Market Overview

US equities stabilized on Thursday, while bond yields rose as investors adjusted expectations for a gradual Federal Reserve easing cycle expected to start in 2025.

The S&P 500 saw a slight decline of 0.1%, settling at 5,867. Meanwhile, the yield on 10-year US Treasuries climbed 5 basis points, reaching 4.57%. The US dollar index increased by 0.4% to 108.4, while gold prices dropped 1.7% to $2,605 per ounce.

Federal Reserve Monitoring

UBS analysts are closely watching the Federal Reserve's strategy, which aims to balance potential labor market downturns against the risk of persistent inflation above the 2% target.

Federal Reserve Chair Jerome Powell has observed a softening trend in the labor market and anticipates that this will continue, predicting a potential rise in unemployment.

Despite mixed inflation data, where headline personal consumption expenditures (PCE) inflation is near the 2% target and core inflation rose to 2.8% in October, the Fed is likely to wait for lower core inflation rates before reducing rates further.

The Fed's forecast has been updated, now predicting two 25 basis point cuts in June and September of 2025, instead of a total 100 basis point reduction spread over four quarters. This is contingent on core inflation slowing to below 2.5% by the June Federal Open Market Committee (FOMC) meeting. However, if labor or inflation data weakens, an earlier rate cut in March could occur.

Investment Recommendations

Despite expecting fewer rate cuts, UBS encourages investors to focus on high grade and investment grade bonds, diversified fixed income, and equity income strategies. Although the need for "positioning for lower rates" has diminished, UBS still finds absolute fixed income yields attractive and suggests seeking diverse income sources.

The firm has a positive outlook for US equities, predicting the S&P 500 could reach 6,600 by next year, influenced by potential policy shifts under a second Trump administration. UBS advises investors to "sell further dollar strength," given its overvaluation despite recent support from changing Fed and government policies.

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