All eyes on Fed decision - Rate cut priced in, 2026 outlook uncertain

In focus today

• In the US, today's main event will be the FOMC's rate decision. We expect a 25bp cut to the policy rate target, in line with consensus and market pricing. We expect Powell to verbally push back against continuation of sequential rate cuts in early 2026. The updated rate projections, or 'dots', will likely reflect varied views within the FOMC, while macroeconomic projections will see only cosmetic changes. The Fed may also take further steps to support liquidity. See more in our Fed preview: Hawkish cut is a consensus choice, 5 December. Ahead of the decision, Q3 employment cost index (ECI) is due for release. 
• In Sweden, October economic activity data is released, including the GDP indicator, household consumption, new orders, and production value index. While we expect slower growth for Q4 compared to Q3 due to weaker summer indicators, this does not alter the positive outlook for 2026.
• In Norway, we expect November core inflation to decline to 3.1%, matching Norges Bank's September MPR estimate. October core inflation surprised to the upside at 3.4% y/y, likely influenced by price adjustments ahead of Black Week.
• In Canada, the Bank of Canada is set to announce its rate decision. We expect the rate to remain unchanged at 2.25%, in line with consensus.
• In Denmark, November inflation data is released. We expect it to remain unchanged at 2.1% y/y, with food prices remaining a key focus due to their impact on consumer sentiment.

Economic and market news

What happened overnight

In China, November CPI came in as expected at 0.7% y/y, reaching a 21-month high driven largely by food prices. Core inflation held steady at 1.2% y/y, while PPI remained stuck in deflationary territory at -2.2% y/y (cons: -2.0%). This underlines the persistent weakness in domestic demand and the challenges of achieving a near-term recovery.

In US-Japan relations, the US criticised China for targeting Japanese military aircraft with radar during a training exercise last week, calling the actions "not conducive to regional peace and stability." Japan welcomed the support, emphasising the strength of their alliance.

What happened yesterday

In the US, the JOLTs job openings report for October came in stronger than expected at 7.670m (cons: 7.150). This indicates that labour demand remains relatively robust, aligning with signals from high-frequency indicators. While the overall labour market balance remains steady, details in the report were less positive: voluntary quits and hires declined, while involuntary layoffs increased. The ratio of job openings to unemployed remains stable at 1.01, consistent with levels observed throughout the year. Thus, the Fed is still likely to cut rates today, but on the margin, this increases the likelihood of a pause in the easing cycle in early 2026.

The NFIB small business optimism index for November rose modestly by 0.8 points to 99.0. Actual price changes increased notably, while plans for future price changes remained stable. Hiring plans also improved, recovering close to pre-pandemic levels.

In France, PM Sébastien Lecornu secured a political win yesterday evening as the parliament narrowly approved next year's social security budget, thereby averting a government crisis. The bill's adoption reduces pressure on PM Sébastien Lecornu to resign, as his strategy to win over the Socialists by suspending the pension reform helped break political deadlock. However, challenges remain with the main budget, which has faced even tougher opposition, with only one lawmaker supporting it in an earlier vote. The debate on the main budget begins on 15 December, which means it might be passed before Christmas, and the government would thereby avoid relying on emergency laws to roll over the 2025 budget. However, there is still a significant risk that the parliament will fail to reach an agreement.

Equities: It was a slow day in equities, as investors are on hold before the Fed meeting tonight. S&P 500 and Stoxx 600 ended a meagre -0.1% lower. Defensives - or should we say health care - underperformed. In fact, global defensives have underperformed cyclicals since 25 November. However, unlike then, this is no longer a broad defensive pullback. In fact, consumer staples was the best performing sector yesterday. The defensive underperformance is transforming more and more to health care simply selling off (after an incredible rally the last three months). Global health care stocks were -1% lower yesterday, quite sizable given the mild moves elsewhere. The wait and see mode is continuing this morning, with futures little changed.

FI and FX: US yields edged higher after a stronger-than-expected October JOLTS report, signalling resilient labour demand despite some softening in quits and hires. The Fed is expected to cut rates today, but data slightly raises the odds of an early-2026 pause. In Europe, yields consolidated as France avoided a government crisis by passing the social security budget, though risks remain around the main budget debate later this month. EUR/USD trades in a tight range ahead of the FOMC, with risks leaning modestly USD-positive, while SEK strengthened despite seasonal outflow expectations. Today's Norwegian inflation data plus the Fed decision might guide the NOK in the near term.