Why the market is pricing in a Fed rate cut for December

Inflation and Interest Rates - September PCE report showed inflation rose 28% year-over-year, the fastest pace since spring 2024 [1] - Tariffs impacted durable goods inflation, but overall inflation is expected to decrease from nearly 3% to around 2% next year [3][4] - The market anticipates the Fed will cut rates, but some dissenters suggest a more cautious approach [6] - Long-term yields are expected to remain around 4%, potentially rising to 45%, due to sticky inflation and supply issues [37] Economic Outlook - The US economy may experience a "code red affordability moment," particularly affecting lower-income individuals and young people [2][13] - Stimulus from tax cuts, the World Cup, and the US's 250th birthday could lead to a strong economic year [9] - Consumer spending remains strong, despite concerns about affordability [16][18] - AI is estimated to contribute about 25% to GDP growth, with AI-related capital expenditure representing approximately 15% of GDP [73][72] Market Dynamics - The market may broaden beyond the "Magnificent Seven" to focus on the "Impressive 493" stocks in the S&P 500, leveraging AI for productivity gains [21] - Bitcoin is primarily a trading vehicle influenced by technical factors rather than fundamentals, with stablecoins potentially replacing its transaction function [23][25] - The labor market shows signs of cooling, with increased layoff announcements and employers limiting headcount [89] - The Beige Book indicates cooler consumer spending and hiring, along with moderate price increases [87][91]