Federal Reserve officials signal hawkish stance; AI valuation concerns rise amid market volatility.

Federal Reserve Warnings on Rate Cuts

Cleveland Fed President's Concerns

Cleveland Fed President, Beth Harmack, has warned that further interest rate cuts could pose widespread risks to the economy. These risks include prolonging high inflation cycles, stimulating risk appetite in financial markets, and encouraging high-risk lending. While rate cuts may be seen as "insurance" for the labor market, they could exacerbate financial stability risks.

Goolsbee's Unease About December Rate Cuts

Fed member Goolsbee expressed discomfort regarding potential rate cuts in December, suggesting that inflation appears to be stagnating. He noted that while the economy is strong, he is wary of significantly lowering rates based on the assumption that inflation will decrease.

Fed Governor Cook on Financial Resilience

Fed Governor Lisa D. Cook stated that the financial system remains resilient, but asset valuations are high. She highlighted risks from the growth and complexity of private credit markets and hedge fund activities, which could disrupt the Treasury market. Cook noted that current risk compensation is low compared to historical levels, indicating a potential for asset price declines.

Morgan Stanley Abandons December Rate Cut Expectations

On November 20, Morgan Stanley retracted its prediction of a 25 basis point rate cut in December, citing a strong September jobs report that indicates economic resilience. The firm now expects rate cuts in January, April, and June 2026, with the target policy rate dropping to 3%-3.25%.

U.S. Job Market Surprises

The U.S. non-farm payrolls increased by 119,000 in September, significantly exceeding expectations of 50,000. The unemployment rate rose to 4.4%, the highest since 2021, complicating the Fed's December decision-making.

U.S. Government Restructures Energy Department

The U.S. Department of Energy announced a restructuring that prioritizes fossil fuels and nuclear energy over renewable energy and efficiency. This change aligns with President Trump's energy agenda, introducing new offices focused on hydrocarbons and geothermal energy while eliminating the Clean Energy Demonstration Office.

White House Economic Council on Rate Cuts

White House National Economic Council Director Hassett stated that the September job data was "extremely strong" and indicated a need for rate cuts in December. He warned that the government shutdown could negatively impact Q4 growth.

Dalio on AI Bubble

Ray Dalio acknowledged the existence of an AI bubble but suggested that it won't burst without external factors, such as increased wealth taxes. He advised investors to take defensive measures, like holding gold, rather than selling off assets due to bubble concerns.

Market Reactions to Earnings Reports

Nvidia's Earnings Impact

Despite Nvidia's strong earnings report initially boosting market sentiment, major indices closed lower, with the Nasdaq dropping over 2%.

Amazon's Investment Plans

Amazon announced plans to invest at least $3 billion in a new data center in Warren County, Mississippi, aimed at supporting AI and cloud computing.

Walmart's Strong Performance

Walmart reported Q3 revenue growth of 5.8%, with e-commerce sales rising 27%, leading to a 6% stock increase post-earnings.

Cryptocurrency Market Decline

Cryptocurrency prices fell again, with Bitcoin dipping to $86,000 and Ethereum to $2,800, reflecting broader market trends.

Hong Kong Stock Market Activity

On November 20, significant net purchases were made in Hong Kong stocks, with notable investments in the Tracker Fund and Alibaba.

Conclusion

The financial landscape is currently marked by caution regarding interest rate cuts, high asset valuations, and mixed economic signals. Investors are advised to remain vigilant as market dynamics evolve.