What to watch in the week ahead

• The recent US government shutdown created a backlog of US economic data. As a result, there will be an unusually large volume of releases this week, including on inflation, employment, and the consumer. Will this add to confidence that the Fed will cut again early in the new year?
• A range of top central banks hold policy meetings this week. Will this support the view that the global easing cycle is nearing its conclusion outside the US?
• The pendulum of market confidence swung toward caution late last week, after announcements from AI leaders Oracle and Broadcom failed to meet upbeat investor expectations. Will sentiment swing back in a positive direction as trading winds down for 2025?

Will a deluge of US data point to another Fed cut early in the new year?

Markets were cheered by the final Federal Reserve meeting of 2025, which delivered the rate cut that investors had been expecting and pointed to a less hawkish mood among policymakers than some had feared. The S&P 500 climbed to a fresh record high the day after the meeting, taking the advance of the index for 2025 back above 17% for this year—though worries over the outlook for AI dampened sentiment at the end of the week.

Uncertainty over the timing and scale of further easing has lingered after the Fed meeting. On the more hawkish side, the Fed statement brought back cautious language on “the extent and timing” of further cuts, which has signaled a pause in policy moves in the past. On the dovish side, Chair Jerome Powell recognized that “inflation has come in a touch lower,” and the Fed trimmed its inflation forecasts slightly.

But the Fed routinely stresses its approach to policymaking remains data dependent, and there will be plenty of that this week. Some of the data backlog from the US government shutdown is set to be cleared, with major jobs and inflation prints due. November employment data will be released, which is likely to show slowing job creation, in line with recent trends. On inflation, we expect the consumer price index for November to show core prices—excluding food and energy—rising by a modest 0.2%, which would present no significant barrier to further Fed easing. We also get the Fed’s favorite inflation measure, the personal consumption expenditures index, for October. Retail sales for October should provide further insight into the health of the consumer, after recent signs of softening demand.

Our view is that a cooling labor market and contained inflation will allow the Fed to cut once more in the first quarter of 2026. That provides a positive backdrop for US stocks, which tend to perform well when the Fed is easing and GDP is still growing. In addition, we expect medium-duration quality bonds (four to seven years) to deliver mid-single-digit returns, from a mix of yield and capital appreciation as the Fed cuts rates.

Are rate cuts outside the US winding down?

The Federal Reserve hinted last week that an end to easing is probably in sight, while many of its peers appear to have already reached their destination. Last week, the Swiss National Bank (SNB) kept rates at zero, refraining from further easing despite recent data showing that inflation slowed to zero in November on an annual basis. SNB Chair Martin Schlegel stressed again that the “hurdle is high” for further easing. That partly reflects the potentially adverse side effects of negative rates on pension returns, the health of the banking system, and the risks of a property bubble. But there are signs that the SNB is not alone in having reached the end of its rate-cutting cycle, which we expect a range of central bank meetings coming up this week to underline.

We see the European Central Bank keeping rates on hold at 2% this week, and for the foreseeable future, despite subdued inflation. Nor do we expect Norway’s Norges Bank to lower rates, given inflationary pressures and a tight labor market. In our view, Sweden’s Riksbank has reached the end of its easing cycle. While the Bank of England is an exception, and we anticipate two more rate cuts this cycle, we see a broad global trend in which the US's rate advantage is being eroded.

Against this backdrop, the DXY index, which tracks the US currency against six major peers, fell to its lowest level since October and is down around 9% year to date. That puts the dollar on track for its worst year since 2017. Aside from its narrowing rate advantage, we expect the dollar to face headwinds from its elevated valuation, the twin fiscal and current account deficits, as well as a move by central banks to diversify away from the US currency. We expect US dollar weakness to extend into the first half of 2026. Our current forecast is for the euro to strengthen to about 1.20 against the dollar in the first quarter, from around 1.16 at present. We are also positive on relatively high-yielding currencies, such as the Norwegian krone and Australian dollar.

Will renewed confidence in AI help spur a Santa rally?

The tech-heavy Nasdaq Composite index remains within around 3% of the all-time high struck in late October. But sentiment has recently been swinging between optimism over the rising demand for AI services to concern over unrestrained capital spending and fears that the tech sector has become too expensive. Last week, concerns flared once again, with a 1.6% decline undermining hopes for a Santa rally into the festive season. As of 12 December, the index was down 0.7% for December. This followed mixed results from AI leaders, including database company Oracle and chipmaker Broadcom.

But, without taking a view on single stocks, we believe the drivers behind AI and tech remain. Alongside last week’s setbacks, there were positive signs on the policy front after President Trump said he would allow NVIDIA to sell its latest generation H200 chips to China. That eased fears that the US will put the brakes on chip exports to its chief strategic rival—though media reports suggested that Chinese regulators still plan to limit access. Although capex for the industry has been rising, we don’t see signs of an investment bubble, with spending still supported by robust cash flow. Capex is also supported by strong demand for AI products and services. Adoption rates among US businesses have also jumped. According to the Ramp AI index, nearly 45% of US companies now have paid subscriptions to AI models, platforms, and tools, up from around 25% at the start of this year.

So, we continue to believe that the long-term potential of AI remains underestimated. Investors underallocated to the theme should consider diversified exposure across the AI value chain. Our strategic focus will increasingly favor the application layer, as we anticipate that companies operating within this segment will benefit most from ongoing AI-related capital expenditures.