Decisive battle in "Fed Week"! Will the high-flying U.S. stocks and the tense bond market finally get clarity from Powell's decision?

When evaluating the outlook of the bond market in a tense and uncertain manner, the US stock market closed near historical highs last Friday, with the S&P 500 index hovering below 6,900 points. Investors will have a busy schedule this week, with the last Federal Reserve policy meeting of 2025, and the press conference by Federal Reserve Chairman Powell following the interest rate decision being the highlight. In terms of corporate earnings, Oracle Corporation (ORCL.US) and Adobe (ADBE.US) will report earnings on Wednesday, while Broadcom Inc. (AVGO.US) and Costco Wholesale (COST.US) will report earnings on Thursday. On the economic data front, the theme of the labor market from last week will continue, as the delayed October JOLTS job vacancy data will be released on Tuesday, shedding light on hiring, layoffs, and quits. Welcome to the "Fed Week" The Federal Reserve will announce the latest interest rate decision on early Thursday morning at 3:00 am Beijing time. Traders are almost certain that the Federal Reserve will cut interest rates by 25 basis points, bringing the Federal Funds rate to 3.5%-3.75%. At the same time, the market will closely watch Powell's remarks at the press conference following the interest rate decision, searching for any clues about the Federal Reserve's future interest rate path. Last week's economic data showed cracks in the labor market. Data from ADP and Challenger, Gray & Christmas companies both showed unexpected job losses and increased layoffs. These weak data largely boosted expectations for a rate cut by the Federal Reserve this week. The September Personal Consumption Expenditures (PCE) data released on Friday showed a slowdown in inflation, further solidifying market expectations. After signs of deterioration in the US labor market during the summer, the Federal Reserve cut interest rates for the second consecutive time in October. However, since then, five voting members of the Federal Reserve have given hawkish speeches, indicating hesitance or opposition to a rate cut in December. The lack of new economic data due to the US government shutdown in October and November further deepened the internal divisions within the Federal Reserve. However, with statisticians working to catch up on missed data after the end of the shutdown, the influx of new data will help alleviate the ongoing tension between the Federal Reserve's dual mandate of curbing inflation and maximizing employment. Even though a rate cut seems almost certain, there are still many details to watch. Most importantly will be Powell's comments and Q&A during the press conference. If the Fed's statement is precise, the interest rate decision may not cause market volatility, but the more informal nature of the press conference remains a focal point of high scrutiny. The market will also receive the last Summary of Economic Projections for the year, outlining policymakers' outlook on the future of the US economy for the next year and beyond. The dot plot will be closely watched, giving investors insight into policymakers' forecast of the interest rate path and how serious the internal divisions within the Federal Reserve are. This meeting will also have other key points to watch. Firstly, this will be the last policy meeting composed of the current voting members of the Federal Open Market Committee. The chairs of the Federal Reserves of Cleveland, Minneapolis, Dallas, and Philadelphia will rotate into the voting seats, replacing their peers from Boston, Chicago, St. Louis, and Kansas City. Furthermore, speculation around Powell's successor has peaked in recent days, as Trump has pledged to nominate a candidate early next year. Kevin Hassett, the Director of the White House National Economic Council and a loyal supporter of Trump, is widely seen as a frontrunner for the position, although bond investors are increasingly anxious about this potential appointment. Economists such as Anna Wong and Stuart Paul said, "Is it important if Powell leans hawkish at the press conference to appease hawkish regional Fed presidents? After all, the next Fed chair - Hassett, the frontrunner - could join the board as soon as February next year, effectively making Powell a 'lame duck' in the last few months of his chairmanship." Watching the "Santa Rally" Last Friday, the US stock market closed the week on an optimistic note, with investors anticipating the (now more certain) rate cut. Despite the stock market nearing historical highs once again, Bank of America Corp strategist Michael Hartnett pointed out that the momentum for the traditional year-end "Santa Rally" may face threats. Currently, investors are confident in the "best-case scenario," where the Federal Reserve cuts rates while inflation continues to fall, and economic growth remains resilient. However, Hartnett noted that if the Federal Reserve signals dovishness on this week's meeting, this optimism may face a test - as such signals could imply a greater-than-expected economic slowdown. In a report, he explicitly stated, "The only factor that could stop the Santa Rally is dovish rate cuts leading to long-term bond sell-offs." Nervousness in the bond market As shown by Hartnett and the 10-year US Treasury yield, the bond market continues to feel pressure on the Federal Reserve's policy path for next year. Following a rough week in several weeks, the US Treasury yields rose slightly further last Friday, with the 10-year yield increasing by over 10 basis points. Although inflation data released last Friday seemed to solidify expectations for a rate cut by the Federal Reserve on Wednesday, higher-than-target inflation readings still raised doubts among investors about a rate cut in 2026. The market mood seems to be leaning towards the hawkish side - even if Hassett succeeds Powell as the Federal Reserve Chairman, there are doubts whether he can achieve the rapid rate cuts Trump desires. With the inflation data disproving earlier warnings about layoffs and job losses in the private sector job market, this will be another question that the Federal Reserve needs to address on Wednesday, at least in the short term. More details about this picture will likely come on December 16 when the November non-farm payroll report is released. Observing Bitcoin The statement that "Bitcoin is digital gold" has been somewhat confirmed this year, as funds flowing out of the US dollar have at different stages flowed into cryptocurrencies (although more has flowed into real gold, with gold rising nearly 60% this year). Even critics have to acknowledge this - Bitcoin has been stabilizing in the range of $75,000 to $120,000 this year as a value store, separate from stocks and cash. However, Bitcoin has a notable difference from gold in history: it has always fluctuated with risk appetite, soaring alongside tech stocks and meme stock crazes and falling when the market becomes cautious. In simple terms, it often moves in sync with stocks. However, Bitcoin is likely to show a directional divergence from stocks for the first time since 2014 this year. While the S&P 500 index has risen more than 16% this year, Bitcoin has clearly been on a downward trend, even though it may eventually reverse, the significant difference in performance between the two assets this year is extremely rare. After another fairly volatile trading day last Friday, Bitcoin remains a focus for investors this week.