Wentz Weekly: Rate Cut and AI Volatility Drive Choppy Week

Wentz Weekly Insights
Fed Moves Closer to Neutral While AI Trade Volatility Increases

 

US stocks experienced a very mixed week – after a brief bounce in AI names the beginning of the month, we saw the momentum and AI trade unwind again last week after earnings reports from two key names, along with a media report about data center delays. Markets rotated with value in favor last week as the Dow and the small cap Russell 2000 index both increased over 1% while the S&P 500 and Nasdaq were negative.

The Treasury market saw a steepening of the yield curve – longer date bond yields rose while shorter dated yields fell. This came after a Fed meeting where the FOMC voted to cut interest rates another quarter of a point (0.25%), bringing its policy rate to the range of 3.50%-3.75%, down from a peak of 5.50% just two years ago. The decision came with three dissents however, two voting to hold rates unchanged and one voting to cut a larger half a point.

The policy statement was little changed – when describing the labor market, it took out the phrased that unemployment has “remained low,” reflecting the recent slowing in hiring. Fed Chairman Powell said in his post-meeting press conference the cut was done this meeting instead of December because the labor market cooled “a touch more gradually” than it previously thought.

This meeting included the Summary of Economic Projections (SEPs – released every other meeting, or four times per year) where all 19 Fed officials provide their projections on where they see economic growth, interest rate, unemployment, and inflation over the next three years. The projections were relatively unchanged from the last update (mid-September).

However, as seen in the chart below, we would note the downgrade in economic growth this year and upgrade next year to 2.3%, up from 1.8%, while lowering the inflation expectation slightly. Fed Chairman Powell said in the post-meeting press conference some of the growth adjustment reflects the government shutdown and activity being pushed into 2026.

On interest rates (federal funds rate), while the consensus for rates next year is 3.4% (indicating one rate cut), the range of projections from the 19 Fed officials were wide. For example, one official sees six rates cuts while several see a rate increase.

This, along with the several dissents, illustrates the increasing division within the Fed. There were also conflicting messages with cutting interest rates over worries about the labor market while at the same time forecasting stronger economic growth.

We also note Chair Powell’s response to a reporter’s question, in which he indicated that the policy rate is now within a neutral range—one that neither stimulates nor restrains economic growth. This suggests the Federal Reserve may be approaching a pause in its rate-cutting cycle.

Market reaction was positive – stocks saw a move higher after the meeting Wednesday. That continued into Thursday with markets higher, except for technology. That worsened Friday with all major indices lower as AI capacity and payoff concerns crept back into markets.

Thursday’s tech decline came after Oracle reported its earnings where results were strong with it reporting a 440% increase in RPO (basically a measure of future profits) but concerns about its spending continued after it said it now expects to spend $12.1 billion on capex, 45% more than what was expected.

The seventh largest company in the S&P 500 Broadcom (designer of high performance chips) was the other AI-related company that reported earnings last week and similar to Oracle, reporting earnings that were better than expected and a significant increase in backlogs. However its shares fell as well, dragging the tech sector down, after it provided margin guidance that was lower than expected, leading to more worries for investors about the payoff in AI.

Friday’s selloff was intensified after a Bloomberg report said Oracle is delaying completion dates for OpenAI data centers from 2027 to 2028 due to labor and material shortages. With many AI related investments priced for perfection, we would expect these types of headlines to continue to drive volatility in the sector.

Attention this week turns to economic data, including several delayed releases. The most closely watched will be November’s employment report, due Tuesday, where consensus expectations call for 40,000 net job gains. That will be followed Thursday by the release of November’s consumer price index, with economists forecasting inflation to rise 0.3% month over month and 3.1% year over year. Other notable data includes retail sales and personal income and spending.

Week in Review:

It was a very mixed week for the US equity markets while international markets were up slightly (still outperforming US markets by about 15% year-to-date). Upside was seen in value and small caps while the downside was seen in growth and technology, driven by an unwind in the AI trade. Despite the mixed performance and selling in tech, the volatility index (VIX) fell almost 4% to the lowest level since September. The four major US stock indices finished as follows: Russell 2000 +1.19%, Dow +1.05%, S&P 500 -0.63%, and Nasdaq -1.62%. Treasuries were mixed as well – shorter maturity bonds saw yields a little lower while longer dated bonds saw yields higher. The dollar index fell 0.60%, gold increased 2.07%, while Bitcoin rose 0.99%. Meanwhile, oil fell 4.39% over worries of oversupply in 2026 and optimism on a Russia/Ukraine peace agreement. 

 

Recent Economic Data

• Job Openings and Labor Turnover Survey: The number of job openings on the last day of October was 7.670 million, relatively unchanged from September, unchanged from the same time a year ago, and about 400k more than the consensus expectation. Labor market data recently has indicated a pretty stagnant labor market – neither growing nor shrinking. The number of hires declined about 200k from the month prior to 5.149 million while the number of separations declined 214k from the prior month to 5.050 million, and down about the same level from a year ago. Within separations, all of the decline came from lower quits, now at 2.941 million and down almost 300k from a year ago, indicating employees may be less confident in switching jobs or finding a better/higher paying job.

• Employment Cost Index: The employment cost index showed businesses’ employment costs increased 0.8% in the third quarter, roughly in line with expectations and matching the recent pace. Over the past year, employment costs are 3.5% higher, which is a little below expectations. Making up costs was a 0.8% increase in both wages and salaries and benefit costs in the quarter, and over the past year making up the 3.5% increase was a 3.5% increase in both wages and salaries along with benefit costs.

• Jobless Claims: The number of jobless claims the week ended December 6 was 236,000, an increase of 44,000 from the week prior, which was the lowest since late 2022. The four-week average increased slightly to 214,750. The number of continuing claims (which is delayed one week) decreased 99,000 to 1.838 million, with the four-week average down 27k to 1.918 million. It seems last week’s report, that showed a sharp decline, was possibly an outlier.

• Trade Balance: The trade balance for September (delayed data) continues its substantial improvement after seeing record high deficits in the spring from a tariff related surge in imports. The US trade deficit shrank 10.9% in September to $52.8 billion. The smaller deficit will be a positive for the GDP calculation and was due to a 3.0%, or $8.4 billion, increase in exports while imports increased 0.6%, or $1.9 billion. Year-to-date the trade deficit is 17.2%, or $112.6 billion, higher than the same period 2024. Total trade, a good indication of cross-border activity, was up $2.6 billion or 0.4%.

• Productivity & Costs: Delayed

Company News

• Warner Bros. Discovery: Paramount said it is launching an all-cash hostile bid of $30 per share for Warner Bros. Discovery, a week after it accepted a buyout price of $27.75 per share from Netflix. The company will propose the offer directly to WBD shareholders, hoping to convince them it is in their best interest to keep the company as one, whereas Netflix deal is only for the streaming and studio business (not the linear business “Global Networks”).

• IBM: IBM said it has agreed to acquire data streaming company Confluent for $11 billion in all cash, or $31 per share, a 34% premium to where shares traded prior to the announcement, as it looks to further its push in AI. IBM said the move will “enable enterprises to deploy generative and agentic AI better and faster.” Confluent provides an open-source data streaming platform that lets companies stream, process, and react to data in real time instead of storing an analyzing later.

• JPMorgan: Shares of JPMorgan were lower last week after its CEO of consumer and community banking said at a financial services conference that the current economic environment is “a little more fragile” adding that the company sees 2026 expenses at $105 billion, higher than the consensus estimate of $101 billion, and nearly 10% higher from 2025. The higher expense is being driven by volume and growth related expenses, what it called high quality costs, followed by strategic investments. 

• Nvidia: Reuters reported Nvidia is informing its Chinese customers it is considering boosting production of its high end H200 AI chips due to demand exceeding current supply, following Trump’s announcement the US will allow the company to export its most advanced AI accelerators.

• Disney: Disney announced it will make a $1 billion equity investment in OpenAI, becoming a strategic equity partner in the company. It also announced a 3-year licensing agreement which allows OpenAI’s tools to use more than 200 characters and other assets from Disney including Pixar, Marvel, and Star Wars, to generate AI content, along with allowing Disney to use OpenAI’s products internally for productivity and new ideas. It also allows Sora, OpenAI’s AI video creation tool, to generate short videos featuring the licensed content. On a similar topic, Disney sent Google a cease and desist letter after alleging Google’s AI have been involved in copyright infringement of its characters.

• Alphabet: YouTube TV announced it will launch TV plans with more than 10 genre specific packages starting next year. For example, it will be launching a sports package that gives access to major sports networks like ESPN, NBC Sports network, and FS1. Customers can include add-ons and the packages include the same features as YouTube TV currently offers.

Other News:

• Advanced Chip Exports Approved: Shares of chipmakers (specifically those that make more advanced chips like AI accelerators) were higher after Trump said he has approved the sales of Nvidia’s H200 GPUs to China, adding that the US will receive 25% of all sales associated with these chips. A report by the Financial Times says despite being granted the approval, China is preparing to limit access to the H200 chips as it is looking to achieve self-sufficiency in chip manufacturing.

• National AI Policy: Trump signed an executive order to create a national policy to regulate AI in effort to limit state regulation, limiting the state’s ability to write and enforce their own laws. The EO will create a new AI litigation task force with the task of challenging state AI laws that are inconsistent with the national policy. The administration said the goal is to promote innovation and ensure the US remains competitive in the AI race. This will be viewed as a big win for big AI tech companies.

• Farmer Support: President Trump is preparing to announce an aid package for US farmers affected by tariffs and lower crop prices, according to Bloomberg, with up to $12 billion offered as support in the form of one-time payments for producers of soybeans, pork, and other commodities that were hit the most from retaliatory tariffs.

• Financial Stability Oversight Council Makeover: Treasury Secretary is proposing a big change in how the government approaches regulation and stability, recommending via a letter changes to the Financial Stability Oversight Council and its approach on regulation. The agency’s focus has been tighter regulation and oversight of institutions and the new approach will reverse that, pushing for loser regulation and a freer approach to reduce the burden on institutions it oversees. The Financial Stability Oversight Council was formed during the Financial Crisis (2008) to monitor and address systemic risk that leads to failures.

• China’s Annual Economic Conference: Sentiment in China is seeing a boost after it held its annual Central Economic Work Conference where it mostly retained its monetary and fiscal policy stance. Regarding economic growth, officials expect to achieve the 5% growth target this year and made the same target for 2026. Officials committed to implement a more proactive fiscal policy and will target a fiscal deficit with monetary policy expected to remain moderately loose.

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