Group 1 - Long-maturity Treasuries started 2026 on a defensive note after experiencing the largest annual gain in five years, with investors focusing on potential Federal Reserve interest-rate cuts to stimulate inflation [1] - The yield on the 30-year bond increased by about two basis points to 4.87%, marking the highest level since September, while shorter-maturity yields remained stable or decreased [2] - The upward pressure on yields is attributed to a concerning long-term fiscal outlook and signs of resilience in the US economy, as indicated by strong data and rising stock prices [3] Group 2 - Market volatility is expected to increase as investors assess the direction of monetary policy, with historically high valuations for US stocks providing a compelling reason to hold bonds as a hedge [4] - There has been significant demand for interest-rate derivatives that offer protection against the Fed's target range falling to 0%, while swap contracts predict a lower bound closer to 3% by year-end [5] - Despite the resilience of the US economy and inflation exceeding the Fed's 2% target, which complicates the case for further rate cuts, the market returned over 6% last year as measured by the Bloomberg US Treasury index [6] Group 3 - Other global bond markets weakened, with those closed on Wednesday catching up with declines in Treasuries, and January is typically a busy month for new corporate bond issuance, competing for investor cash [7]

Market Overview - The stock market is experiencing a reversal after an initial gain, with technology stocks facing increased selling pressure [1] - Major indexes, including the Dow, S&P 500, and Nasdaq Composite, have all turned lower after starting the day in positive territory [1] Economic Indicators - Treasury yields are slightly lower, indicating market expectations for further interest rate cuts by the Federal Reserve, which could support ongoing economic growth [2]

Core Viewpoint - The upcoming economic data releases will significantly influence the debate regarding the Federal Reserve's interest rate cuts, particularly in light of the recent government shutdown and its impact on data availability [1][2]. Economic Data Impact - The delayed announcements of monthly employment and inflation figures are expected to clarify whether the Fed is nearing the end of its easing cycle after three consecutive cuts or if further aggressive actions are necessary [2]. - The labor market's performance, particularly the employment figures, is deemed crucial for determining future interest rate movements [3]. Market Expectations - Bond traders are anticipating two rate cuts next year to bolster the job market and economic growth, despite persistent inflation [2]. - Current market expectations suggest that another rate reduction is not fully priced in until mid-year, with a potential second cut in October [6]. Treasury Yields - As of the latest data, the two-year Treasury yield is approximately 3.5%, while the 10-year yield stands around 4.2% [5]. - Yields have recently decreased from their peaks following comments from Fed Chair Jerome Powell regarding concerns over weaker hiring [5]. Job Market Insights - The economy is projected to have added around 50,000 nonfarm jobs in November, following a reported gain of 119,000 jobs in September, which exceeded estimates [7]. - The unemployment rate has risen to 4.4%, marking the highest level since 2021, indicating potential weaknesses in the labor market [7].

Core Viewpoint - U.S. stocks experienced a significant increase following the release of September's consumer-price index, which was lower than expected, bolstering the argument for potential interest-rate cuts by the Federal Reserve in the upcoming weeks [1] Economic Indicators - The consumer-price index for September came in below expectations, indicating a potential easing of inflationary pressures [1] - The market reaction suggests optimism regarding future monetary policy adjustments by the Federal Reserve, particularly in relation to interest rates [1] Inflation Outlook - Despite the positive market response, there are concerns regarding the trajectory of inflation beyond the immediate future, suggesting a need for caution [1]

Trade Relations and Economic Outlook - U.S. President Trump indicated that Washington is considering ending certain trade relations with China, including the purchase of cooking oil, while U.S. Trade Representative Greer suggested that tensions over export controls may ease following talks between officials from both nations [1][10] - The International Monetary Fund stated that China needs to shift its economic growth model toward domestic demand, which has been subdued amid the property downturn [10] Interest Rate Expectations - U.S. rate futures reflect a 95.7% chance of a 25 basis point rate cut at the upcoming October FOMC meeting [1] - Boston Fed President Collins advocated for continued interest rate cuts to support the labor market, suggesting that monetary policy would remain mildly restrictive [2] - Fed Chair Powell noted worsening labor market conditions, reinforcing expectations for another interest rate cut this month [3] Corporate Earnings and Market Performance - The third-quarter corporate earnings season is underway, with S&P 500 companies expected to report an average earnings increase of 7.2% compared to the previous year, marking the smallest rise in two years [5] - Major U.S. banks, including Bank of America and Morgan Stanley, are set to report earnings, with Bank of America already showing stronger-than-expected results [15] - Wall Street's major indexes closed mixed, with notable declines in stocks like Nvidia and Amazon, while Wells Fargo saw a significant gain after posting upbeat Q3 results [3][4] Global Market Developments - The Euro Stoxx 50 Index rose by 1.49% due to strong earnings and positive political developments in France, with luxury stocks like LVMH surging over 13% after reporting an unexpected increase in Q3 sales [9] - Asian stock markets closed higher, with China's Shanghai Composite Index up 1.22%, driven by expectations for additional policy support amid persistent deflationary pressures [11]

Core Viewpoint - The outlook for gold, silver, and platinum prices is influenced by potential Federal Reserve interest-rate cuts and a weaker dollar, which are expected to lead to above-average returns for commodities [1] Group 1: Market Outlook - The Federal Reserve is anticipated to implement interest-rate cuts, which could positively impact metal prices [1] - The dollar is expected to weaken further, with the FX team suggesting that the current decline is only about halfway through [1] - Historically, periods of dollar weakness correlate with strong performance in commodities, indicating a favorable environment for metal investments [1]

Core Viewpoint - Bond investors are shifting focus towards longer-term Treasury bonds as they anticipate a rally in 10-year US Treasuries, potentially driving yields below 4% for the first time since April [1] Market Dynamics - A cluster of bullish option trades has emerged, indicating investor confidence in the decline of 10-year Treasury yields [1] - Recent market movements have pushed down 10-year Treasury yields by 0.05 percentage points to near 4.1%, while 30-year yields have also decreased to about 4.7% [3] - The bond market is perceived as offering good value, particularly for retirees and pension plans, with current interest rates being attractive [4] Investment Strategy - Pacific Investment Management Co. is advising clients to lock in yields while they remain favorable, as clients are moving from short-term notes to longer, higher-yielding maturities [1] - TD Securities notes that while there is caution in the market, investors are beginning to explore longer-term investments [2] Performance Trends - The bond market has experienced its best year-to-date performance in five years through September, driven by expectations of renewed Federal Reserve rate cuts [5] - The gap between US five- and 30-year bonds has narrowed to approximately 1 percentage point, down from a four-year high of about 1.26 percentage points in early September [6]

Group 1 - The Chinese yuan has reached a 10-month high against the dollar due to optimism surrounding reduced U.S.-China trade tensions and expectations of interest-rate cuts by the Federal Reserve [1][2] - Treasury Secretary Scott Bessent announced a framework for a deal regarding the ownership of TikTok, which may facilitate a phone call between President Trump and President Xi Jinping, potentially leading to broader trade negotiations [2]

Core Viewpoint - Investors are anticipating a potential cut in the federal-funds rate by the Federal Open Market Committee, which may act as a catalyst for small-cap U.S. companies, particularly due to their focus on domestic sales and the potential for reduced borrowing costs [1]. Group 1: Market Performance - Small-cap stocks have underperformed compared to large-cap stocks this year and over the past five years, but the situation may change with expected interest rate cuts [1]. - The S&P 500 has outperformed the S&P Small Cap 600 over the past five years, although the small-cap index led for a significant portion of that period [5]. Group 2: Investor Sentiment - Jay Woods, chief global strategist at Freedom Capital Markets, suggests that excessive volatility may follow the Federal Reserve Chair's press conference, but any potential selloff in small-caps could lead to a rally later in the year [2]. - Momentum in the Russell 2000 index could indicate a stronger bull market than anticipated if it breaks out to new highs [2]. Group 3: Index Criteria and Screening - The S&P Small Cap 600 requires companies to show four consecutive quarters of profitability for initial inclusion, making it a more conservative benchmark compared to the Russell 2000 [5]. - A screening of the S&P Small Cap 600 highlights companies with rapid revenue growth and those expected to grow quickly through 2027 [4].

Group 1 - Economists at Morgan Stanley and Deutsche Bank are predicting accelerated Federal Reserve interest-rate cuts due to slowing inflation and a weakening labor market [1][3] - The Fed is expected to announce a 25 basis-point cut at its upcoming meeting, with traders anticipating further reductions in October and December [1][2] - Deutsche Bank has revised its forecast to include a third interest-rate cut in 2025, while Morgan Stanley expects cuts at four consecutive meetings through January [1][4] Group 2 - Morgan Stanley forecasts that the upper bound of the target range will reach 3.5% by January, with cuts expected in September, October, December, and January [2][5] - Economists suggest that the Fed will pause after January to assess inflationary impacts, with potential further cuts anticipated in April and July [4][5] - The argument against a larger 50 basis-point cut this month is based on the relatively low unemployment rate and the current fed funds rate being closer to neutral [6]