Rate-Cut Hopes Slip as AI Trade Continues to Falter
Stronger growth readings and a pickup in price pressures this week reduced the likelihood of a December rate cut. Even Nvidia’s strong earnings couldn’t stabilize sentiment as the AI trade continues to lose momentum, triggering sharp swings across equities and other risky assets. Investors remain uneasy, balancing solid underlying fundamentals against stretched valuations and uncertainty around the Fed’s next move. With only a handful of FOMC voters openly supporting a cut, the December 10th meeting now stands as the next major catalyst for markets.
Key Data:
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November’s Flash PMI signaled faster economic growth while price pressures intensified. The Flash US Composite PMI rose to 54.8 in November, a 4-month high. Numbers above 50 indicate expansion while those below signal contraction. Improvement was led by the services sector, which hit a 4-month high of 55 while manufacturing lagged slightly, falling to 53.6, a 2-month low. Meanwhile, input costs accelerated sharply in November on the back of tariffs and higher wages.
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Lower mortgage rates lifted existing home sales in October. Sales of previously owned homes rose 1.20% month-to-month to 4.1 million units. The rise in sales came despite a drop in inventory to 1.52 million units, down 0.70% from September. That represents a 4.4-month supply. By comparison, six to seven months is considered a healthy balance between supply and demand. Healthy demand and lower inventory helped push the median price of a home up 2.10% year-over-year to $415,200.
- The U.S. job market delivered mixed signals in September. Non-farm payrolls rose by 119,000, well above the ~50,000 forecast, but the unemployment rate ticked up to 4.4%, a near four-year high. Private-sector wage growth remained steady at +3.8% year-over-year, while average hourly earnings rose just +0.2 % from the prior month. Beneath the surface, employment gains were concentrated in health care (+43K), food services and drinking places (+37K), and social assistance (+14K) — while losses hit transportation & warehousing (−25K) and the federal government (−3K). It was also announced October’s data will be impacted by the recent 43-day government shutdown. The Bureau of Labor Statistics (BLS) will not publish the October unemployment rate, and October non-farm payroll numbers will be rolled into the November report. Importantly, policymakers at the Federal Reserve will not see any additional employment data prior to their next meeting, leaving in question how they will weigh the uptick in the unemployment against the better-than-expected payroll gains.
It was a rough week for markets as the AI trade continued to lose momentum and economic data likely put a December rate cut off the table. Bulls had pinned this week’s hopes on a strong quarterly earnings report from tech darling Nvidia to resolve concerns over frothy valuations in the sector. Factually, the company delivered, topping analysts’ estimates and issuing an upbeat fourth-quarter forecast. On its earnings call, CEO Jensen Huang reassured shareholders that demand for its current-generation Blackwell chips were “off the charts” while firmly rejecting the idea of an AI bubble. Traders initially cheered the news, sending shares up as much as 5% at Thursday’s market open and helping propel the Dow Jones Industrial Average to a session high up more than 700 points. However, the rally lost steam, fading by late morning and reversing entirely by the close. At its low, the Dow had swung 1,128 points from its peak. As trading came to a close, Nvidia finished down 3% while the Dow shed 387 points for a 0.84% loss on the day. Beyond Nvidia, investors digested the first official government labor market report since the end of the shutdown. Initial jobless claims fell by 8K to 220K in the week ended Nov. 15, better than the 227K estimate and broadly consistent with the pre-shutdown figure of 219K. The report reinforced the Fed’s view of a labor market that is soft but relatively stable. Meanwhile, S&P’s Flash PMI underscored persistent inflationary pressures, showing prices accelerating sharply in November as companies cited tariffs and higher wages as key drivers. Companies, however, remained upbeat for the year ahead with hopes for greater policy support in the form of lower interest rates and more government fiscal stimulus.
Investors had hoped that with Washington functioning once again and government data beginning to flow that sentiment would stabilize following what had been a few rocky weeks. Instead, attention remained focused on stretched AI valuations and uncertainty over the prospects of a December rate cut. The volatility in AI has extended beyond equities, sparking a broader pullback in risky and speculative assets more generally. High-yield corporate credit spreads have widened, signaling rising concerns over economic growth. Crypto, another risk-sensitive asset class has also faltered recently with Bitcoin finding itself down more than 25% from October’s highs – erasing its year-to-date gains. A pullback to a large degree was to be expected and is frankly healthy, but upside speculation that has been persistent over the last six months has now been replaced by increasing momentum and positioning of downside bets. Trading in put options (downside insurance) and leveraged, inverse equity funds (hedged) has accelerated in recent days with the Pro Shares UltraPro Short QQQ seeing $12 billion of inflows on Thursday – its largest one day intake ever. Unfortunately, you can’t time markets and that particular trade had lost nearly -3.5% as of midday Friday. Fundamentals – on net – still appear supportive for markets but investors are jittery and loath to give up gains achieved to date. With Thanksgiving next week, we wouldn’t expect any substantial change in narrative and the next major catalyst is likely to be the rate decision following the FOMC meeting on December 10th. Of the twelve voting members, four are on record as supporting a December cut, five have signaled hold or are known hawks – leaving three uncommitted or unknown votes holding the fate for investors. With a “hold” baked into the market’s assumption and bearish posturing beginning to stack up, a “not out of the question”, surprise cut could whip sentiment back to the positive and hand investors an early Christmas gift.
The Week Ahead
Holiday travelers will be hitting the road for the Thanksgiving holiday. Week in Review will pause in observance. Our next edition arrives on December 5th with the latest manufacturing and services numbers.
How The Nutcracker became an American Holiday Tradition
When the old-world ballet known as The Nutcracker premiered in 1892 in its homeland of Russia, the production received disappointing reviews. Critics called it “an insult” to Russia’s Imperial Theater, “death for the company,” and “quite amateurish.” It paled in comparison to masterpieces like Sleeping Beauty and Swan Lake that were part of the Russian ballet’s repertoire. Audiences complained that the focus on children in the first act was frivolous and that the second act felt disjointed from the rest of the ballet. For decades, The Nutcracker remained relatively obscure and rarely performed outside of Russia. Today, it is one of the most popular ballets in the world and is almost synonymous with the holiday season in the United States.
Each December, audiences flock to theaters for the enchanting tale of a young girl and her nutcracker prince. The origins of The Nutcracker date back to a story written by E.T.A. Hoffman in 1816 called The Nutcracker and The Mouse King. Hoffman’s original version is a much darker, more sinister tale than the ballet we know today. In 1845, French author Alexandre Dumas, who wrote The Three Musketeers and The Count of Monte Cristo, altered Hoffman’s story, making it lighter, sweeter, more whimsical, and less scary.
In 1890, choreographers Marius Petipa and Lev Ivanov commissioned Russian composer Pyotr Ilyich Tchaikovsky to write the intricate and emotionally rich score for their ballet adaptation of The Nutcracker. Despite its pedigreed creators, the ballet was not well-received. It wasn’t until Christmas Eve in 1944 when Willam Christensen’s debut of The Nutcracker in San Francisco finally earned a warm reception from audiences. Christensen was an American choreographer, dancer, and teacher who established the San Francisco Ballet Company with his brothers. His version of the ballet was the first full-length production of The Nutcracker in North America. Realizing the ballet’s potential, the Christensens began repeating it annually during the holiday season.
The New York City Ballet followed suit a decade later in 1954 with its own unique production created by George Balanchine, founder of the School of American Ballet in New York City. Balanchine designed his production so that his students could essentially grow up in the ballet, taking on roles each year that matched their level of training. The New York City Ballet’s performance includes 90 dancers, 62 musicians, 40 stagehands, and more than 125 children, ages 8 to 12, in two alternating casts. In 1957, it was broadcast on television, which was a real start of The Nutcracker becoming a cultural sensation and cherished holiday tradition. From there, it spread rapidly as more major and regional ballet companies started performing the work every year, some of them adopting Balanchine’s program and other great choreographers putting their own creative stamp on the production, such as Mikhail Baryshnikov, Rudolf Nureyev, and Alexei Ratmansky.
Ticket sales from The Nutcracker often sustain many ballet companies – large and small – throughout the remainder of the year. The New York City Ballet’s production of The Nutcracker attracts 100,000 people each season, contributing about 45% of the company’s annual ticket revenue from its roughly five-week run. Once dismissed as uninspired, The Nutcracker has since blossomed into a beloved holiday treasure that draws audiences year after year with its ability to capture the joy and magic of the season.