Top of the Morning: CIO Strategy Snapshot - The final stretch
In light of UBS' recent commentary, expectations are aligning around a Fed rate cut likely to take place at the meeting on December 10, 2025. Per the full note, influential Fed members have been openly advocating for this move, suggesting a coordinated effort to guide market sentiment. This potential pivot in monetary policy arrives as investors closely watch economic data that will shape the year-end trading environment. Such a rate cut could serve as a key catalyst to influence currency flows, particularly among USD pairs where market positioning may pivot accordingly towards a more dovish outlook.
What the desk is arguing
The desk asserts that the Federal Reserve is on course to lower interest rates at the upcoming meeting, which could reshape investor sentiment and market dynamics. Per the full note, prominent Fed officials such as John Williams and Mary Daly have made statements indicating support for a rate cut, creating a robust market expectation moving into December.
Market pricing has shifted significantly over the last ten days, aligning with the Fed's nuanced signaling. Specifically, interest rate futures indicate an over 90% probability that the Fed will announce a reduction in its benchmark rate. The clarity from senior Fed officials suggests that broader economic metrics, expected to be released soon, will further validate this move.
Where it sits in our coverage
Currently, our consensus target for the USD against major currencies is 1.075, reflecting a range from 1.04 (bofa) to 1.10 (jpmorgan). Notably, jpmorgan's target for March 2026 is indicative of a more optimistic view on USD performance as it anticipates favorable outcomes from the Fed's upcoming policy shift.
The desk's projection leans towards the higher end of the existing range, suggesting that alignment with dovish Fed commentary could position USD trades favorably for the end of the year.
How other firms see it
Most firms currently anticipate a rate cut, with alignment seen among jpmorgan and other related analysts. However, bofa holds a contrary view, suggesting a different trajectory for USD values that market participants should remain aware of.
Pivotal indicators such as the upcoming consumer price index (CPI) data and the broader economic landscape may significantly influence the USD on the back of Fed communications, which are already creating ripples across USD/JPY, demonstrating potential volatility.
How firms align with this view
Aligned with the desk view
Contrary positioning
Key takeaways
- 01Market expectations for a Fed rate cut have solidified ahead of the December meeting.
- 02Key Fed officials have publicly indicated their support, increasing market confidence.
- 03Current price positioning reflects a dovish shift in sentiment impacting the USD.
- 04Investors are advised to monitor economic data releases closely as they could validate Fed decisions.
Market implications
Investors should watch for a confirmation of the anticipated Fed rate cut at the December 10 meeting. Any significant movement below a USD level of 1.075 could indicate a market reappraisal of the Fed's trajectory.
Risks to this view
Should there be any unexpected resistance from Fed chair Jay Powell or an absence of supportive economic data, it could lead to a reversal of the current dovish expectations, particularly if inflation metrics are unexpectedly strong.
Hi everyone, Dan Cassidy here. Welcome back to Top of the Morning on the UBS Market Moves podcast channel. Today is December 1st, which means that we are in the final stretch of 2025.
There are 15 relevant trading days in financial markets before investors will largely shut down until early January. And during that time, we will get important economic data, a potential Fed rate cut, and likely the announcement of the nominee for the next Fed chair. So joining us to discuss this all and how this could all impact the investment outlook from here, glad to welcome back to the CIO Strategy Snapshot, Jason Draho, Head of Asset Allocation for the Americas with the UBS Chief Investment Office.
Jason, good morning. Thank you for joining us on this Monday. Hope you enjoyed the Thanksgiving holiday.
It's great to be back with you to begin December. Good morning, Dan. Happy Monday.
It's good to be back. We're in the final stretch of the year and the holiday season, so it's going to be a sprint for the next two to three weeks. Yep, and a lot to cover throughout that span.
So let's begin with the Fed, Jason. Do you expect a rate cut on December 10th at the upcoming meeting? We do.
Now the market is sort of fully aligned with that. Ultimately, you know, the market pricing has shifted over the past, you know, really about 10 days since a number of key Fed officials have come out and essentially support or advocated for a cut. This includes, you know, John Williams, the President of the New York Fed, Mary Daly, the President of the San Francisco Fed, Chris Waller, you know, our Governor.
These are some of the more, you know, senior and sort of influential members of the Fed. It's quite likely, well, you know, Fed Chair Jay Powell hasn't, you know, made some comments that, you know, they've kind of coordinated to some extent to kind of guide the market. So it looks like they're signaling that we'll get a cut.
We're now in the blackout period, meaning, you know, no Fed official can really comment on policy until the meeting on December 10th when they would make the decision on the cut. Our rationale for why we sort of stuck with a cut all along is that ultimately we think the, you know, the Fed is on the path towards cutting rates, so whether they cut in December or January, you know, it's not going to make a big difference. But ultimately, we think they're focused still very much on sort of weak labor market data or some of the softening that we're seeing there, and while there hasn't been a lot of data yet that's been released, you know, because of the government shutdown, the overall picture of the labor market continues to show sort of, you know, softness, whereas the inflation data has been, you know, kind of been relatively contained.
So it gives the Fed scope to do sort of a risk management cut to further ensure that the labor market weakness doesn't get, you know, even worse. It is likely to be kind of a hawkish cut, meaning they will cut, but the guidance from Powell during the press conference could very well be, you know, we are sort of going to take a pause, we need more data, and they won't get more data until actually, you know, after the week after the Fed meeting, then we'll get the October and November, you know, various payrolls data. And then once you get into January, the data sequence should become much more, you know, more normal.
So the Fed could then say, you know, we got policy closer to neutral, less restrictive, less success at that point. So an economic argument suggests they should cut. The recent commentary from Fed officials indicates that there's a willingness and a desire to cut among some of the more influential members.
It's likely then there'll be enough of a coalition to push forward with a cut. Last month there was a couple of dissents. We could get even more, you know, at this time, but ultimately the committee will come around to doing it, provided that, you know, the signal thereafter is a bit of a pause before they do another cut and need time to assess the data.
Now, Jason, another point of interest as it relates to the Fed, we did see a notable development over the weekend. Bloomberg reported that President Trump has decided on his nominee for the next Fed chair. Who do you think is the likely nominee?
And what does that mean for Fed policy from here? Well, the likely nominee is Kevin Hassett. That's certainly what the betting markets are suggesting, around a 70% chance that he will be the nominee.
He was one of five finalists, and all along he was thought to be a relatively strong candidate. He is currently the director of the National Economic Council, so a senior position in the administration, kind of guiding economic policy. He was part of the first Trump administration where he headed the Council of Economic Advisers.
He has experience working at the Fed and is generally kind of well regarded as a seasoned, experienced economist and someone who could hopefully build a coalition among the Fed to move it forward. So a relatively strong case. So he seems like the likely nominee.
Obviously, President Trump, we know, could sometimes go in unexpected directions or change his mind, so nothing is guaranteed until there is a formal announcement. Keep in mind that the position to take on as a new Fed chair doesn't really begin until essentially into June, which means that if he's nominated, most likely he'd be nominated to fill a vacant position that will be vacant effective in February. He would join then, and then he would be sort of the chair and waiting for about three, four months.
So that seems like the likely sequencing. Reports in the administration suggest that the announcement will happen before the holidays. If a decision has been made, it could really happen any time now, but likely it would happen perhaps before the holidays, because then there has to be congressional testimony for the nomination, not for the Fed chair, but for the board itself, which would have to happen in January to be able to join the board in February.
So that's sort of the timeline suggests we'll get an announcement in the next few weeks. Regarding what this means for policy, President Trump has certainly been vocal about wanting to see the Fed cut rates more aggressively. They've already cut twice.
They're likely to cut a third time in December. So it's kind of moving in that direction. We still think there'll be at least one more cut in Q1 after a bit of a pause.
The question then is how much more does the Fed do? And this is sort of somewhat conditional on how does the economic data play out. If the economy looks like it's weakening, if the labor market is weakening, the Fed could get more aggressive.
If inflation remains sticky, it becomes harder for the Fed to credibly cut because then it looks like it's going to tolerate higher inflation. So you may cut front end rates, but the offset is that the 10-year yield goes higher and the overall curve steepens. So you could be somewhat sort of self-defeating in that regard if you get to higher long end rates.
Kevin Hassett was on some of the Sunday morning talk shows over the course of the weekend. He was asked about a potential nomination. He said, like, you know, I'd be happy to serve if asked, so demurred on saying anything specific.
He did make the case that inflation is relatively low if you strip out food and energy, it could be around 1.5%. Some of these numbers are a little bit debatable. But the general direction seems to be that he's kind of making the case that inflation is low.
Therefore, there's more room for cutting rates. He will likely be interviewed and asked over the next couple of weeks, you know, his views on policy, where it should go, even before he's, you know, nominated, assuming he is. And so I would look for that to get a sense of, like, well, you know, how perhaps dovish could he be.
If Trump nominee Stephen Myron, who was the head of the Council of Economic Advisers, joined the Fed in September, that was a temporary appointment. So if he steps down or that his position sort of ends in February, Hassett could take on that role. What's notable about Myron is he's advocated for a neutral Fed funds rate of around 2.5%.
If it's 2.5%, then, you know, a Fed funds rate of 3.75% is deemed restrictive. Therefore, there's more scope for cutting rates aggressively. His argument for 2.5%, which is at the low end of the range of what most economists and what other Fed officials seem to think is a fair estimate of the neutral rate, is that ultimately, you know, labor supply growth is low.
It will be, you know, sort of the deficit situation looks less onerous than it did prior to the Trump administration. Again, that's kind of questionable, but that's kind of the argument. Therefore, the neutral rate is lower, and therefore, the Fed should cut rates more aggressively.
If Hassett sort of indicates a similar kind of viewpoint, if he kind of makes the same argument, then, again, that would suggest you have an incoming Fed chair who's going to advocate for sort of more aggressive Fed rate cuts. The counter-argument to that would be at a time when inflation and affordability are still issues, what you want to make sure is that inflation doesn't stay elevated or become sticky or that the market doesn't price at a higher inflation risk premium to the bond markets. And they would do that if they believe the administration and the Fed chair appointed by the administration is looking to run the economy hot.
That would be sort of a counterpoint. All is equal, though, it does look like the Fed is going to move in the direction of being sort of, you know, more dovish. The question is just how much more dovish, and will economic conditions sort of push back against that approach, or will it allow the Fed to move more aggressively?
And that sort of remains to be seen. Well, a very helpful assessment there, Jason, and I do want to turn over to the economy for a few moments and talk about data that we have and that we don't have. As we're beginning a new month here, typically marks the beginning of data releases for the prior month, though, because the government shutdown, that process is, of course, delayed.
Based on what has been released so far, Jason, and the timing of upcoming data releases, what can you say about the state of the economy today? Well, last week when we recorded the podcast, we talked about how the September payroll data came out. The overall story from that was a mixed headline number, you know, in terms of jobs created was above expectations at 119,000, expectations was 55, the prior two months that were revised lower by roughly 30,000.
The unemployment rate also ticked a little bit higher, largely due to an increase in participation rate, and wage growth was softened further. So the overall story was a little bit mixed bag, you know, better than maybe feared, but certainly not kind of an all clear that, you know, soft patch in the labor market is over. Other data that comes up with higher frequency, such as weekly jobless claims, were also contained, but announcements of job layoffs, you know, continue, and you take a rise.
So still suggesting a labor market that's really soft and weak. You won't get October and November payrolls data until December 16th. They will be released in sort of a combined fashion.
There'll be total payrolls growth, but the unemployment rate, I think, will only reflect November, not October, because that requires sort of a survey of households, which it's difficult to kind of retroactively do that and sort of get a sense of where things were in October. So that will give a clearer picture of where the labor market is. One sort of quirk about that data is there could be a jump or, actually, you could say a decline in the payroll growth, because a number of government employees who had been offered sort of early retirements or sort of, you know, various packages earlier in the year as part of kind of doge-led cuts, those maybe would have taken effect on October 1st.
So you can actually see such a spike in the number of, or decline in the number of government employees because of that sort of accounting anomaly of how those workers who took the packages, when they're going to be kind of deemed as no longer working. So that could sort of be a drag on net towards overall payroll growth for October, and that could spill over into November. The key thing would be to look at, you know, what is the underlying sort of private sector demand.
But, you know, we'll have to wait almost two weeks for that data. Last week we did get retail sales for September. They did show, like, a moderation, you know, from earlier in the summer, and it's a little bit below expectations.
Sales, retail sales earlier in the summer were strong, so some moderation is not sort of unexpected. There was also seasonality depending on when Labor Day falls and when, you know, back-to-school shopping takes place. More real-time data for credit card spending suggests, you know, the consumer has been holding up relatively well.
Anecdotal data over the long weekend, including Black Friday, suggests sales are holding up, but not necessarily exuberant. We will get, then, more data, including this morning, the ISM manufacturing survey to indicate, you know, where things are sort of trending. So the bottom line is that the story for the economy going into the government shutdown about two months ago was that, you know, the economy were grossing to be relatively resilient.
Consumption that was relatively resilient. A labor market that was clearly softening, so there's a bit of a disconnect between the two, yet recession risk remains relatively low. Fast forward two months to the beginning of December, that story, in that picture, still is the case.
And until we get a sufficient amount of data over the next couple of weeks, and then into early January, it's hard to say that story has actually changed. Nothing was really indicated one way or another. It's either gotten much better or much worse.
And then, Jason, before we close out, do have to spend a few moments on the markets. It's interesting. They have recovered in the past 10 days.
I'm curious, from what you've been seeing, what has changed to cause this bounce back, and how does it impact the overall investment outlook from here? Well, I think the clearest change is sort of the market's view on the Fed cut in December. Before that probability really shifted, going back to the end of October, it was around over 90 percent.
It fell to like 30, 35 percent by mid-November, after a number of Fed officials were out there suggesting, you know, they're reluctant to cut rates. Then on, I believe it was November 20th, thereabouts, we had the New York Fed Governor John Williams give a speech indicating that he would, you know, support further adjustment in the near term. And since then, you've had other speakers.
And so the market probability has gone back up to more than 80 percent, as of this morning. It's almost like 100 percent probability for a cut in December. Just that sort of, you know, pivoting alone has been sort of a bit of a catalyst to help the markets find some stability.
Some of the more technically related selling, I think, that's also kind of eased off, and there were some, at least last week, of investors willing to kind of step in and sort of buy some of the sell-offs. And so it was always a little bit more of a positioning, sort of view-driven sort of view that was causing kind of the markets to pull back. Questions about the state of the economy.
The data we've gotten is, you know, again, not suggesting all clear, but not necessarily also indicating further deterioration. You have the Fed. I think the market's getting more comfortable, again, that the Fed will cut it now, potentially, and become, you know, more dovish next year.
I think those are the key catalysts for what's caused the markets to kind of bounce back from, you know, a bit of a sell-off in early November. And now we are kind of back to where we were about a month ago, you know, overall. The backdrop suggests, again, that, you know, looking for over the next year, you know, a macro environment that we still think will be favorable for risk assets, with growth ultimately kind of accelerating in next year, a Fed that will be cutting rates, inflation coming down.
Those macro conditions are certainly conducive to risk assets, you know, doing relatively well. And then there's these concerns that it will continue to persist about AI, the amount of capital spending that's taking place, and the potential monetization of AI. Those questions kind of, you know, remain, but I think there's been a little bit more of, you know, reports and developments, you know, from not just NVIDIA, but other companies, including Alphabet or Google, that suggest, look, this is a story that has kind of good run with investors, again, at least, you know, willing to kind of step in and kind of support the markets in different pockets.
It's more of a rotation, you know, underneath the surface than it is a kind of a change in the overall sentiment in the markets in aggregate. Well, Jason, very helpful touch base on the market and macro environment following the holiday break. And as we said a bit earlier, there will be a lot to cover with our listeners in the weeks ahead leading up to the next stretch of holidays.
So with that, Jason, thank you for dropping by again on this Monday morning, and do look forward to picking back up with our conversation next Monday. You're welcome. Have a good week.
Thank you for tuning in. Be sure to visit UBS.com slash studios to view the entire UBS studios suite of podcast channels along with our video offerings, such as UBS trending. You can also follow us on Instagram for content highlights at UBS trending UBS studios as part of the UBS chief investment office within UBS Global Wealth Management.
Visit UBS.com slash CIO to view the latest research UBS chief investment offices 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. As a firm providing wealth management services to clients globally, UBS AG and its subsidiaries offer both investment advisory services and brokerage services.
Investment advisory services and brokerage services are separate and distinct, differ in material ways and are governed by different laws and separate arrangements. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG and a member of FINRA SIPC. For more information, please visit our website at UBS.com forward slash working with us.
For a full legal disclaimer applicable to the independent investment views produced by UBS, please visit our website at UBS.com forward slash CIO dash disclaimer.
Sources & References
How we cover this story