A not-so-hawkish Fed cut - We maintain our call

In focus today

In Norway, the Regional Survey is due for release. We expect it to confirm that growth continues to rise at a moderate pace, with capacity utilization largely unchanged and indicate that the level of activity is somewhat below normal. Specifically, we expect that respondents in the survey will expect 0.3-0.4% growth next quarter, that capacity utilization will be unchanged at 35% and that the number of companies experiencing labour shortages will fall from 25% to 24%.

In Sweden, the final figures for November inflation are being published. The preliminary figures surprised to the downside, with CPI at 0.3% y/y, CPIF 2.3% y/y, and CPIF ex. energy 2.4% y/y. As preliminary estimates are generally reliable, significant revisions are unlikely. It will be interesting to analyse the details to understand the factors behind the surprise. Specifically, whether the low outcome is linked to seasonal variations or other underlying causes.

In central bank space, attention turns to the Swiss National Bank, where we forecast the rate to remain unchanged at 0.00%. The Central Bank of Turkey is also set to release its rate decision.

Economic and market news

What happened yesterday

In the US, the Federal Reserve cut its policy rate target by 25bp to 3.50-3.75% last night, as widely anticipated. Miran voted for a larger 50bp cut, while Schmid and Goolsbee dissented in favour of a hold, also in line with our expectations. We (and the markets) had expected Powell to push back against market pricing further rate cuts for 2026. However, his avoidance of strong forward guidance led to a decline in UST yields and broad USD weakening during the press conference. We maintain our Fed call and expect two final rate cuts in March and June. The Fed also announced reserve management purchases of T-bills starting 12 December at USD 40bn per month, indicating more front-loaded easing to liquidity policies than we anticipated.

Ahead of the meeting, the US Q3 Employment Cost Index signalled slightly slower-than-expected wage growth at 0.8% q/q (prior: 1.0%). This pace is close to ideal for the Fed - supporting consumption without driving inflation - and is positive for overall risk sentiment.

In Sweden, October economic activity data showed a slight decline, with lower production in the business sector as well as declining household consumption. The GDP indicator fell by 0.3% m/m, though its volatility warrants cautious interpretation. Overall, the data aligned with our expectations of slower growth for Q4, reflecting lagged effects of the summer slowdown, and does not alter the positive outlook heading into 2026.

In Norway, November core inflation declined to 3.0% y/y (cons: 3.1%, prior: 3.0%), driven by domestic and imported goods ex. food. Annual growth in household appliances and electronics dropped close to September levels, indicating that volatility was likely influenced by Black week adjustments. The print is marginally lower than Norges Bank's estimate from the September MPR at 3.1%, reinforcing the disinflationary trend. While this is unlikely to affect Norges Bank's rate path next week, it provides scope for signalling a more aggressive cutting cycle, dependent on the Regional Network survey today.

In Canada, the Bank of Canada kept the rate unchanged at 2.25% as widely expected.

In Denmark, November inflation held steady at 2.1% y/y. Food prices declined 0.9% from October, which could potentially have a positive impact on consumer sentiment.

Equities: Equity investors cheered the not-so-hawkish Fed cut yesterday. S&P 500 jumped 1% at the press conference, eventually closing 0.7% higher and small cap Russell 2000 1.3% higher. The rate decision triggered a clear cyclical preference in markets: Value cyclicals like materials, industrials, and consumer discretionary were all ~2% higher. This is interesting. Previously this year we have seen cyclical growth stocks - mag 7, basically - rallying at dovish surprises. This time, it was more of a "run it hot" reaction in markets, where expectations of stronger macro fuelled the move higher rather than lower yields. This fits our narrative very well.

One sector worth highlighting is health care, performing very strong in the risk-on session yesterday. This is a bit odd in a historical context, but health care has been behaving like a cyclical sector in recent trading. This has certainly been a tremendous rally, but we take profits today and neutralize our health care sector call. Reason for this is that the positive health care call has been a valuation call, and this argument has rapidly changed. The relative discount has gone from 20% to 10% vs global markets the last three months, which we think is a fair discount at this part of the cycle. For instance, health care now trades close to the multiple of consumer staples, after a 20% discount at the bottom.

FI and FX: Yesterday's Fed rate cut was a rather balanced one, but given that markets expected a hawkish cut, market reactions were slightly to the soft side. Rates rallied somewhat and the USD weakened a tad with EUR/USD trading at 1.169. Only tiny and transitory, negative reactions in EUR/SEK and EUR/NOK following the FOMC decision. Ahead of the Fed rate decision European rates rose once again, resulting in the fifth consecutive day of higher rates. Potential rate cuts for the ECB have by now been eliminated for 2026. This morning, EUR/SEK is back at 10.84 and EUR/NOK trades at 11.83.