Stocks and Bonds Slide at Start of Big Fed Week: Markets Wrap

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Wall Street anxiety halted a four-day rally in US stocks while Treasuries joined a global bond slump ahead of the Federal Reserve’s final meeting of 2025. While an interest-rate cut is all but certain, traders are growing anxious about the pace of next year’s cuts.

The S&P 500 slid 0.3% Monday after the equities benchmark closed within spitting distance of an all-time high. A busy merger Monday failed to bolster the mood after President Donald Trump raised potential antitrust concerns on Netflix Inc.’s planned takeover of the Hollywood studios and streaming business of Warner Bros. Discovery Inc. and Paramount Skydance Corp. stepped in with its own hostile bid.

Uncertainty over the pace of easing in 2026 and wariness about the sustainability of an AI-driven rally tempered sentiment. US stocks had rebounded in recent weeks after some Fed officials signaled they intend to cut rates for a third straight time on Wednesday.

“Expectations for a quarter-point rate cut have been cemented by continued signs of weakness in the employment market, although it’s certain to be one of the most contentious rate decisions in recent history,” according to BMO’s Ian Lyngen.

Kevin Hassett, a top candidate to take over the role of Fed chair, said it would be irresponsible for the Fed to lay out a plan for where it aims to take interest rates over the next six months. The White House National Economic Council Director emphasized the importance of following the economic data in a CNBC interview Monday.

Unease that inflation remains too high has also caused divisions among Fed officials, in a rift that’s been exacerbated by the lack of fresh data during the shutdown. After this week’s likely cut, money markets are leaning toward two more moves by the end of 2026, down from three signaled barely a week ago.

Evercore ISI’s Julian Emanuel says December will bring a season of surprises for investors, while “a divided FOMC makes any pronouncement far less credible than usual.”

US bonds have been on the back foot of late, closing out their worst week in eight months last week amid jitters over the pace of future rate cuts. Economic data and officials’ comments suggest Wednesday’s rate decision is unlikely to be unanimous, with dissent expected from both hawks and doves. US Treasuries extended losses, with the 10-year yield rising around three basis points to 4.17%.

“Labor market weakness, whether due to a downshift in the ‘natural rate of breakeven job growth’ from restrictive immigration policies or because the economy is actually slowing could cause Powell to sound more dovish,” Emanuel wrote.

“Monday has been the worst day of the week for Treasuries over both the long run — since 1990 — and in 2025. Today’s price action seems to be living up to that pattern of behavior, not only in the US but elsewhere. Since the start of 2022, the US 10-year yield has risen some 2.5% on Mondays and gone largely nowhere on the other days of the week.”

— Cameron Crise, Macro Strategist, Markets Live. For the full analysis, click here.

Looking ahead to the expected end of the Fed’s easing cycle in 2026, Lisa Shalett, chief investment officer of Morgan Stanley’s wealth management arm, says investors will need to pivot to the theme of “fiscal dominance,” where monetary policy takes a backseat to government spending concerns.

“As investors digest the consequences, potential implications include a steeper yield curve, a 10-year Treasury yield anchored above 4%, higher inflation, wider term premiums and further US dollar debasement,” she said. “This new regime supports positive stock-bond correlations, boosting the need for diversification in real assets, international securities and alternatives.”

Europe underperformed in a global bond market slump after the European Central Bank’s Isabel Schnabel became the first senior official to suggest with any certainty that European rates have reached a floor.

“The tone of Chair Powell’s press conference and accompanying statement will be critical,” wrote Deutsche Bank AG strategist Jim Reid. “We expect Powell to emphasize that the hurdle for further cuts in early 2026 is high, signaling a near-term pause. This guidance will be key to maintaining credibility.”

For stocks, interviews with 39 investment managers across the US, Asia and Europe showed that a vast majority of allocators were still positioning for a risk-on environment through next year. The thrust of the bet is that resilient global growth, further developments in artificial intelligence, accommodative policy and fiscal stimulus will deliver outsize returns.