What to watch in the week ahead

• Markets have become confident that the Fed will cut rates at the conclusion of its policy meeting on 10 December. That follows further signs of cooling demand for workers from data last week. Beyond the rate decision, investors will be looking for clues regarding the outlook for monetary policy in 2026, including from the tone of the Fed's press conference and its economic forecasts.
• The US dollar declined for a third week in a row, amid expectations that Fed easing will further erode the rate premium offered by the US over its main peers. The US currency is on track for its worst year since 2017. Will it remain soft in the run-up to the end of the year?
• The tech-heavy Nasdaq is back to less than 2% from its all-time high. Will investors focus on strong AI fundamentals, or will worries above elevated valuations dominate?

Will the Fed satisfy the market’s desire for lower rates?

The mood among investors was positive last week, with the S&P 500 rising 0.3% to within less than a percent from a record high, as confidence mounted that the Federal Reserve intends to cut rates at the conclusion of its policy meeting on Wednesday. The market pricing for a reduction climbed above 90% last week, up from around 25% two weeks before. Such optimism was bolstered by further signs that the US economy is cooling.

The ADP survey, which has become more closely watched due to delays in official data releases due to the recent US government shutdown, pointed to an unexpected loss of 32,000 jobs in November—versus expectations for growth of 10,000. The ISM survey of the services sector indicated both shrinking employment and some signs that price pressures are abating. And at the end of the week, the Fed's favorite measure of inflation—the personal consumption expenditures index—raised no red flags on price pressures.

Investors are also looking to whether the Trump administration nominates a proponent of faster rate cuts to replace Fed Chair Jerome Powell, whose term ends in May. The front-runner is Kevin Hassett, the director of the White House National Economic Council, who has spoken in favor of easier policy.

We also expect the Fed to cut rates this week. But this is not a foregone conclusion, given the concern expressed by several voting members in recent weeks of the risk that inflation will linger above the 2% target. The impact of the meeting on the market will also hinge on the tone of the Fed statement and Powell’s comments at the news conference following the announcement. In addition, the Fed will publish updated economic estimates—including its dot plot, which charts the rate expectations of policymakers. All of this will impact market confidence in the potential for more easing in the first quarter of 2026.

Our view is that the Fed is on track to cut rates twice by the end of the first quarter. Against this backdrop, we are positive on quality bonds, specifically high grade government and investment grade corporate bonds. Mediumduration quality bonds (four to seven years) should deliver mid-single-digit returns from a mix of yield and capital appreciation as the Fed cuts rates, in our view. We see quality bonds as part of a broader investor strategy to ensure diversified sources of income.

Will the US dollar come under additional pressure?

The US currency lost ground for a third consecutive week last week, ahead of an expected Fed rate cut. The DXY dollar index, which tracks the US currency again six major peers, is now down close to 9% this year. That puts the dollar on track for its worst annual performance since 2017.

Investors this week will be looking to see how the US currency responds to the Fed meeting. But our view is that the dollar will decline further over the coming months. The interest rate premium offered by the US over major peers is being eroded. While the Fed is pressing ahead with easing, other major central banks, such as the Reserve Bank of New Zealand and Bank of Japan, have signaled a pause or a hawkish turn. The euro and sterling have both been helped by recent monetary policy and fiscal developments.

And the longer-term expectations for Fed policy could prove a headwind for the US currency. The impending leadership change at the Fed—while not likely to mark a radical departure—looks likely to result in a stronger tilt toward more expansionary monetary policy. In addition, central banks and private investors continue to diversify reserves and portfolios away from the dollar. Finally, persistent US fiscal and current account deficits, combined with elevated valuations, reinforce the long-term case for a weaker greenback.

So, while the dollar has already weakened significantly, we see further declines over the coming months. We maintain an Attractive stance on the euro, Australian dollar, and Norwegian krone, and prefer long positions in select high-yielding emerging market currencies over low-yielders. We continue to rate the USD as Unattractive.

Can tech break new record highs?

The S&P 500 ended last week less than 0.5% from a record high. The techheavy Nasdaq Composite has recently lagged slightly but is now less than 2% off its all-time peak, and it's up 22% so far this year. Investors this week will be looking to see if the index can break to another record high. One focus will be results from AI leaders such as Oracle and Broadcom. Despite recent worries over elevated valuations, we continue to see the broader fundamentals of tech and AI as strong.

Leading tech companies have indicated that the demand for AI-related products and services supports increased capital expenditures, and we think aggregate token usage stands out as the most reliable metric to track. Tokens serve as the basic unit of compute in AI models—each time a model processes a word, instruction, or line of code, it consumes tokens. Google has offered some insights into token usage across its products: monthly usage climbed from 480 trillion tokens in May to 980 trillion in July and to 1,300 trillion in October. In terms of fundamentals, it's also worth noting that big tech corporate margins remain healthy despite higher capital expenditure. Our analysis suggests that, even with our projection of USD 1.3tr in global AI capex by 2030, big tech companies can collectively maintain stable margins, currently at around 27%.

So, we maintain our recommendation to diversify investments across the AI value chain, encompassing the enabling, intelligence, and application layers. Our strategic focus will increasingly favor the applications layer, where we see the greatest benefit from AI-related capital expenditures.