A Shift in the Winds: Labor Market Cools, Rate Cut Expectations Evolve

December 18, 2025

The past week brought a convergence of delayed economic data and shifting central bank sentiment, resulting in a somewhat volatile period for investors. While major U.S. equity indices continue to hover near all-time highs achieved earlier in the month, a sense of caution has entered the market, leading to a loss of upward momentum in recent sessions. The key narrative this week revolves around a definitively cooling labor market and the Federal Reserve's delicate balance of easing monetary policy while remaining data dependent.

U.S. Economic Data: A Delayed, Yet Clear, Signal

The Labor Market: A Significant Slowdown

The most consequential data release this week was the highly anticipated, but delayed, November Employment Situation Report from the Bureau of Labor Statistics. Due to the recent federal government shutdown, this report was released yesterday and combined data for both October and November, painting a clearer, albeit sobering, picture of the labor market's deterioration.

• Nonfarm Payrolls: The economy reportedly lost 105,000 jobs in October and only added 64,000 jobs in November. While the November figure was slightly above consensus, the significant net loss over the two months signals a sharp deceleration in hiring momentum compared to earlier in the year.  However, the October number was impacted by 165,000 government employees who took DOGE payout officially leaving the government.¹
• Unemployment Rate: The headline Unemployment Rate rose to 4.6% in November, its highest level since 2021. This rise is a clear indicator that the labor market's strength is fading, a key factor the Federal Reserve has been monitoring.²
• Average Hourly Earnings (AHE): AHE edged up by a modest 0.1% month-over-month, slowing the 12-month gain to 3.5%. This cooling in wage inflation is a positive sign for the broader inflation outlook, but it underscores the broader softening in the labor market.²

Industrial Production

In contrast to the labor data, U.S. Industrial Production has shown signs of stabilizing, if not modest growth. While the official November G.17 report is still delayed and now expected on December 23rd, the September data showed a 0.1% increase. Recent flash Purchasing Managers' Index (PMI) data suggests continued, albeit slow, expansion in the manufacturing sector. This indicator will remain critical as a measure of domestic economic health, especially considering the current global trade tensions and tariff impacts.^{3, 7.\}

U.S. Macro: Inflation Takes a Surprising Step Back

The November Consumer Price Index (CPI) report, released today by the Bureau of Labor Statistics, delivered a notable "downside surprise" that has immediately shifted market sentiment. Headline CPI rose 2.7% year-over-year, cooling significantly from September's 3.0% and coming in well below the consensus forecast of 3.1%. Even more encouraging for the Federal Reserve was the Core CPI (excluding volatile food and energy), which landed at 2.6%, its softest reading since March 2021. While the data carries a slight asterisk due to collection delays following the recent government shutdown, the underlying trend shows a broadening disinflationary path—led by a critical "rollover" in shelter costs and unexpected cooling in goods prices. This softer-than-expected print has triggered a dip in Treasury yields as investors pull forward expectations for potential rate cuts in early 2026.2,6

Federal Reserve Policy: Rate Cuts and Evolving Expectations

Impact of the Recent Rate Cut

The Federal Reserve's quarter-point rate cut announced earlier this month - its third reduction this year—has had a complex impact on the market. Initially characterized as a "risk management" or "insurance cut," the move aimed to preempt a deeper economic slowdown stemming from trade and labor market weakness.⁴

• Positive Market Reaction: The rate cut provided an immediate boost to risk assets, particularly in the run-up to the recent market high, as lower borrowing costs tend to favor equities and corporate credit.
• "Hawkish Cut"? : However, the official policy statement and the Fed's updated "dot plot" were described by many as a "hawkish cut," signaling that the bar for further easing has risen. The Fed emphasized a complete reliance on incoming data before making any additional moves.  However, with the announcement of a QE program of buying least $200 billion in T-Bills a month, it looks to us like a dovish cut.

Shifting 2026 Rate Cut Expectations

Market expectations for the path of monetary policy in 2026 are undergoing a significant recalibration.

• Market vs. Fed: While financial markets, as reflected in the CME FedWatch Tool, still price in a strong probability of at least two additional quarter-point cuts in 20264, the Fed's own projections suggest a slower pace. The median Fed forecast anticipates only one additional cut in 2026.⁵
• The Data Dependence Challenge: The substantial divergence between the market and the central bank highlights the extreme importance of future economic data. Should the labor market continue to weaken, market expectations for more aggressive easing will likely strengthen, putting pressure on the Fed to act sooner. Conversely, a rebound in data could force the market to align with the Fed’s more cautious outlook.

Market Performance: At Highs, But Losing Steam

Despite the recent turbulence, the S&P 500 Index and the Dow Jones Industrial Average remain near all-time highs. This resilience is likely a testament to the belief that: 1) the Fed will continue to act as a backstop against a deep recession, and 2) the underlying health of many corporate balance sheets remains strong.

However, the market has lost steam in the last few days. This softening is largely attributed to:

1. Labor Data Volatility: The mixed signals from the delayed employment report created uncertainty, leading some investors to take profits.
2. Sector Rotation: We have observed a notable sector rotation where the high-flying, technology-oriented growth stocks that led 2025's rally have retreated, while more cyclical and value-oriented sectors (such as financials and materials) have seen renewed interest6. This suggests that investors are bracing for slower growth by shifting toward less volatile, dividend-paying stocks.
3. End-of-Year Positioning: As the year-end approaches, institutional investors are likely engaging in portfolio rebalancing and tax-loss harvesting, which can create intraday and daily volatility that is disconnected from the broader macro picture.

Other Relevant Market Catalysts

• Tariff Inflation: The ongoing impact of tariffs continues to be felt, specifically in rising prices for intermediate goods, which is now starting to spill over into the services sector6. This persistent inflation source remains a key challenge for the Fed.
• Strength in Metals: Gold and especially silver have seen significant gains, with silver prices recently hitting record levels6. This performance indicates a flight-to-safety trade and increasing demand for hard assets amidst global economic and political uncertainty.

Disclaimer

This material is for informational purposes only and does not constitute a recommendation to buy or sell any security. Past performance is not indicative of future results. All investments carry risk, and investors should consult with a financial professional before making any investment decisions.

Sources

1. U.S. Bureau of Labor Statistics, The Employment Situation –November 2025.
2. YCharts, Economic Calander
3. Federal Reserve Board, Industrial Production and Capacity Utilization (G.17).
4. Federal Reserve, Summary of Economic Projections (SEP) update, December 2025.
5. CME Group FedWatch Tool, as of December 16, 2025.
6. Bloomberg Markets, various, week of December 9-16, 2025.
7. S&P Global Flash PMI Survey, December 2025.

Researched and compiled with the assistance of Gemini Pro. This newsletter represents our opined general assessment of the market environment at a specific time and is not intended to be a forecast or guarantee of future performance or results. The opinions and statements expressed are intended for information purposes only, and does not constitute investment advice, a recommendation or an offer or solicitation to purchase or sell any securities or investment strategies to any person in any jurisdiction in which an offer, solicitation, purchase or sale would be unlawful under the securities laws of such jurisdiction. This material may contain estimates and forward-looking statements, which may include forecasts and do not represent a guarantee of future performance. This information is not intended to be complete or exhaustive and no representations or warranties, either express or implied, are made regarding the accuracy or completeness of the information contained herein. The opinions expressed are as of December 16, 2025, and are subject to change without notice. Investing involves risks. Past performance is not a reliable indicator of current or future results, and index returns do not account for fees. It is not possible to invest directly in an index.

Investment advisory and wealth management services are offered through Highline Wealth Partners, an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training and does not guarantee investment performance.