We were earlier of the view that Dec FOMC might be a hold because of lack of data but seeing the New York Fed President Williams comment and current market pricing which Fed might not want to surprise, we accept the possibility of a cut of 25 bps. But we still believe this will be a hawkish 25 bps cut stressing that the inflation gap matters more than the unemployment gap based on financial conditions being “loose” because equities are high and credit spreads are tight. It would stress that neutral is above 3%, that policy is only “modestly” restrictive and that future moves depend on “incoming data” rather than the clear deterioration already visible in labor market readings and credit access. Markets would read that as one-and-done or, at best, a much shallower future path of easing until new leadership/personnel is established. Front-end yields would stay elevated in real terms; the dollar would rally and the risk premium on equities and credit would need to rise to compensate for the Fed being behind the curve on labor markets. We now see a Fed on hold for Q1CY26 and starting cuts once Fed Chair Powell’s tenure ends in May’26. This will also be aided by lower inflation in H2CY26. This will bring 2 more cuts of 25 bps each in H2CY26 bringing the terminal to 3-3.25% by end CY26. In US macro data, we have ISM services and manufacturing, ADP for Nov payrolls & Sept Core PCE data. There is no dated UST supply this week. There is no Fed speak scheduled this week (due to the customary black out period before FOMC) except Fed Chair Powell on 1st Dec which is likely a non-monetary speech. In RoW events, we have Eurozone HICP data due on Tuesday which is expected to come at 2.1% headline and 2.4% for core. Canadian labor data might come stronger for November considering falling trade policy uncertainty.
