Good morning investors,
Today's Fed decision at 2 PM likely isn't the newsworthy part with the 25 basis point cut almost certain at 88% odds. The real show starts at 2:30 PM when Powell reveals the dot plot and delivers what markets expect to be a "hawkish cut" signaling pause ahead. Oracle and Adobe report after close with both down 30% and 22% respectively, desperately needing AI monetization proof. Meanwhile, ByteDance and Alibaba are circling Nvidia's H200 chips after Trump's approval, though Beijing's blessing remains uncertain as China pushes semiconductor self-sufficiency.
Opening Bell: Pre-Fed Positioning
Dow ($DIA ( ▲ 1.36% )) futures down 29 points with S&P ($SPY ( ▲ 0.23% )) and Nasdaq ($QQQ ( ▼ 0.32% )) futures off 0.1% and 0.2% respectively. Treasury yields rise with the 10-year at 4.20% and 30-year at 4.82% as bond markets price hawkish messaging despite the cut. Russell 2000 hit fresh all-time intraday highs Tuesday, small caps front-running rate cut benefits.
SpaceX reportedly targeting a 2026 IPO to raise $30 billion at $1.5 trillion valuation, which would be history's largest listing. The company's ambitions include space-based data centers, joining Google in exploring orbital computing infrastructure.
The Hawkish Cut: Decoding Today's Fed Choreography
Markets have coined today's expected move a "hawkish cut", where the fed reduce rates but signal we're done for now. The FOMC faces an impossible balancing act: October's JOLTS data showed hiring down 218,000 and layoffs up 73,000, validating doves who want insurance cuts against labor market deterioration. Yet September PCE inflation sits at 2.8%, well above the 2% target, giving hawks ammunition to argue further easing risks entrenching price pressures.
The committee enters this meeting deeply divided. October saw two formal dissents, one from each camp, with Cleveland's Loretta Mester warning "inflation is pretty well above the goal, and it's not just all tariff-driven." Goldman expects the statement will resurrect language about "the extent and timing of additional adjustments," essentially raising the bar for any further cuts. Former Fed monetary affairs director Bill English expects the message: "We've made an adjustment and we're comfortable where we are, and they don't see a need to do anything more in the near term."
The dot plot becomes crucial. September's projection showed two cuts for 2026, but that was before inflation proved sticky and labor markets showed resilience. Watch for the median dot to shift higher, potentially showing just one cut or even flat rates through 2026. Individual dots matter too: if we see a wide dispersion with some members projecting hikes while others see multiple cuts, it signals a committee without consensus, raising volatility ahead.
Powell's 2:30 PM press conference must thread an impossible needle. He needs to justify today's cut without committing to more, acknowledge inflation risks without spooking markets, and maintain flexibility without appearing rudderless. Expect him to emphasize "data dependence" repeatedly while noting policy remains "restrictive" even after the cut. Any slip toward either extreme, too dovish triggering bond vigilantes or too hawkish crushing equity momentum, could unleash significant volatility.
The wildcard remains balance sheet policy. With overnight funding markets stressed, some expect the Fed to announce resumption of bond purchases, though not at QE pace. This technical adjustment could be misinterpreted as additional easing, complicating the hawkish cut messaging. Powell will need to carefully distinguish between operational purchases and monetary accommodation.
China's H200 Hesitation
ByteDance and Alibaba inquired about H200 purchases following Trump's approval, but Beijing hasn't given clear signals. The dilemma: China desperately needs chips with Alibaba's Eddie Wu citing critical shortages, yet accepting American technology undermines the self-sufficiency narrative.
Huawei's Ascend chips lag Nvidia in performance despite massive investment. Chinese tech survived on pre-ban stockpiles plus inferior domestic alternatives. The H200 offers real performance gains but at the cost of technological dependence Beijing spent years trying to break.
Oracle's OpenAI Problem
Oracle reports after close down 30% from September highs on debt fears and OpenAI concentration risk. The $400 billion backlog that sparked euphoria now faces scrutiny as markets question sustainability. Oracle Cloud Infrastructure expected to show 68% revenue growth, but investors want client diversification beyond OpenAI.
Adobe similarly needs AI catalyst proof after falling 22% year to date. The creative software giant has AI capabilities but hasn't translated them into growth acceleration markets demand. Both stocks desperately need narrative shifts tonight.
Bond Market Rebellion
The paradox persists, where the Fed cuts rates while Treasury yields rise. The 10-year stands above where it started the easing cycle, defying conventional wisdom. Markets demand greater compensation for mounting deficits and policy uncertainty, essentially disagreeing with continued Fed easing.
This disconnect explains mortgage rates staying elevated despite Fed cuts. The long end worries about 2026 inflation resurgence under potential Hassett Fed leadership pursuing aggressive easing. Bond vigilantes sending clear message that cutting into sticky inflation risks credibility.
AI Infrastructure Reality Check
Fervo Energy's $462 million raise for geothermal power highlights AI's infrastructure demands. Google backing the startup to power data centers shows hyperscalers exploring every energy avenue. The 500 megawatt Utah plant coming online 2026 represents just the beginning.
Enhanced geothermal could provide two-thirds of new data center demand by 2030 at competitive prices. The technology borrowing fracking techniques from oil and gas aligns with Trump administration preferences while solving AI's energy bottleneck.
Final Thought
Today marks the inflection point between 2025's rally and 2026's uncertainty. We sit at crossroads with the S&P hovering near 6,850, small caps breaking out, but bonds screaming caution. The Fed must navigate between supporting markets and maintaining inflation credibility.
The consensus expects a hawkish cut, deliver the quarter point but signal extended pause. This Goldilocks messaging attempts satisfying both hawks worried about inflation and doves fearing recession. History suggests such fence sitting satisfies nobody.
My read is that Powell delivers the expected hawkish cut with dot plot showing fewer 2026 cuts than markets hope. Initial disappointment creates buying opportunity as performance chase dynamics overwhelm Fed parsing. The bigger story remains broadening market participation with small caps leading, suggesting sustainable advance rather than exhaustion.
Watch the 10-year yield's reaction more than stocks. If yields spike above 4.25% on hawkish messaging, equity weakness follows. But if yields stabilize despite hawkish tone, stocks can power through on solid fundamentals and year-end dynamics.
The Oracle/Adobe reports matter more than usual given their massive underperformance. Any positive surprise could ignite beaten down tech while disappointment confirms rotation away from unprofitable AI dreams toward profitable reality.
December's final sprint depends on threading today's needle successfully. Use volatility as opportunity as the setup remains bullish into year-end despite today's uncertainty.
As always, feel free to reach out with questions about navigating Fed day volatility.
Best regards,
Dan Sheehan
This newsletter is for informational purposes only and should not be considered as investment advice. Please consult with your financial advisor about your specific situation.