Calm Before PCE: Slower Momentum, Higher Odds of a Fed Cut

This week feels like a market easing back into risk with less thrust but on steadier footing. Stocks opened the week firmer and volatility edged lower, yet the advance has grown more selective as investors look to today’s PCE inflation report for confirmation that disinflation remains on track before next week’s Fed decision. The tone is set for slower momentum with a calmer surface as indicated by the VIX slipping into the mid-teens. Intraday swings have narrowed, which is a setup that typically accompanies a “wait for the news” positioning going into the FOMC meeting next week.

Breadth improved in places that hadn’t led for much of the year, and small caps were standout. The Russell 2000 logged a record close on Tuesday, outpacing the S&P 500 and Nasdaq during several sessions as traders leaned into the idea that easier policy could relieve funding and refinancing pressure on smaller balance sheets. That relative bid was notable given a choppier week for megacaps and helped offset a modest loss of momentum at the index level.

Sector performance was similarly telling. Energy led on several days, aided by firmer crude headlines and a bid for cash-flow sturdiness. Health care and parts of financials held up well, while the most expensive corners of tech traded unevenly as investors faded premium multiples ahead of PCE. The demand for quality cash flow equities over momentum risk tilt echoes across several weekly recaps and dovetailed with the small-cap pop, reinforcing the idea that leadership is broadening even as headline indexes grind rather than sprint.

Sentiment also moved with price. The AAII survey showed a sharp jump in individual-investor optimism as bullish responses climbed to roughly 44.3%, up about 12 percentage points from the prior week, while bearish readings fell into the low-30s. Rising optimism alongside falling implied vol can extend rallies in the short run, but it also raises the stakes for today’s inflation print by thinning out protection just as traders crowd the same macro bet.

Economic data continues to support a cooling but not buckling narrative. ISM Manufacturing fell further into contraction at 48.2 in November, while ISM Services held in expansion at 52.6, another month in which services kept the lights on as goods remained sluggish. That split matched the labor crosscurrents, as some private indicators hinted at softer hiring. ADP’s November snapshot showed private employers cut 32,000 jobs, the first decline in over two years, with the pullback led by small firms and weakness in information and professional & business services. ADP also reported pay growth cooling to +4.4% year over year, consistent with a softer but still positive wage backdrop.

Rates and the policy path remain at center stage. Fed funds futures and mainstream trackers continued to price a very high likelihood of a quarter-point cut at the December meeting, helped by the accumulation of softer private data and calmer markets. The front end of the yield curve reflects those expectations, while the long end held near 4.1% as global duration sent occasional crosscurrents into Treasurys. The message from the yield curve is quite simple as easing is the base case, but term premia are not collapsing.

All of it runs into today’s Personal Income & Outlays report, which includes the Fed’s preferred inflation gauge with consensus centered on disinflation with headline near the high 2% year over year print, and core running around a quarter-percent month over month. Because the calendar was reshuffled after the shutdown, this September-dated PCE print lands unusually close to the Fed’s meeting, perhaps magnifying its market impact.

Beyond PCE, the next official non-farm payrolls report arrives in mid-December, giving markets a final check on hiring and wages before the year turns. Until then, careful positioning rather than chasing momentum is doing more of the work. The S&P 500 is edging higher, the Russell 2000 has speed, energy and health care are frequent gainers, and tech leadership is more selective. It’s not euphoria, but after a jump in AAII optimism and a slide in volatility, the path of least resistance may remain up so long as inflation doesn’t force a hasty rethink.

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