EconoTicker

Markets Slash Odds of December Fed Rate Cut to 45.4%

Markets are now pricing in only a 45.4% chance of a 25 bps rate cut at the Federal Reserve’s December 10–11 meeting, sharply lower than the 63.8% probability seen just a week earlier, according to CME FedWatch.

The shift reflects stronger U.S. economic data, firmer inflation readings, and repeated Fed signals that policymakers are in no rush to ease monetary conditions.

Market impact: Bearish for risk assets; fading rate-cut expectations strengthen the USD and pressure equities and crypto.

The latest U.S. 10-year Treasury auction recorded a yield of 4.074%, down from 4.117% in the previous sale. The decline signals solid investor demand for longer-dated government debt amid easing inflation pressures and expectations that the Federal Reserve will keep rates steady in the near term.

Market impact: Mildly positive for USD; strong demand for Treasuries supports confidence in U.S. financial stability, though lower yields may slightly temper dollar gains.

The Thomson Reuters/Ipsos Primary Consumer Sentiment Index (PCSI) edged down to 51.31 in November from 52.86 in October, indicating a mild softening in consumer confidence. The decline reflects lingering concerns over inflation and high borrowing costs, though overall sentiment remains relatively stable as the labor market continues to support household spending.

Market impact: Mildly negative for USD; softer sentiment may signal moderating consumption momentum heading into year-end.

U.S. mortgage applications rose 0.6% in the latest week, rebounding after a 1.9% decline previously, according to the Mortgage Bankers Association (MBA). The average 30-year fixed mortgage rate increased slightly to 6.34% from 6.31%, while the Purchase Index climbed to 172.7 and the Market Index to 334.2. However, the Refinance Index slipped to 1,247.5, reflecting weaker refinancing demand amid still-elevated rates. Overall, housing activity remains resilient despite persistent affordability pressures.

Market impact: Neutral for USD; steady mortgage activity signals stable housing demand but limited near-term implications for monetary policy.

The latest Redbook Index showed U.S. retail sales up 5.9% year-on-year, slightly higher than the previous 5.7%. The data points to steady consumer spending ahead of the holiday season, supported by easing inflation and a resilient labor market, though high borrowing costs continue to cap discretionary demand.

Market impact: Mildly positive for USD; stronger retail momentum reinforces the view of sustained consumer resilience in the U.S. economy.

Yields on short-term U.S. Treasury bills edged higher this week. The 3-month bill yield increased to 3.815% from 3.730%, while the 6-month bill yield rose to 3.700% from 3.640%. The uptick signals steady investor demand and reflects expectations that the Federal Reserve will keep interest rates elevated in the near term. Market sentiment remains anchored around stable monetary policy and resilient short-term funding conditions.

Market impact: Neutral for USD; rising bill yields indicate steady rate expectations but no significant shift in monetary outlook.

The University of Michigan Consumer Sentiment Index fell to 53.6 in October from 55.1, missing expectations of 55.0, as households turned more cautious about economic prospects and personal finances. The Current Conditions Index dropped to 58.6, while the Consumer Expectations Index slipped to 50.3, reflecting softer confidence amid persistent cost-of-living pressures.

Inflation expectations remained mixed — the 1-year outlook held steady at 4.6%, while the 5-year expectation rose slightly to 3.9%, the highest in several months. The uptick in long-term expectations suggests lingering uncertainty about the pace of disinflation and the Federal Reserve’s policy outlook.

Market impact: Mildly negative for USD; weaker sentiment and higher long-term inflation expectations present a mixed backdrop, with limited support for the dollar.

The U.S. Composite PMI rose to 54.8 in October from 53.9, signaling stronger private-sector growth. The Services PMI climbed to 55.2 from 54.2, showing robust expansion in business activity and new orders, while the Manufacturing PMI inched up to 52.2 from 52.0, pointing to steady factory performance.

The data highlight broad-based economic momentum, driven by resilient consumer spending and improving business sentiment. Input cost pressures moderated, and firms reported solid hiring trends, suggesting continued strength in domestic demand despite high interest rates.

Market impact: Positive for USD; stronger PMI readings reinforce expectations of sustained U.S. economic resilience and may keep the Fed cautious about easing policy too soon.

Core inflation eased to 3.0% in September from 3.1%, while headline CPI increased to 3.0%, up from 2.9% in August but below the 3.1% forecast. On a monthly basis, overall prices rose 0.3%, and core CPI increased 0.2%, both indicating contained price pressures.

The data suggest that underlying inflation continues to cool even as energy and housing costs add mild upward pressure to headline figures. The Core CPI Index stood at 330.54, compared with 329.79 in August, showing a steady but modest rise.

Analysts noted that the latest figures align with expectations for disinflation progress while maintaining a stable growth environment. The report reinforces the view that the Federal Reserve is likely to keep rates unchanged in upcoming meetings as it monitors further inflation moderation.

Market impact: Mildly negative for USD; slower core inflation growth strengthens the case for the Fed to extend its pause in tightening policy.

The Federal Reserve’s balance sheet fell slightly to $6.59 trillion, down from $6.596 trillion the previous week, as the central bank continued its quantitative tightening (QT) process by allowing maturing securities to roll off. Meanwhile, reserve balances with Federal Reserve Banks declined to $2.93 trillion from $2.988 trillion, reflecting reduced liquidity in the banking system.

The modest weekly changes underscore the Fed’s ongoing effort to shrink its balance sheet and normalize financial conditions after years of expansion. Analysts note that liquidity levels remain sufficient to support market stability, but tighter reserves could gradually increase funding pressures in money markets if the QT pace continues into 2026.

Market impact: Neutral for USD; continued balance sheet reduction aligns with the Fed’s long-term policy normalization goals without signaling any immediate liquidity risk.

U.S. Treasury yields declined across short-term maturities, with the 4-week bill auction clearing at 3.945% (down from 4.030%) and the 8-week bill at 3.900% (down from 3.960%). Meanwhile, the 5-year TIPS (Treasury Inflation-Protected Securities) auction yield dropped sharply to 1.182% from 1.650%, indicating moderating inflation expectations and renewed demand for inflation-linked securities.

The softer yields reflect increased investor appetite for government debt amid easing risk sentiment and speculation that the Federal Reserve may maintain steady rates longer into 2025. The strong demand for TIPS suggests confidence that inflation is gradually cooling, aligning with recent price data.

Market impact: Mildly negative for USD; lower yields and stronger Treasury demand indicate softer inflation outlook and reduced rate hike expectations.

The Kansas City Fed Manufacturing Index jumped to 15 in October from 4 in the previous month, signaling a strong rebound in regional factory activity. The broader KC Fed Composite Index also rose to 6 from 4, reflecting improvement across production, new orders, and employment components.

The surge in manufacturing sentiment across the Midwest suggests resilience in industrial output despite higher borrowing costs and ongoing supply-chain adjustments. Firms reported stronger demand for machinery and fabricated metals, alongside steady price growth and moderate wage pressures.

Market impact: Mildly positive for USD; stronger regional manufacturing data support optimism for continued industrial recovery in the U.S. heartland.