The financial markets are bracing for a significantly different December than anticipated just weeks ago, as expectations for a Federal Reserve rate cut have dramatically reversed course. This rapid shift, fueled by the Fed's latest signals, is now prompting a re-evaluation of risk across various asset classes, with profound implications as the year draws to a close.
Rate Cut Prospects Evaporate
Market sentiment has undergone one of the fastest reversals this year regarding the Federal Reserve's December policy meeting. Real-money prediction markets, notably Polymarket, now assign only a 32% probability to a 25 basis point rate cut, a stark contrast to the near-certainty priced in just weeks prior. The overwhelming consensus has flipped, with a 67% chance now expected for rates to remain unchanged. This dramatic repricing was triggered directly by the latest Federal Reserve minutes, which conveyed a cautious stance on inflation and highlighted ongoing uncertainties within the labor market, effectively signaling a less dovish outlook than previously assumed by traders.
Markets React with Contrasting Fortunes
The sudden collapse in rate cut expectations has elicited a mixed response across financial markets. Equities, particularly the S&P 500 and Nasdaq Composite, have shown remarkable resilience. Despite some volatility and giving back a portion of November gains, both indices have maintained their broader uptrends, with buyers continuing to defend higher levels. Tech stocks, in particular, continue to attract institutional investment even amidst rising macro uncertainty. In stark contrast, the cryptocurrency market has experienced a significant downturn. Total market capitalization has slid, reflecting a continuation of earlier sell-offs and making new local lows. Speculative assets like crypto are proving highly sensitive to the evaporation of expectations for easier monetary conditions, feeling the brunt of tighter liquidity prospects.
A Nuanced Path into December
As December approaches, the near-term trajectory for risk assets appears increasingly nuanced. Equities may continue to exhibit stability, provided that corporate earnings remain robust and labor market strength persists, thereby supporting valuations. However, the cryptocurrency sector faces ongoing pressure unless there's a material improvement in liquidity conditions or a recovery in ETF flows, which have seen recent outflows. The substantial $700 billion decline in crypto's total market cap since early November underscores its vulnerability. This rapid reversal in monetary policy expectations positions December as a critical macro juncture, with markets now clearly signaling an environment of tighter conditions rather than anticipated relief.
