Key week ahead: Fed's potential bond buying, Microsoft chip talks, Baidu's Kunlun evaluation.

US Core PCE Misses Expectations, Signals Further Rate Cuts by the Fed

The US Commerce Department released a key inflation indicator on December 5, showing that the inflation rate for September was lower than expected. This report, delayed due to the government shutdown, signals a green light for the Federal Reserve to consider further rate cuts.

Key Inflation Metrics

• The core PCE price index, excluding volatile food and energy prices, rose by 0.2% month-over-month and 2.8% year-over-year. The monthly figure met expectations, but the annual rate was 0.1 percentage points lower than anticipated.
• Overall personal consumption expenditures increased by 0.3% month-over-month, with an annual inflation rate also at 2.8%, both in line with forecasts.

The Fed uses the PCE price index as a primary tool for measuring inflation, with officials generally viewing core data as a better indicator of long-term trends.

Rate Cut Expectations

Economists predict that the Fed will cut rates in December, with two additional cuts expected in 2026. The median forecast from surveyed economists suggests a 25 basis point cut starting in March 2026. The upcoming decision will be announced on December 10, followed by a press conference from Chairman Jerome Powell.

Potential Asset Purchases

Market focus is shifting from rate cuts to the possibility of the Fed restarting large-scale asset purchases. Former New York Fed expert Cabana anticipates an announcement of $45 billion monthly purchases of Treasury securities to address reserve shortages and rising repo rates, potentially marking a resumption of balance sheet expansion.

Economic Growth Outlook

US Treasury Secretary Scott Bessent stated that the holiday shopping season has been "very strong," predicting a 3% GDP growth for the year despite challenges from the government shutdown. He noted that the economy has performed better than expected, with two quarters of 4% GDP growth.

Regulatory Changes for Leveraged Loans

US banking regulators have relaxed post-crisis restrictions on leveraged loans, citing that previous guidelines were overly restrictive and led to a significant loss of market share for regulated banks. The new rules will shift the focus from strict regulations to general risk management principles.

Stock Market Reactions

• The major US stock indices saw slight gains, with the Dow Jones up 0.22%, the Nasdaq up 0.31%, and the S&P 500 up 0.19%.
• Notable movements included a rise in large tech stocks, with Broadcom up over 2% and Google and Meta both gaining over 1%. However, Netflix saw a decline of nearly 3%.

Silver and Gold Market Trends

Silver prices surged to a new high, reaching $59.33 per ounce, supported by strong ETF inflows. In contrast, gold prices showed volatility, initially rising before declining.

Upcoming Developments

Investors are advised to keep an eye on the upcoming import and export data from China, which is expected to be released soon.