Fed delivers anticipated rate cut, but with a hawkish surprise
Summary
Last week, the Fed delivered a much anticipated 25 basis point (bp) cut, but the commentary was more hawkish than anticipated. The looming lapse in SNAP benefits was a potential catalyst to force an end to the U.S. Government shutdown, but a federal judge ordered emergency funds be used to pay benefits, resolving the immediate issue but not the broader shutdown problem. Meanwhile, big tech stocks hit record highs even as companies announced major layoffs.
The S&P 500 reached another record high last Tuesday, concluding the week up 0.7% compared to the previous week. As of last Friday, 63% of S&P 500 companies (representing 69% of market capitalization) had announced third-quarter results, with 64% of these companies exceeding consensus estimates by at least one standard deviation. Year-to-date, the S&P 500 has gained 17.5%. The yield on the 10-year U.S. Treasury rose nine basis points to 4.11%, with most of that movement occurring just after the FOMC meeting held on Wednesday.
Fed cuts, but hawkish surprise
At its October meeting last week, the FOMC reduced the federal funds rate target range by 25 bps to 3.75-4.00%. It also announced that balance sheet runoff will end in early December, with principal payments from mortgage-backed securities to be reinvested solely into Treasury bills. Based on a blend of limited traditional and alternative data sources, Chair Powell noted that inflation excluding tariff effects is close to the 2% target, estimating that tariffs have added approximately 0.5-0.6% to prices. Regarding future policy, Powell emphasized that decisions are not predetermined and that a rate cut in December is not assured. He acknowledged differing views within the FOMC, with some members suggesting a pause in rate cuts and citing the lack of reliable data as a reason for caution. Powell described the current monetary policy stance as modestly restrictive, contributing to labor market cooling. Powell’s surprisingly hawkish comments reduced the probability of a December cut to 65% from above 90% prior to the Fed meeting.
Record highs and layoffs
Last week’s market movement for several tech companies, including Microsoft and Amazon, highlighted a striking paradox: stock prices are soaring to record highs even as the companies behind them announce fresh rounds of layoffs. This juxtaposition reflects a broader shift in tech’s post-pandemic playbook. Investors are rewarding efficiency and margin discipline over sheer growth, and companies are responding by reallocating resources toward high-return initiatives like AI infrastructure and cloud services. The layoffs, while painful, are being framed as part of a longer-term strategy to streamline operations and boost profitability.
Shutdown update
The government shutdown is now over a month in duration and the second longest in U.S. history. It is poised to reach a record duration this week if not resolved. Last Friday, one day before the scheduled suspension, a federal judge ordered the Trump administration to tap emergency funds to pay for SNAP benefits.
The week ahead
Earnings season is in progress, and several data releases typically scheduled for this period, such as the JOLTs report on Tuesday and the October employment report on Friday from the Bureau of Labor Statistics, may be impacted by the shutdown. Markets will closely watch Wednesday’s Supreme Court ruling on tariffs, which could reshape trade dynamics and influence inflation expectations heading into year-end.
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