Hello and welcome to Signal over Noise. I'm Ulrike Hoffmann-Borchati, CIO for the Americas and Head of Global Equities for UBS Wealth Management. Recent signals increasingly support our view that this year's macro headwinds are turning into tailwinds next year.
The twin engines of U.S. monetary and fiscal stimulus are humming. It's a rare combination. Of course, it's not the full throttle monetary and fiscal expansion that we saw during deep recessions like the Great Financial Crisis or COVID.
But it's still rare to see them working together. Most of the time, they offset each other. Loose fiscal with tighter money, parts of the 1980s Reagan era, or tighter fiscal with easier money, parts of the 1990s and 2010s.
On the monetary side, the data in the last weeks supports another rate cut this coming Wednesday in our view. And this is for two reasons. Inflation has come in lower than expected and the labor market remains weak.
On inflation, the Fed's favorite inflation gauge, core PCE, rose 0.2% in September, a tad lower than expected. And more importantly for the Fed, as a key soft indicator, is that median inflation expectations over the next year declined to 4.1% in December, well below consensus expectations at 4.5%. And on the labor market, the signals continue to point to a slowly softening labor market.
ADP estimated private employment fell by 31,000 in November versus expectations for a small gain. And announced layoffs remain historically high, even though they're moderated from the elevated October levels. So what's next?
After 25 basis points cut on Wednesday, we expect the Fed to make its next move contingent on data without expressing a clear bias. And this is because two key figures, non-farm payroll for October and November, will only be released the following week on December 16th. We continue to see conditions in place for a last cut of 25 basis points in Q1 of 26, bringing the total cuts to 4.1% in aggregate.
And this is because we think both inflation and inflation expectations are coming down further, and the labor market will remain in brittle condition. And in addition, the next Fed share announcement early next year could lead to a more dovish bias in the Fed's decision-making. Beyond monetary easing, a key positive indicator for economic activity is that consumer sentiment edged up in December, the first rise in five months.
Sentiment levels are still near historic lows, and it will take more than just holiday cheer to turn sentiment. But green shoots of optimism, especially among younger consumers, are promising. So with the potential cyclical recovery in the first half of the year, the key question lies with the strong structural trends that have driven the equity market rally for the past three years.
In particular, AI. The signal from our tech conference in Arizona last week was clear. AI is alive and well.
Companies from all layers of the AI value chain shared a uniform message, that the demand for AI workloads remains strong. On the enabling layer, data center, semi, and semi-cap companies all spoke to strong demand for AI infrastructure, from servers to silicon. LAM research said that AI-driven complexity drives a multi-year semi-cap upcycle.
NVIDIA mentioned its growing backlog from the recent deals, including the one with Anthropic, that are incremental to the 500 billion backlog announced at the end of October. AMD expects to have more multi-gigawatt customers in addition to OpenAI. And according to neocloud providers Corvue and Nebios, AI compute demand is still being driven by three factors.
Scaled training workloads, the rise of reasoning models, and increasing adoption of multimodal architectures. On the intelligence layers, frontier model companies are seeing stable pricing trends, increased demand for magentic models that can run more than a day to solve problems. Anthropic in particular sees its mode both in superior intelligence, as well as an infrastructure stack that makes intelligence more easily accessible.
And on the application layer, Walmart spoke about the potential for agentic commerce, where AI agents can find the right solutions for different purchase decisions. A commodity product at the lowest price, optimized baskets, or the ingredients for a suggested recipe. And in healthcare, NVIDIA mentioned Eli Lilly's AI factory that uses NVIDIA's AI systems and models to build the most powerful AI pharma supercomputer.
The stated goal? To compress timelines for both drug discovery and preclinical work. So to summarize, given the supportive macro policy and intact structural trends, little stands in the way of a Santa Claus rally that could push equity markets to new highs in the remainder of the year.
With this, stay well and stay ahead. UBS Chief Investment Office's investment views are prepared and published by the Global Wealth Management Business of UBS AG or its affiliate UBS. This material has no regard to the specific investment objectives, financial situation, or particular needs of any specific recipient and is published for informational purposes only.
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