The Fed's decision to pause rate hikes at this meeting is all but certain, yet across-the-board beats in macroeconomic data are repricing the December policy path, and markets have staged a rare rally in which both risk assets and safe-haven assets rose together under an intensifying "higher for longer" narrative 鈥?with crude oil the sole exception, falling against the trend and hinting at latent demand-side concerns.
The probability that Fed Chair Warsh and his colleagues hold rates steady today has exceeded 90%, but interest rate futures show the implied probability of a December hike has quietly climbed back above 80%. At the same time, durable goods orders, existing home sales, home prices and the consumer confidence index all beat expectations, pushing the U.S. macroeconomic surprise index to its highest level since July and providing fresh support for the "higher for longer" narrative.
Against this backdrop, equities, credit bonds, the dollar, gold and bitcoin all advanced in tandem, while the 10-year Treasury yield held steady below the 5% mark and bond volatility fell to its lowest level in more than a month. Crude oil was the lone outlier on the day 鈥?diplomatic talks raised de-escalation expectations that weighed on prices, with WTI testing the $100 level, which marginally gave the bond market some breathing room but also brought concerns about the global demand outlook to the surface.
Macro Data Beats Across the Board, December Hike Expectations Rekindle
A batch of macroeconomic data released on Tuesday collectively exceeded market expectations, giving the Fed justification to maintain its restrictive stance. Durable goods orders, existing home sales, home prices and the consumer confidence index all came in above forecasts, lifting the U.S. macroeconomic surprise index to its highest peak since July.
The interest rate futures market reacted swiftly. Although the probability of a pause at this meeting remains above 90%, the implied probability of a December hike has rebounded from recent lows to above 80%. This repricing shift means the market is reinterpreting "pause" as "skip" rather than "end" 鈥?whether this repricing of the policy path is sustainable will depend heavily on the direction of this week's mega-cap technology earnings season.
The 10-year Treasury yield remained range-bound below 5%, with the long end relatively favored. Strong macro data and softening oil prices offset each other, keeping yields broadly stable. Bond volatility dropped to its lowest level in more than a month, and while the equity risk premium has retreated somewhat, it still diverges significantly from bond risk.
Treasury Yields Plateau at Highs, Risk and Safe-Haven Assets Rally Together in Rare Convergence
With Treasury yields oscillating at elevated levels and the market forming relatively stable expectations for the policy path, a rather rare scene unfolded on the day: risk assets and traditional safe-haven assets rose hand in hand.
In equities, the Nasdaq 100 reclaimed its 100-day moving average, and the S&P 500 broke above its 50-day moving average. Credit markets strengthened in tandem, with both investment-grade and high-yield credit spreads narrowing, and data center bond spreads also compressed.
Meanwhile, the dollar strengthened on euro weakness and technical factors, rising to the upper edge of its roughly one-month range; gold staged a strong rebound near the $4,000 support level; and bitcoin advanced in sync after finding support at $80,000.
This "buy everything" pattern essentially reflects that, in a window where yields have plateaued at highs and near-term policy path expectations have become clearer, funds chose broad positioning rather than one-sided bets while waiting for the Fed decision and tech giants' earnings.
AI Financing Narrative Reignites, Tech Stocks Lead Gains but Volume Remains Thin
Another important catalyst driving the day's stock market gains came from a phase of repair in the AI investment narrative.
Broadcom completed a $63 billion financing arrangement, with Bank of America, Citigroup, Morgan Stanley and Blackstone participating jointly, to fund Anthropic's lease of Broadcom AI chips and networking equipment. This is the largest AI chip financing deal to date, though Broadcom reportedly bore some losses to facilitate the transaction. At the same time, Meta completed a $25 billion equity offering that was roughly five times oversubscribed, demonstrating strong institutional demand for mega-cap technology stocks.
According to Goldman Sachs' technology trading desk, the drivers of the day's AI sector strength included: a temporary easing of AI financing concerns, market expectations for this week's earnings and capital expenditure guidance from Google, Microsoft and Amazon, and technical rebounds in some individual stocks from oversold conditions. The broad AI sector has gained about 5% since last Friday's close, while non-AI sectors have fallen about 30 basis points over the same period.
However, Goldman traders also noted that overall trading activity on the day was only 3 out of a possible 10, with an overall selling bias of about 1%. Long-only institutions were net sellers in information and communication services and macro products, while hedge funds bought in communication services, technology and financial sectors. This was not a sentiment-driven bottom-fishing rally, but rather cautious positioning ahead of the Fed decision and major tech earnings.
Crude Oil Falls Against the Trend, Demand Concerns and Geopolitical Premium Coexist
In the broad "buy everything" rally, crude oil was the sole exception. WTI crude prices fell again, testing the $100 mark.
The direct trigger for the oil price decline was a positive diplomatic signal 鈥?officials from Saudi Arabia, Turkey and Pakistan held talks with Iran in Tehran, easing market concerns about U.S.-Iran conflict de-escalation and the risk of supply disruptions through the Strait of Hormuz. Iran's Supreme Leader reportedly discussed the possibility of ending the current conflict in a meeting with the Supreme National Security Council.
However, structural tightness on the supply side has not dissipated. The spot premium on the Brent December-January spread is close to $5 per barrel, significantly wider than a week ago; crude and refined product inventories are about 76 million barrels below seasonal averages. At the same time, continued Houthi attacks on Saudi Arabia make it difficult for the risk premium to fully dissipate.
The scarcity premium in the shipping market also deserves attention. Middle East crude export volumes have largely recovered to pre-war levels, but tanker freight rates remain elevated. Iran has reportedly threatened action against vessels owned by Sinokor, which last month carried about 40% of crude oil exports through the Strait of Hormuz, meaning elevated freight and insurance costs will continue to support oil prices above pre-war levels.
In refined products, diesel prices fell to a one-week low, weakening on both sides of the Atlantic. The temporary pullback in oil prices marginally supported the bond market, but the demand concerns it reflects create a subtle tension with the day's strong macroeconomic data.
Beware of Credit Stress Spreading, "Rotation鈥擟ontagion鈥擟apitulation" Three-Phase Risk
Beyond the day's broad rally, Bloomberg macro strategist Frank Monkam warned that the market may be on the eve of the next decline, with risks set to unfold in three sequential phases: rotation, contagion and capitulation.
In the first phase, capital migrates from technology and AI-related exposures toward defensive and low-beta sectors. This rotation may initially support major indices and create an illusion of market resilience, but in reality the market's leadership is quietly deteriorating.
In the second phase, as financing conditions continue to tighten, credit stress spreads from the AI space to the broader market, weighing on overall earnings forecasts. Rising credit volatility and deteriorating financing conditions will drive a full repricing of equity risk premiums, and the credit market will gradually dictate the direction of risk appetite.
In the third phase, when defensive rotation can no longer absorb selling pressure, systemic deleveraging and portfolio de-risking will amplify index-level declines. Frank Monkam noted that inter-sector correlations have been converging rapidly since September, a dynamic that is crucial 鈥?the real turning point is not the current rotation itself, but the moment credit stress ultimately hits market breadth. At that point, orderly sector switching could escalate into a full-scale liquidity liquidation.
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