All Eyes on the Fed This Week - Not So Much the Deed, but the Words

The forward guidance at the Fed’s Wednesday meeting will drive the market action.

Key Takeaways

• German Industrial Production Surges: Global bond yields continue to inch higher — by +3 basis points in Europe and Japan (nearing 2.0% for the first time since 1999) and by one basis point in the U.S. to 4.15%. At play could be the reaction to the ripping +1.8% surge we saw in German industrial production for October (on top of the +1.1% burst of growth in September) — six times the +0.3% consensus forecast! The YoY trend swung to +0.8% from -1.4% in September.

• China is Triumphing in the Trade War: Beyond the German upside production surprise, we received a different one out of China, where its exports managed to rebound by +5.9% YoY in November (consensus was +4.0%). There was a big decline in exports to the U.S., more than offset by a huge expansion in trade flows to the rest of the world. The fact that China’s trade surplus for 2025 (with one month to go) has pierced the $1 trillion mark for the first time (not to mention +22% higher than this time in 2024 despite the Trump tariffs) shows first-hand that it has the upper hand in this trade war.

• Equity Risk Premium Has Collapsed: There is another K-shape to the U.S. economy: page A1 of the WSJ goes with American Consumers Sour On the Economy’s Trajectory, while B1 runs with Investors Feel Good About the Stock Market Again. Meanwhile, the CAPE multiple of nearly 40x generates a 2.5% real yield, and the real yield from the TIPS market for the 30-year Treasury bond is also 2.5%. What we have on our hands is a de facto 0% equity risk premium when accurately measured. Investors may “feel good,” but that doesn’t mean it makes good sense to be loading up on an S&P 500 index where there is zero compensation for the incremental risk over the bond market.