Fixed Income & Equities Markets Week in Review

The major domestic indices moved moderately higher this week, after Monday’s “risk off” pullback to start the month of December. The end of last week closed out a volatile November. The S&P 500 eked out a November gain of 0.2% after trading down more than 4.5% at one point. The index successfully pushed higher for a seventh straight month. The equal-weight S&P 500 fared better than its cap weighted S&P 500 counterpart, outperforming it by nearly 2%. The Dow Jones Industrial Average (Dow) gained 0.5%, while the Nasdaq Composite underperformed, losing 1.5% and snapping a seven-month winning streak. The small-cap oriented Russell 2000 was the best performer, rising by 1.0%, as hope of an interest rate cut by the Federal Reserve (Fed) next week continued to rise.

This week saw economic data releases getting back up and running after the government shutdown. There was some support for a still-solid macro backdrop theme. The November Institute for Supply Management (ISM) Services index came in better, printing at 52.6 versus an expected 51.8 and slightly higher than October’s 52.4. New orders were weaker, but employment trends were better and prices paid were moderately lower. It was the highest reading since February. Initial jobless claims for last week also came in lower than expected at 191,000 (versus an expected 221,000 and lower than the previous week’s upwardly revised 218,000). It was the lowest reading since September 2022.

At the same time, some softer economic data was also released. ADP private payrolls fell by 32,000 in November, worse than the anticipated gain of 10,000 and October’s 47,000 increase. It was the 3rd decline in the last four months and the biggest contraction since March 2023. In addition, the November ISM Manufacturing index printed at 48.2, below consensus for 49.1 and October's 48.7 (and in continued contraction territory, which is below 50). The report noted a decline in new orders and employment, while showing a rise in prices. Tariffs, global uncertainty, supply chain challenges, staffing adjustments, margin pressure and government-related disruptions were noted as challenges. Finally, on the holiday shopping front, affordability challenges are being flagged amidst a holiday-related ramp in “buy now, pay later” credit usage and evidence of trade-down spending behavior across some income levels.

Friday brought the delayed September PCE reading, the Fed’s favored inflation metric. While stale data, September’s core PCE ticked 0.2% higher month/month, in-line with consensus and August’s reading. The annualized core PCE came in at 2.8%, in-line with consensus and a small decline from August’s 2.9%. The slight decline could provide an opportunity for the Fed to cut rates when it meets next week. But inflation is still persistently lingering above its 2.0% target, while there are some potentially softening labor trends. With the Fed members divided on the topic of a rate cut, next week’s meeting dynamics could prove interesting. The equities market is pricing in a nearly 90% probability of a 0.25% rate cut next week, so a disappointment on Wednesday could cause a “thud” for market sentiment.

In the meantime, the week brought a better-than-expected start to the holiday shopping season. According to Adobe Analytics, US shoppers spent $44.2 billion during the five-day period from Thanksgiving through Cyber Monday, up 8.8% year/year and ahead of expectations for $43.7 in spending. Salesforce also noted that artificial intelligence (AI) influenced 20% of Cyber week orders. Jewelry, apparel, cosmetics, electronics, video game consoles, and home appliances were mentioned as some of the better performing categories.