As of late, the US markets have been showing signs of stagnation, with the stock prices finding it difficult to climb higherMeanwhile, US Treasury bonds have experienced a significant downturn, while Bitcoin and other cryptocurrencies have maintained a strong presence, rallying to new highsThe anxiety surrounding the expanding fiscal deficit has contributed to a staggering 25-basis-point surge in the yield on 10-year Treasury bonds last week, marking the worst weekly performance of the year so farOn a contrasting note, individual investors are flooding into the stock market, as evidenced by record participation rates, especially in meme stocks which have seen wild fluctuations recentlyIn comparison, the American economy is proving to be more resilient than those of other major economies around the globe, leading to a continued appreciation of the US dollar.

In Europe, the European Central Bank (ECB) has opted to cut interest rates by twenty-five basis points; however, the euro’s response has been minimal

Conversely, the Swiss National Bank's unexpected decision to reduce rates by 50 basis points aims to counteract the excessive strengthening of the Swiss francGeopolitical tensions are exacerbating the situation, particularly with potential sanctions on both Russia and Iran, leading to a general increase in energy prices and a slight uptick in gold prices.

On the horizon, the Federal Open Market Committee (FOMC) of the US Federal Reserve is set to convene for the last meeting of the year on December 17-18. The inflation data released for November has provided a glimmer of hope for rate cuts; however, it leaves many questions unanswered regarding the direction of interest rates in the coming yearThe sentiment can be captured in a recent Bloomberg article's headline: “Green light for December, yellow for next year.”

To delve deeper into the specifics, the Consumer Price Index (CPI) and core CPI for November stood at 2.7% and 3.3% year-on-year, respectively, both surpassing market expectations

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However, these figures are not alarming enough to incite panic, thus providing monetary authorities the necessary leeway to recalibrate the interest rate trajectoryBack in September, prior to a significant rate cut, inflation appeared to be rapidly aligning with the target of 2%. By October, many began to question the stagnation in price decline; the latest data confirms that inflation not only halted its downward trend but has started to rebound.

On a positive note, the previously soaring rental costs have begun to decrease, mitigating fears of runaway inflationThe downside, however, is that commodity prices, which had earlier been under control, are now experiencing an upward tick once againDiscussions among Fed officials about future monetary policy directions are beginning to reveal rifts; the hardline stance on rate cuts has softened, and the language used by officials is drifting further from the forward guidance offered in September

Jerome Powell recently hinted at this shift: "We are finding more room to pursue a neutral interest rate policy."

Market reactions have been tellingFollowing the CPI report, the Chicago futures market assigned a 96% probability that the Fed will cut rates by 25 basis points, an increase from the 70% forecast prior to the data releaseCurrent projections suggest that cuts next year may range between 50 to 75 basis pointsThe current administration at the Federal Reserve seems reluctant to spring any major surprises on the market; thus, the likelihood of a 25 basis point cut appears highEvaluating the last two months of data, while the case for a rate cut might seem tenuous, it still stands to reason.

The crux of the upcoming meeting will likely revolve around the context provided by Powell and the updated dot plot from FOMC members

With inflation trends showing a tempered resurgence, alongside substantial uncertainties regarding the incoming administration's policies, the landscape appears complexCurrent Treasury Secretary Janet Yellen has publicly expressed concerns that proposed tariff strategies could derail the Fed's fight against inflation, potentially hiking living costs for households and operational costs for businesses.

The possibility of the Fed pausing rate cuts next year is tangible, although the timing remains uncertainThe Fed must not only keep a close eye on inflation and employment figures but also consider the implications of the new government’s policiesFollowing the assumption of office, the new government is anticipated to utilize its momentum to quickly implement initiatives that bypass Congressional approval, speeding up those requiring legislative action

Proposed measures related to fiscal policy, tariffs, immigration, deregulation, and streamlining government actions will need careful scrutiny to assess their feasibility.

The labor market in the US continues to exhibit strength, and personal income growth remains robust, giving the Fed ample time and space for observationHowever, a sustained period of low unemployment may be unattainable, as low-income groups are already grappling with a lack of adequate financial resourcesThus, the timing for any potential rate cuts hinges on future data and the incoming administration's policy frameworkPowell maintains that Fed decisions will remain insulated from political pressures; nonetheless, this current Fed may lack a staunch resolve and may veer off the conventional path.

In an intriguing parallel, the ECB held a meeting last week, marking its fourth interest rate reduction, this time by 25 basis points to 3%. This decision lacks any particular excitement, as practically all but one economist surveyed by Bloomberg anticipated this cut

The backdrop to the rate decision provides deeper insights than the cut itselfECB President Christine Lagarde indicated that some members advocated for a more significant decrease, though ultimately, a “unified decision” was madeThe central bank has also revised down its growth forecasts for next year by a whole percentage point to 1.4%, with an even bleaker outlook for the year following.

Lagarde highlighted the adverse impacts of US tariff policies on the Eurozone economyAs a critical blow to European economies—especially those heavily reliant on exports, such as Germany—the potential fallout from these tariffs is significantThe escalated pressure from tariffs may serve to push Europe towards greater market openness and enhanced military expenditureTherefore, the dramatization surrounding tariffs, while perilous, mostly represents speculative risks for Europe.

The Eurozone’s primary challenge lies in its lackluster domestic economy, struggling structural reforms, and a lingering social crisis alongside elevated energy costs

Amid the rapid deterioration of political environments in Germany and France, both governments are presently preoccupied with immediate crises rather than economic self-rescue effortsThe sedimentation of the German and French economies thus portends little hope for recovery outside the tourism sector for the Eurozone in the foreseeable futureThe constraints of monetary union limit the capabilities of European nations to engage in the fiscal expansion seen in the US, relying solely on monetary measures for support.

With fiscal policy largely absent and military spending under scrutiny, it is easy to foresee the mounting pressure on the ECB, prompting it to diverge from the Fed while taking more proactive steps to revive the economyThe omission of “restrictive policies” from the recent meeting statement sets the stage for potentially more aggressive counter-cyclical measures in the future.

Market expectations for the European swap market suggest that traders anticipate a reduction of five basis points in the policy rate to around 1.75% by next September, roughly aligning with what the ECB considers its neutral rate

The market may also predict that Europe could achieve neutral rates among central banks more rapidly than others, with a potential shift towards a more accommodative stance in policyIn keeping with past ECB practices, incremental cuts remain probable, characterized by frequent 25-basis-point reductions unless triggered by unusual events or unexpected data.

However, Europe's issues extend deeper into structural inadequaciesThe region has lagged in technological advancements, traditional manufacturing has lost its competitive edge, and past fiscal crises severely hampered its policy capabilitiesMeanwhile, social support systems are failing, the public is resistant to change, and extremist factions are seizing opportunitiesSince the onset of the Eurozone crisis, growth has remained sluggish, gradually diminishing the region’s weight in the global economy to one-sixth of GDP (PPP). Yet, it is worth noting that there are shining examples, such as Spain, which is growing faster than the US, and ongoing positive structural reforms in Greece and Ireland.