The market smells smoke, even as the Fed is widely expected to lower rates

Not unexpectedly, my father passed away on Sunday after three years of home care, so I’m dealing with the usual death-abroad paperwork and funeral arrangements. I’ll be in and out — mostly out — for a bit. And with caring for a family member with Alzheimer’s over that long a stretch, it’s strange how you not only miss the daily routine, but the whole house suddenly feels empty in a way you can’t really eplain After all the arrangements are completed this week, my wife and I are getting on a plane Friday — to step out of it all for a week, two or maybe all of December.

The market smells smoke

So much for the smooth December glide path, Asia walked in this morning to find the runway suddenly shorter and the crosswinds picking up. Equities across the region slipped, US futures bled lower, and even the usual speculative weather vane – crypto – was leaning risk-off. Yet the notional “good news” backdrop remains: the market is still priced for a December Fed rate cut and the continuation of the easing cycle into 2026. The problem is that investors are starting to remember an awkward truth: not all cutting cycles are created equal.

Last week, the story was clean: the Fed was “normalizing” into decent growth and gently escorting us down from restrictive rates. Now the narrative is drifting uncomfortably toward triage risk, and or whether we’ve gotten too far over our skis on the easing narrative. Is inflation really tamed, or did markets decide it was? So we have tail risks creeping into the ball game.

If labour softness morphs into genuine labour deterioration, the policy mix flips from celebratory champagne to a hospital drip feed. And as I’ve said more times than I care to count, Fed cutting cycles aren’t always bullish. When the cuts are a response to something breaking — the classic Fed-behind-the-curve moment — rather than a reward for disinflation, equities rarely enjoy the view from that room.

We’re not there yet. But the market can see the door, and that’s enough to change how everything trades.

This week’s data slate is the next big test of that distinction. We kick off with fresh reads on US consumer spending, including the Cyber Monday impulse, alongside a batch of delayed indicators that should give a cleaner snapshot of real-time momentum. The Fed’s preferred inflation gauge is finally coming through the pipe – ironically an outdated print by the time officials sit down on 9–10 December – but it still matters for how much political cover the FOMC feels it has for a third consecutive cut. At the same time, the Fed’s communication window snaps shut as we enter the pre-meeting blackout. Powell and Bowman are scheduled to speak, but they’re effectively gagged on the outlook just as the market most wants clarity.

Underneath that, the usual macro workhorses roll in: ADP private payrolls to sanity-check the labor story; ISM manufacturing and services to tell us whether the real economy is wobbling or just catching its breath; and a delayed read on September industrial production to help fill in the nowcast gaps. It’s not a particularly glamorous data mix, but in a market priced for clean disinflation and soft-landing fairy dust, even mundane misses can turn the lights out on year-end risk appetite.

Overlaying the macro, the Fed Independence risk premium is creeping back into the Fed narrative. NEC Director Kevin Hassett chose Sunday television to hint that markets should be ready for an announcement on the next Fed chair before year-end. He politely dodged the question of whether he sees himself as the front-runner, but the message was clear enough: the personnel story is no longer a distant 2026 issue. Every time Washington turns the Fed chair into a political casting call, the independence premium gets marked to market. Equity traders can live with rate uncertainty; they get more nervous when the rules of the game – and the referee – feel negotiable.

Asia, for its part, had plenty of local drama to deal with. Japanese bonds came under renewed pressure at the open, with the 2-year JGB yield punching above 1% for the first time since 2008. That’s not just a line on a chart; it’s the market voting for a materially different BoJ regime. The yen snapped back toward the 155.50–75 area and the Nikkei took it on the chin. As the street re-prices a world in which Japanese rates matter again, every carry structure built on the assumption that JPY is a funding backwater gets dragged into the stress test. You don’t have to blow up the yen carry complex to spook global risk – you just need to convince people that the “free money” leg isn’t free anymore.

Even outside markets, the risk-management theme was hard to miss. Airlines around the world spent the weekend quietly racing to patch a major software glitch in Airbus’s most widely flown aircraft, forcing an urgent update that could have gone horribly wrong in the middle of peak holiday travel. In the end, the industry deserves credit: the rapid response prevented what could have been a full-scale operational meltdown. From a markets perspective, it’s a nice metaphor for where we are: the system can absorb a software shock if everyone moves quickly and the plumbing is sound – but the margin for error is razor thin, and we rely on a lot of unseen code behaving itself.

If Japan is flirting with regime change, China is still stuck in the slow-bleed chapter of its own cycle. November’s PMI prints were a reminder that the world’s second-largest economy is not out of the woods; in fact, it’s still walking deeper into the trees. The official manufacturing PMI edged up to 49.2 from 49.0, but that’s just a nicer-looking contraction, not a trend break. It marked the eighth straight month below the 50 line, and once again missed the consensus call for something closer to 49.4. The more worrying signal came from the non-manufacturing side: services and construction together slipped to 49.5 from 50.1, dipping into contraction for the first time since the post-Covid reopening in 2023. The weakness is concentrated exactly where Beijing doesn’t want it – real estate and residential services.

Taken together, the data suggest that actual GDP momentum is running well below the 4.8–5% growth rate Beijing insists on projecting. Industrial production has posted its smallest gains of the year; exports unexpectedly contracted again, with global demand unable to offset the slump in shipments to the US; and retail sales growth has slowed for five consecutive months – the longest such down-drift since the lockdown era. For an economy trying to shift toward a more consumption-led model, that’s not the profile you want heading into 2026.

Crucially, this isn’t a classic “stimulus is coming” setup. Beijing has already fired a meaningful amount of ammo: roughly 1 trillion yuan in additional measures since late September – a mix of unused provincial bond quota, arrears repayment to corporates, and fresh policy bank funding aimed at investment. Yet credit growth has slowed to a trickle, not because the pipes are blocked, but because the demand for credit simply isn’t there. With the debt bubble already massive, policymakers are understandably reluctant to blow another layer of froth on top just to massage quarter-on-quarter prints. The property crisis is quietly entering its sixth year, and even the latest talk of another housing support package feels more like an attempt to slow the descent than to reflate the old model.

Looking further out, Beijing’s five-year blueprint is clear enough: double down on tech and manufacturing as strategic pillars while promising to “significantly” increase the share of consumption in GDP. Net exports have contributed nearly a third of this year’s growth, but that’s unlikely to be a reliable engine in a world of rolling trade tensions and tariff threats. The near-term reality is less elegant: growth decelerated last quarter to the slowest pace in a year, and forecasters now see this quarter as the weakest since the dark days of late 2022, when Covid Zero was finally being retired. This isn’t an imminent hard landing, but it is a grinding one – the kind of chronic anemia that quietly presses on everything from Asian equity risk premia to the demand side of the commodity ledger.

On the geopolitical front, there has at least been a modest de-escalation in US-China tensions, with last month’s meeting between Presidents Trump and Xi in South Korea producing a temporary truce. Markets would normally cheer that, and some have. But the devil, as usual, is in the fine print – and much of that fine print hasn’t been written yet. Key issues like Chinese shipments of rare earths remain unresolved, and there is, in reality, no enforceable rare-earth agreement sitting on the table. Meanwhile, a flare-up with Japan has added another line of uncertainty as Beijing weighs economic countermeasures. The short version: the geopolitical fog has thinned, not lifted, and that keeps a cap on how far investors are willing to stretch on China-sensitive assets.

All of this feeds directly into the oil story, where OPEC+ is no longer playing the old game of grabbing marginal barrels at any price. At its Sunday meetings, the group opted to pause further production hikes and keep output levels unchanged through the first quarter of 2026. That decision marks a subtle but important shift: after releasing roughly 2.9 million barrels per day back into the market since April 2025, the coalition has decided that regaining market share is less urgent than preserving what’s left of the price floor.

Even with that pause, OPEC+ still has about 3.24 million barrels per day of cuts in place – roughly 3% of global demand. These comprise a 2 million bpd reduction from most members that runs until the end of 2026, plus 1.24 million bpd of the earlier 1.65 million bpd voluntary cut that eight members started unwinding in October. Sunday’s decision left those structures untouched. The message from the group is fairly blunt: stability now outweighs ambition. In an environment where the demand outlook is softening and non-OPEC supply remains stubbornly robust, pushing for higher output would risk turning a gentle overshoot into a genuine glut.

Behind the scenes, OPEC+ is also laying the groundwork for the next big quota fight. The group approved a mechanism to assess members’ maximum sustainable production capacity between January and September 2026, with those numbers set to anchor the 2027 baselines. One external firm will assess capacity for 19 of the 22 members, while sanctioned countries like Russia, Iran and Venezuela will be handled via a separate assessor or by averaging their actual output over August–October 2026. That might sound technical, but for the producers, it is existential; in this system, your capacity baseline is your long-term revenue stream.

It is no coincidence that this is surfacing now. Some members – notably the UAE – have invested heavily to increase capacity and want their quotas to be lifted accordingly. Others, particularly some African producers, have seen their capacity erode but are understandably reluctant to accept lower official quotas that would crystallise that decline. The tension has already claimed one casualty: Angola walked away from the group in 2024 after refusing to accept a lower baseline. The next round of negotiations will be even more fraught, especially if prices remain under pressure.

Overlaying all this is the Russia–Ukraine dimension. As Washington pushes a new peace effort, the oil market has to price a very fat tail: a successful deal that leads to sanctions relief could unleash millions of “clean” barrels currently stranded in the shadow fleet; a breakdown could just as easily trigger tighter sanctions and further curbs on Russian exports. OPEC+, for its part, is trying to hedge that uncertainty by keeping some spare cuts in its back pocket and prioritising stability over heroics.

For now, the tape is delivering a pretty clear verdict. Brent closed Friday near $63 a barrel, down about 15% year-to-date and effectively in a straight line lower since the second quarter of 2024. In other words, the market is already trading a world of soft demand, ample supply buffers, and limited geopolitical risk premia – a world that rhymes uncomfortably well with the China and Fed narratives described above. When the second-largest economy is struggling to generate organic demand, and the world’s central bank is easing partly because it has to, not because it wants to, it’s hard to build a structurally bullish oil case without leaning heavily on new supply shocks.

Put it all together and the Asia open makes sense. We have a Fed that is cutting, but with a growing question mark over the reason for those cuts; a looming leadership decision that threatens to re-politicise the monetary anchor; a Japan that is quietly exiting the zero-rate museum; a China that can’t quite reflate without reigniting its debt hangover; and an OPEC+ that has decided that survival at $60-handle crude is preferable to an all-out volume war. That’s not a backdrop for panic, but it is one where the December glide path looks a lot bumpier than the seasonal playbooks would suggest.

For traders, this is a market that still rewards owning carry and quality, but punishes complacency. The cuts are coming, but the question we have to keep asking is simple: are these “insurance cuts” that validate the soft landing, or “emergency cuts” that mark the first stage of triage? This week’s data – and the way the market trades around it – will tell us which side of that line we’re really on.