Is the Fed’s rate-cutting cycle winding down?

Transcript

Hi, welcome to Russell Investments market week review for the week ending December 12th. My name is Alex Ker. I'm a senior portfolio manager based out of Sydney. And there's three things to really go through this week. The first the big event for the week was the Fed. So they met they lowered interest rates by 25 basis points as had been widely expected by the market. Uh and during comments Prep kind of indicated that they're towards the end of the rate cutting cycle. They're not looking at hiking rates anytime soon. Uh but they think they've gotten policy to a more uh a closer position to neutral. And from our perspective within that's probably about right, especially given our global market outlook view that the economy is looking pretty resilient and should see a bit of a reaceleration through next year supported by AI AI capex adoption of AI supporting productivity and also the fiscal impulse from the one big beautiful act. Um so looking ahead, we think that we're towards the end of that Fed cutting cycle and and markets generally were were quite um positive on that news. So we saw equities a little bit higher and bond yields a tad lower in the US. On the back of that, we also got the JOL report which is very dated right now given the the the shutdown and we're catching up still on the data, but there we saw an improvement in openings. So we're still in this environment of low hirings, low firings. That's probably the best characterization of the US labor market right now. But if we look at some of the more realtime measures of labor demand, so looking at job openings through Indeed, for example, they still look okay. So we're still in this environment where we're not seeing an acceleration in the labor market, but we aren't seeing any further deterioration. And the second thing that was really interesting is we actually got two companies reporting earnings this week. So Oracle and Broadcom, very central to the AI thematic. You recall a couple of months ago, Oracle stock price had a huge run uh after the announcement of a deal with open AAI and it's given back a lot of that. In fact, it's given back all of those gains uh since that period. Uh during their press conference, during their earnings report, sorry. Um we saw an increase in capex. So the capital expenditure for the quarter was much higher than the um than the market had expected and the indications for future capex had also increased and revenue was a little bit softer. And I think this is a really important dynamic as we head into 2026 is the market has been very focused on capex numbers. As we look ahead, there's also the question mark about what kind of revenue companies generated from this. How are they monetizing this investment? And that's going to become a thematic that will probably come more apparent uh through 2026. So Oracle missed and then broken had a small beat on Thursday close. The stock was up about 3 and a half% after hours. So a bit of a mixed picture there in the early stages of corporate earnings around AI. Uh the final thing was in Australia. So one of the things that has been really notable especially living in Sydney uh has been Australian bond yields have risen quite aggressively in the last 2 months and the spread of Australian 10-year bond yields above the US 10year is close to 60 basis points which is towards the higher end of the last 10 years. A lot of this has been driven by concerns and expectations that the RBA, the Reserve Bank of Australia, is going to have to raise interest rates twice through next year. We think that's probably a little bit over a bit of an overreaction from the market to a couple of inflation prints. Uh the right now, Australia's inflation prints are being uh they're quite noisy with some government policy um influence price changes around electricity and water flowing through. Uh and so I know within that's actually Australian bonds is still really attractive. They actually look one of the cheapest markets in terms of valuations. U spread has widened a lot and so from here probably a bit of nice asymmetry. Uh and as you look to next year, you can't rule out one rate hike but two rate hikes is pretty unlikely in our opinion given that the labor market uh is still um in a fairly isn't reacelerating. We got the labor market data this week uh that did show that we aren't seeing a reaceleration in labor or wages. So with that backdrop, we think that you know the potential for the RBA to stay on hold is probably higher than the market uh is anticipating. And so there's a bit of asymmetry there. Uh with that, I might leave it there, but thank you for your time. Thanks for listening and we'll speak to you soon. >> Hi, I'm Sophie Antaly, head of portfolio and business consulting at Russell Investments. If you liked what you just saw and heard, consider subscribing to our YouTube channel or check us out on LinkedIn. Thanks for tuning in.

Key takeaways

U.S. Fed cuts rates, signals potential pause
Focus shifts to AI monetization
Australian bond yields surge

Fed moves closer to neutral policy stance

On Wednesday, the U.S. Federal Reserve (Fed) delivered a widely anticipated 25-basis-point rate cut at its final meeting of the year. In the press conference that followed, Chair Jerome Powell emphasized that monetary policy is now much closer to neutral and that the central bank is likely nearing the end of its rate-cutting cycle. He also made it clear that rate hikes are not under consideration.

These remarks dovetail with the macro environment we expect in the year ahead, as outlined in our recently published 2026 Global Market Outlook. We anticipate a resilient U.S. economy supported by ongoing AI-driven investment, productivity gains from broader AI adoption, and fiscal momentum from the One Big Beautiful Bill. Market reaction to the Fed’s decision was relatively muted, with equities inching higher and bond yields drifting modestly lower.

Meanwhile, the latest data continued to point to a largely unchanged U.S. labor market. The delayed October JOLTS report showed a small increase in job openings, for instance, while real-time indicators such as Indeed postings remained steady. Together, these measures suggest the U.S. job market is still in a “low hire, low fire” environment, with little sign of renewed momentum or meaningful deterioration.

Is AI spending entering a new phase?

Recently released earnings reports from Oracle and Broadcom provided useful perspective on how AI-related spending is progressing. Both companies are key suppliers of the infrastructure that supports AI development, which makes their results an early gauge of how the investment cycle is unfolding.

Oracle reported capital expenditures that were well above expectations, and guidance for future investment also moved higher. Revenue, however, was a little softer. That combination is important as we look ahead to 2026. Markets have spent much of the past year rewarding companies for large AI-related investments, but softer revenue at Oracle underscores the next phase of the conversation, which will likely focus more on how these investments translate into actual earnings.

Broadcom delivered a modest earnings beat, with shares rising about 3.5% in after-hours trading. The combined picture from both companies points to an AI spending cycle that remains active but uneven. Markets are still evaluating not just how much companies are investing, but how quickly that investment might translate into revenue in the year ahead.

RBA rate hike outlook

In Australia, government bond yields have risen sharply over the past two months, widening the spread between Australian 10-year bonds and U.S. Treasuries to roughly 60 basis points—near decade highs.

The recent rise in yields reflects, in part, market expectations that the Reserve Bank of Australia (RBA) could deliver two rate hikes in 2026. We see this as unlikely. In our opinion, several recent inflation readings have been distorted by temporary policy effects—particularly in electricity and water prices—making it difficult to gauge the underlying trend and contributing to an overestimation of inflation persistence.

Data released this week showed no meaningful pickup in hiring or wage growth, reinforcing our view that while one RBA rate hike cannot be ruled out next year, two hikes are unlikely. With yields now considerably higher, we see Australian government bonds as relatively attractive.

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