings trajectories, the rally could lose steam as election euphoria fades.

Once the euphoria subsides, however, investors will have to grapple with a still-tough rate environment for small firms, anemic earnings growth and now, valuations that look a little stretched by their own historic norms (even as they are still cheap against the even pricier S&P 500.)