A Not-So-Hawkish Fed Cut

For the week ending 12 December 2025

As of midday Friday, global equities were trading close to record highs following less-hawkish-than-expected commentary from the Fed after Wednesday’s rate cut, though concerns remained over the pace of heavy AI spending. The S&P 500 Index closed at a record high 6901 on Thursday, while small caps have continued to outperform large caps since the November 20 market low. The yield on the US 10-year Treasury note moved toward the top of its recent range, trading at 4.18% (up from 4.11% last week). The price of a barrel of West Texas Intermediate crude oil fell $2 from a week ago to $47.50. Volatility, as measured by futures contracts on the Cboe Volatility Index (VIX), fell to 16 from 17.5.

MACRO NEWS

Fed cuts rates, raises bar for more

On Wednesday, as expected, the Fed cut rates 0.25%, to a range of 3.50% to 3.75%. The FOMC indicated that the easing cycle is now on hold, using the same language as when it paused the first phase of the cycle in December 2024, saying it will consider the extent and timing of further cuts. Three members of the committee dissented from the decision to cut rates a quarter-point; Stephen Miran voted to cut 0.5%, and Jeffrey Schmid and Austan Goolsbee both voted to leave rates unchanged. The Fed also announced it will buy $40 billion of short-term Treasury bills per month through the early part of 2026 to replenish waning bank reserves. In the lead up to the meeting, investors had expected a more definitively hawkish tone from Fed Chair Jerome Powell. The Fed, the chair said, thinks that US employment figures are likely overstated by as many as 60,000 jobs a month, suggesting that employment has been falling in recent months. Powell added that he “[doesn’t] think that a rate hike is anyone’s base case” for the Fed’s next move. He also noted that “this doesn’t feel like a hot economy” that is generating wage pressures. Most excess inflation is linked to tariff passthrough, which Powell said should peak in Q1 2026, while services disinflation appears to be continuing. The Fed raised its 2026 GDP forecast and lowered its inflation outlook, suggesting productivity continues to trend higher. The median 2026 Fed funds “dot” suggests one more cut in 2026.

Ukraine talks inch ahead

Talks to end the war in Ukraine continue, but territory and security guarantees remain major sticking points. US President Donald Trump has been invited to meet with European leaders this weekend to discuss the plan, but so far he has not committed to the meeting. Ukrainian President Volodymyr Zelensky said Thursday that he may call a referendum over whether to cede control of parts of the Donbas region. A proposal currently under negotiation involves creating a “free economic zone” in sections of the Donbas region from which Ukrainian forces would withdraw. In separate remarks earlier this week, Zelensky called for a US congressionally-ratified security guarantee to safeguard Ukraine against future Russian attack. Meanwhile, European leaders are set to meet next week to make a final decision on whether to proceed with $105 billion loan to Ukraine using frozen Russian central bank assets.

QUICK HITS

The US trade deficit fell more than expected in September, to $52.8 billion. That’s the smallest trade gap since June 2020, when global supply chains froze early in the pandemic.

China’s annual trade surplus exceeded $1 trillion in November. Despite the decline of shipments to the US, exports grew 5.9% last month. US Trade Representative Jamieson Greer confirmed this week that China is complying with its trade agreement and noted progress on their soybean purchase commitments.

Japanese Prime Minister Sanae Takaichi announced a $135 billion stimulus package that relies on bond markets for 60% of its funding. Japan's GDP shrank 2.3% in Q3, marking its first contraction in six quarters, amid weak business spending. Japan's real wages fell for the tenth-straight month in October as wages struggled to keep pace with rising consumer inflation.

The US says it will allow the export of last-generation GPUs to China, though China says it will limit access to the technology, the Financial Times reported. The artificial-intelligence chips will require a special security review in the US before they are exported, according to administration officials.

Taiwanese exports grew at their fastest pace in 15 years in November thanks to the AI-chip boom.

Kevin Hassett, a potential Fed Chair nominee, said this week that if he were to assume the role, he would be apolitical and rely on his own judgement instead of bowing to political pressure.

The French National Assembly adopted a social security budget, which includes the suspension of an unpopular pension reform. The passage of the bill slightly increases the likelihood that the 2026 budget will be approved before year-end, though hurdles remain in the deeply divided assembly.

Silver traded at a record $63 an ounce late this week, fueled by a weak dollar, tight physical inventories and demand tied to the buildout of AI infrastructure. The metal has more than doubled in price this year.

The Bank of Canada held rates steady as expected on Wednesday. BOC Governor Tiff Macklem said that rates are “at about the right level” if the bank’s forecasts play out as expected.

US forces seized an oil tanker off the coast of Venezuela on Wednesday. The vessel Skipper has been under US sanctions for years as part of an illicit oil shipping network. The US continues to ramp up pressure on Venezuelan President Nicolas Maduro.

With tensions high between the Japan and China, two US B-52 bombers flew in formation with Japanese fighters over the Sea of Japan on Thursday in a show of US support for Tokyo. The exercise came a day after Russian and Chinese warplanes conducted their own joint patrol in the seas around Japan’s southern islands.

Mexican lawmakers this week approved new tariffs on Asian imports, broadly aligning with US efforts to tighten trade barriers against China. The bill imposes tariffs of between 5% and 50% on more than 1,400 products from Asian nations that don’t have a trade deal with Mexico.

The US budget deficit narrowed by $16 billion in November compared with the year before. It has fallen 16% in the first two months of the fiscal year compared with the same period last year. Revenues climbed 14% year-over-year in November, helped by tariffs.

On Thursday, a Democratic proposal to extend Biden-era enhanced Obamacare subsidies for an additional three years failed to clear the necessary 60-vote threshold in the US Senate, while a Republican counterproposal offering households federal funds to put toward out-of-pocket health costs also fell short, garnering only 51 votes. The subsidies lapse at the end of the year unless they can be extended in the eleventh hour. House Republicans were scrambling Friday morning to come up with a plan to ease the impact of the expiration of these subsidies.

On Thursday, the Federal Reserve Board of Governors unanimously reappointed 11 of the central bank’s regional presidents to new five-year terms. The move quells concerns that governors appointed by President Trump could block the reappointments, which would exacerbate fears over the Fed losing its independence.

China vowed to prioritize domestic demand in its 2026 policy roadmap by supporting consumers and boosting household incomes. The government will maintain a sizable budget deficit, use interest rate cuts, and keep the yuan’s exchange rate stable, it said.

UK GDP contracted 0.1% in October, the fourth-straight month of flat or declining growth.

President Trump signed an executive order on Thursday aimed at preventing state-level regulation of AI. The goal is to prevent a patchwork of local rules that hinder the technology’s growth.

THE WEEK AHEAD

Monday: China retail sales, industrial production; eurozone industrial production; Canada CPI

Tuesday: Global preliminary PMIs; UK unemployment, US employment report, retail sales

Wednesday: UK CPI; eurozone CPI

Thursday: UK Bank of England meeting; eurozone ECB meeting; US CPI

Friday: Japan CPI, BOJ meeting; UK retail sales; US existing home sales

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The views expressed in this article are those of MFS and are subject to change at any time. No forecasts can be guaranteed.

Past performance is no guarantee of future results.

Sources: MFS research, Wall Street Journal, Financial Times, Reuters, Bloomberg News, FactSet Research.