Wentz Weekly: More Rate Cuts Ahead

Wentz Weekly Insights
More Rate Cuts Ahead

The S&P 500 entered last week on a seven-month winning streak after posting a modest 0.13% gain in November. The index gained another 0.31% to open the first week of December with Treasury yields rallying, leading to another week that favored higher beta (higher risk) investments. Technology was one of the best performing sectors while interest rate sensitive and defensive sectors like utilities, real estate, and consumer staples were at the bottom.

Momentum continued as we get closer to the Fed meeting, which takes place this week. Markets are looking for a rate cut, evident by the 90%+ probability the futures market is pricing in. That expectation increased after some of last week’s labor market data.

The monthly labor report from the Department of Labor initially scheduled for last Friday was delayed due to the government shutdown as employees were unable to conduct the survey in time (the release will be postponed to next week). However we still saw data like the ADP payroll and Challenger Job Cuts.

ADP said it saw payrolls decline 32,000 in November, the third decline since June and the second highest since the massive pandemic-related declined from 2020. The report noted November’s slowdown was broad-based and led by small businesses, and added job creation has been flat the second half of 2025 and pay growth has been on a downward trend.

Then, the Challenger job cuts report said the number of job cuts, at a little over 71k in November, was 24% higher than November 2024, although down 53% from September’s spike of 153k job cuts. Year-to-date job cuts are at 1.1 million, the highest in any year since the pandemic in 2020.

These types of caution flags are a reason we think the Federal Reserve will vote to cut rates this week, although we believe several Fed voters will dissent. Market odds of a December rate cut were at over 90% prior to the Fed’s last meeting late October. Then Fed Chairman Powell provided hawkish comments at that meeting, suggesting the Fed may pause rate cuts as it awaits more data. Rate cut odds then moved to just 30% the following two weeks. This, along with AI worries, led to a quick selloff in stocks the first half of November.

However, since then we saw worsening economic data on the labor market, an extended government shutdown, and several higher profile Fed members voicing support for another rate cut, moving odds back to around 90% and sparking a 5% rally in stocks since.

The updated Summary of Economic Projections (SEP) will be released with this meeting, offering a view to where the average Fed member sees interest rates, growth, inflation, and unemployment this year, next year, and over the medium-term. This may not draw as much attention as Powell’s indications about what could be in store for 2026 regarding rate cuts.

Moving forward the bar for rate cuts may be held higher. Going into the meeting there has been increased speculation, despite most likely implementing a rate cut, the Fed will tweak its forward guidance more hawkish, meaning possibly less rate cuts in 2026 than what markets are expected.

This week will also be a big one for artificial intelligence, not because of any brokerage events or conferences, but because we will see earnings reports from several AI related companies like Broadcom, Oracle, and Adobe. Broadcom supplies the “plumbing” of the AI system – the AI hardware and helps co-design AI chips (accelerators) and rack systems for the chips, Oracle provides the software as well as infrastructure for AI workloads, and Adobe embeds AI into creative and marketing software for the end user.

Broadcom is benefiting to a large degree from partnerships like the one with OpenAI, helping it develop its own in-house AI accelerators. Oracle made a massive partnership with OpenAI as well, collaborating to provide compute power in a $300 billion deal. However, concerns are growing about the capital expenditure dedicated to these ambitions as we discussed in the prior newsletter.

Oracle has been the center of this debate after it revealed it is borrowing more to finance its AI-related investments. The price an investor pays to insure again a possible default by oracle has recently spiked, nearly tripling since September. We are expecting to gain more clarity from management this week on this subject.

Outside of the Fed meeting and these tech earnings, we will see several brokerage conferences where we could see corporate/guidance updates and will also get a couple more economic reports on the labor market.

Week in Review:

Stocks moved higher last week though traded in a tighter range as volatility fell another 6% with the four major US indices finishing as follows: Nasdaq +0.91%, Russell 2000 +0.84%, Dow +0.50%, and S&P 500 +0.31%. The equally weighted S&P 500 trailed slightly with just a 0.24% increase. Treasury yields saw its first considerable gain in weeks with the 2-year Treasury yield higher by 7 basis points to 3.57% while the 10-year yield increased 12 bps to 4.14%. The dollar index declined 0.47% while gold was relatively unchanged. Bitcoin declined again, falling 1.68% for the week. Oil rose 2.61% after OPEC paused production increases and Ukraine/Russia appear far apart on a peace agreement.

Recent Economic Data

• ADP Employment: The ADP employment report, which gives monthly payroll data from the payroll provider ADP that covers over 500,000 US businesses, showed private payrolls declined 32,000 in November, below the 20,000 increase that was expected. The report notes job creation has been flat the second half of 2025 and pay growth has been on a downward trend. It added November’s slowdown was broad-based and led by small businesses.

• Jobless Claims: The number of jobless claims the week ended November 29 was 191,000, a decline of 27,000 from the prior week, and surprisingly the lowest level since September 2022. It was surprising because it was only two months ago we saw the highest number of initial jobless claims (264,000) since October 2021. Jobless claims have consistently been in a range of 190k-260k since late 2021 now. The number of continuing claims was 1.939 million, down slightly from the week prior with the four-week average down 6k to 1.945 million.

• PMI Manufacturing Index: The PMI manufacturing index was 52.2 for November (an index level over 50 signals expanding activity), slightly more than the expectation of 51.9 and up for the fourth consecutive month, suggesting manufacturing activity has seen steady improvement since summer. The improvement in November was driven by a rise in production and further increase in employment as confidence in the outlook strengthened, according to the report. However, it did note growth was limited by demand growth which contributed to an “unprecedented rise in stock of finished goods.” Meanwhile inflation remained elevated, but has improved from the worst levels of the year.

• ISM Manufacturing Index: The ISM manufacturing index painted a different picture, with the index at 48.2, lower than the 49.0 expected and dropping about half a point from last month, indicating manufacturing activity remains weak after contracting (below 50) for the ninth straight month. The report noted pullbacks in supplier deliveries, new orders, and employment, while just 4 of the 18 major manufacturing categories reported growth in the month.

• Industrial Production (Delayed):Industrial production in September (delayed data) increased 0.1% after a 0.3% decline the month prior. The slight increase was from a 1.1% increase in utilities (mostly weather related) while manufacturing and mining were unchanged. The capacity utilization rate was 75.9%, dropping from 76.2% and continuing a trend of lower utilization rates since peaking early 2022 at just over 79%.

• Factory Orders (Delayed): Factory orders in September increased 0.2% as expected but is a slowdown from the 1.3% increase in August. Excluding the very volatile transportation category, factory orders were still up 0.2%, and excluding defense orders (which are also volatile but is looked at to see private sector orders) was unchanged in the month (defense orders were up 31%). On the other hand, shipments of manufactured goods were unchanged in the month, with shipments of nondefense goods excluding transportation were down 0.1%.

• Construction Spending: Delayed
• Trade balance: Delayed

• ISM Services Index: The ISM services index, an index on activity in the services sector, was 52.6 in November, a slight increase from October, indicating modest growth in the services sector (a reading above 50 reflects growing activity), and the highest reading in nine months. The number of industries reporting growth was 12, one more than in October, while the number reporting contraction was 5, one less than October. Supplier delivery times drove much of the increase, which may be blamed on air traffic disruption from the government shutdown, while new orders increased at a slower pace. Meanwhile, employment continued to decline for eight of the past nine months (index at 48.9) while prices remained elevated with the index at 65.4, however it was the lowest in 7 months.

• Consumer Sentiment: The consumer sentiment index was 53.3 for December, a small increase from 51.0 in November for the first increase in months, but well below the reading of 74.0 from a year ago. The current conditions index of 50.7 was lower than expected for one of the lowest measures on record, while the expectations index was better than expected, increasing 4 points to 55.0. The expectation for inflation the next 12 months was 4.1%, down from 4.5% last month, with longer-term expectations at 3.2%, the lowest since December 2024.

• Personal Income and Consumer Spending (Delayed): Personal income and consumer spending in September along with the PCE price index (inflation reading) were all roughly in line with expectations.
  • Personal income increased 0.4% as expected and the same increase as seen in August. Wages and salaries, by far the largest source of income, were up 0.4% while transfer payments (government benefits like social security, Medicare, etc.) were up 0.3%.
  • Consumer spending increased 0.3%, slightly lower than the 0.4% increase expected and the slowest increase since May. Spending was driven by a 0.4% increase in spending on services, offset by no change in spending on goods. The savings rate was unchanged in September at 4.7%, still lower than the historical average.
  • The PCE price index, the Fed’s preferred measure of inflation, increased 0.3% as expected with core prices (which exclude food and energy prices) increasing 0.2%, slightly lower than the 0.3% increase expected. The price index was up 3.0% over the past year, accelerating from 2.9% in August, while core prices were up 3.0%.

Company News

• Synopsys: Nvidia and Synopsys announced they are entering a partnership on engineering and design where Nvidia will invest $2 billion in Synopsys common stock. The companies will collaborate to combine Nvidia’s strength in accelerated computing, agentic and physical AI with Synopsys’ engineering solutions to “achieve simulation speed and scale previously unattainable through traditional CPU computing,” opening new market opportunities.

• Airbus: European plane maker Airbus, the largest in the world based on market cap Boeing, shares were down nearly 10% after it was issued an Emergency Airworthiness Directive by European regulators for one of its most popular planes, the A320, after it experienced “intense solar radiation” that risked corrupting data critical to maintaining flight controls. As a result, the company ordered an immediate software fix on its fleet of nearly 6,000 planes, impacting service at most major airlines.

• Boeing: Shares of Boeing traded about 10% higher last week after its CEO said the company expects to be positive free cash flow next year (the first since 2023) as compared to the $2 billion in negative free cash flow expected in 2025. It cited steady improvement in production, particularly the 737 MAX and 787 Dreamliner planes, reduction in undelivered planes, and improving defense and services business, with the CEO adding it still expects to achieve $10 billion in free cash flow as targeted previously.

• OpenAI: Sam Altman, CEO of OpenAI, said to employees the company is declaring a “code red” effort to improve the quality of its chatbot ChatGPT and as a result will delay other products amid competitive pressure such as the release of Google’s Gemini AI, the WSJ reported, citing an internal memo. Altman said the chatbot needs more personalized features for users, increased speed and reliability, and allowing a wider range of questions.

• Intel: Shares of Intel were up nearly 10% after a report from an Intel Analyst Ming-Chi Kuo that Intel is expected to begin building Apple’s in-house chip for its MacBook and iPad as soon as 2027 (using Apple’s chip designs but Intel’s processing technologies), signifying a huge vote of confidence in Intel after it has recently struggled to secure customers for its third-party chip manufacturing business. Taiwan Semiconductor currently supplies Apple’s other chips.

• Microsoft: The Information reported Microsoft lowered its AI software sales quotas as customers resist newer products after its salespeople have been unable to meet their goals. Microsoft later said it has not lowered sales targets, and The Information later changed the title of its report that Microsoft lowers AI software growth targets as customers resist newer products.

• Delta Airlines: Delta said in an investor presentation it will see a $200 million impact to its pre-tax profits from the government shutdown, which will translate to a $0.25 impact on earnings per share. However, it added that growth in travel bookings are back to its initial expectations and trends are looking strong heading into 2026.

• Warner Bros. Discovery: Netflix said has agreed to buy Warner Bros. Discovery in a cash and stock deal valuing Warner Bros. at $27.75/share, or an enterprise value of $82.7 billion. Warner Bros. shareholders will receive $23.25 in cash and $4.501 in shares of Netflix stock for each share of WBD owned. The deal will close after Warner Bros. completes its separation of its Global Networks and Discovery Global divisions into a new publicly traded company. Meanwhile, Paramount Skydance, who offered $30/share in an all-cash deal, is questioning the “fairness and adequacy” of the sales process from Warner Bros., saying the company is not acting in the best interest of shareholders.

• Meta: Meta shares moved higher after a Bloomberg report said the company is expected to make a 30% cut in spending, including layoffs, in its Metaverse division. The division includes its push in the metaverse including its virtual reality group and its Quest virtual reality device. While CEO Zuckerberg typically asks executives to look for 10% cuts across the board, this year the metaverse division was asked to look for deeper cuts.

• Amazon: The Washington Post reported Amazon is considering ending its massive shipping contract with the US postal service by the end of next year and moving the shipping services to its own delivery network. This would hit USPS’s financial situation hard as Amazon is its largest and most profitable customer, generating more than $6 billion in annual revenue.

Other News:

• UK Pharma Agreement: US trade representatives said the US reached an agreement in principle with the UK where the National Health Service of UK will pay 25% higher list prices for new prescription drugs in exchange for the US government to not impose tariffs on pharmaceuticals and related medical technology from the UK. The US said the agreement is part of Trump’s plan to work with trading partners to ensure the US is paying the same price for drugs as other nations.

• AI Chip Export Restrictions: There is speculation that the US government will loosen its export controls on Nvidia’s most advanced chips (to China), with Bloomberg reporting the company is close to securing a win over lawmakers. Nvidia CEO Huang has since said he is unsure if China will even accept the H200 (the advanced chips) if the US allows it. Later in the week a group of bipartisan Senators unveiled the SAFE CHIPS Act which would block the Trump administration from loosening restrictions on China’s access to AI chips for 2 ½ years.

• Next Federal Reserve Chairman: Trump said he has chosen his pick for the next Federal Reserve Chair but will not announce it until early 2026. Reports indicate it is the current Director of the National Economic Council Kevin Hassett. Other reports say the administration is discussing having Treasury Secretary Scott Bessent fill the role if Hassett is appointed Fed Chair (in addition to maintaining Treasury Secretary role).

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