Overview: A Turning Point for Rate Expectations and Risk Appetite
Global financial markets on December 18, 2025 were dominated by a sharp reassessment of U.S. inflation and future interest-rate paths, triggering a powerful rally in equities, a drop in bond yields, and a weaker U.S. dollar. A surprisingly soft U.S. Consumer Price Index (CPI) print for November, released against the backdrop of a highly unusual government shutdown–distorted data set, led investors to lean more confidently into the disinflation narrative and bring forward expectations for Federal Reserve easing in 2026.
While questions remain about the reliability of the data, traders largely looked through those caveats and focused instead on the directional message: inflation, at least in the reported numbers, is continuing to cool. That shift reverberated across asset classes, lifting riskier assets such as technology stocks and high‑beta currencies, while pressuring the dollar and trimming demand for traditional safe havens like gold.
U.S. Inflation Surprise: Headline and Core CPI Undershoot Expectations
The key catalyst for the day was the U.S. CPI report for November 2025, which came in weaker than economists had expected on both the headline and core measures.
Headline CPI rose 2.7% year over year, below the 3.0% consensus forecast, reinforcing the disinflation trend that has been underway since mid‑2024. Core CPI, which excludes food and energy and is closely watched as a gauge of underlying price pressures, increased just 2.6% year over year, substantially under the 3.0% market expectation and marking the slowest pace of core inflation since early 2021.
This softer‑than‑forecast core reading was particularly impactful because it arrived at a time when the labor market is still relatively resilient, but clearly no longer running red‑hot. Initial jobless claims for the week of December 13 fell to 224,000, undershooting expectations and easing from the prior week, suggesting ongoing, if moderating, labor-market strength.
Complicating the interpretation is the data quality backdrop. The record‑long federal government shutdown disrupted the Bureau of Labor Statistics’ ability to collect prices in October and compressed November’s sampling period. Economists and policymakers alike flagged these distortions, with Fed officials warning that the figures could be noisy and not fully representative of underlying inflation dynamics. Nonetheless, market participants appeared willing to treat the report as confirmation that the disinflation process remains intact.
Federal Reserve Outlook: Markets Look Beyond Data Distortions
Even with warnings about data reliability, traders used the CPI surprise to further price in a more accommodative Federal Reserve stance in 2026. Fed Chair Jerome Powell and other policymakers had recently emphasized a cautious, data‑dependent approach, noting that premature easing could risk reigniting inflation. However, markets are increasingly convinced that the Fed has likely finished its hiking cycle and will be in a position to cut rates more materially in 2026 if inflation remains near or below 3%.
Following the CPI release, futures markets shifted to imply a steeper path of rate cuts for 2026, with some pricing creeping in for earlier moves depending on growth and labor data. The disconnect between the Fed’s more guarded rhetoric and the market’s aggressive easing expectations has widened, but on this trading day, the momentum clearly favored those betting on a more dovish trajectory.
The CPI data also supported the argument that real (inflation‑adjusted) policy rates are becoming increasingly restrictive as nominal rates remain elevated while inflation trends lower. That dynamic bolsters the case for eventual rate relief, particularly if growth shows signs of slowing and financial conditions tighten further.
U.S. Equities: S&P 500 Rebounds as Tech and AI Plays Lead
U.S. equities responded forcefully to the inflation surprise. After several sessions of weakness, major indexes reversed course and staged a robust rally. The S&P 500 jumped, snapping a four‑day losing streak and closing near 6,765. The index initially traded soft in Asian hours, echoing earlier global risk aversion, but sentiment pivoted decisively following the CPI release at the U.S. open.
The intraday pattern reflected a classic macro‑driven risk-on move. Stocks caught a strong bid immediately after the 8:30 a.m. Eastern Time data release, with gains extending into midday before moderating slightly into the close as traders locked in profits. The move was broad‑based, but technology and growth stocks took center stage, as lower long‑term yield expectations typically support the present value of future earnings in these sectors.
A standout performer was Micron Technology, which surged around 10% after issuing an upbeat outlook that underscored ongoing, robust demand for artificial‑intelligence‑related memory and infrastructure. Micron’s rally fed into broader enthusiasm for the AI theme, benefiting semiconductor names and high‑growth tech peers seen as key beneficiaries of sustained AI investment.
The combination of cooler inflation, falling yields, and strong AI demand created an ideal backdrop for risk assets. Investors rotated back into cyclicals and growth plays, while more defensive pockets of the market lagged on a relative basis.
Fixed Income: Treasury Yields Slide as Bond Buyers Return
In the U.S. Treasury market, yields moved sharply lower as the CPI data revived demand for duration. The 10‑year Treasury yield fell to around 4.10%, with most of the move occurring in the wake of the inflation release. Prior to the data, yields had traded sideways through the Asian and early European sessions, reflecting caution ahead of the event risk.
The drop in yields was consistent with the market’s interpretation that the Fed will face less pressure to maintain restrictive policy if inflation remains near the 2.5–3.0% range. Lower yields also reduced funding costs at the margin, helping to support risk assets from corporate credit to equities.
Curve dynamics suggested a modest bull steepening, as intermediate and longer maturities rallied on the view that peak policy rates are already in place and that the next major move is likely downward. That said, the moves were not extreme enough to signal imminent recession fears; rather, they were indicative of a repricing of inflation and policy expectations.
U.S. Dollar and Forex: From Cautious Strength to Post‑CPI Weakness
The U.S. dollar experienced a notable intraday reversal. During the Asian session, the greenback traded with a slightly bullish tone as traders positioned cautiously ahead of the heavy data and central-bank calendar. The dollar’s early strength persisted into the start of the European session, aided in part by central‑bank developments abroad, before fading ahead of the U.S. open.
The Bank of England’s latest policy meeting delivered an expected 25‑basis‑point rate cut, but the tone of communication was more hawkish than many had anticipated. Governor Andrew Bailey emphasized that there was “more limited space” for further reductions, signaling caution about moving too quickly toward easier policy. That relatively hawkish cut initially lent some support to the dollar against the British pound, as markets perceived the BoE as less dovish than previously priced.
However, the situation changed dramatically once the U.S. CPI data hit. The lower‑than‑expected core inflation print triggered broad‑based selling of the dollar as traders reassessed the relative policy outlook. By the U.S. afternoon, the dollar was trading with a net bearish bias, particularly against higher‑yielding and growth‑sensitive currencies.
In the Asia‑Pacific complex, the New Zealand dollar was an early outperformer after stronger‑than‑forecast GDP growth of 1.1% quarter over quarter, compared with expectations for 0.8%. The data pointed to a nascent recovery, although soft household consumption kept some investors cautious about its durability. Even so, the kiwi’s outperformance was reinforced later in the day as dollar weakness broadened.
The net result was a classic post‑data dollar rotation: currencies tied to higher growth or more hawkish domestic central banks found support, while the greenback lost some of its recent safe‑haven premium.
Commodities: Gold Pauses as Risk Assets Take the Lead
In commodity markets, gold edged slightly lower despite the drop in bond yields that would normally provide support. The metal slipped around 0.14%, settling near 4,332 after retreating from recent highs. Price action was relatively muted during the Asian session, but selling pressure emerged during London hours as traders repositioned ahead of the CPI release.
The post‑data environment proved challenging for gold, not because of any renewed inflation fears, but rather due to the broader risk‑on rotation. With equities and other risk assets rallying on the view that inflation is under control and policy easing lies ahead, demand for traditional safe havens and inflation hedges softened.
There were also signs of profit‑taking, as gold had enjoyed a strong prior run and some investors used the CPI‑driven volatility as an opportunity to lock in gains. The fact that gold stabilized into the U.S. afternoon despite falling yields suggests that positioning dynamics—rather than a fundamental shift in macro views—were the primary driver of the modest pullback.
Other commodities traded in a more mixed fashion, with macro‑sensitive assets generally supported by improved risk sentiment, while idiosyncratic supply‑demand factors continued to shape individual markets. However, none matched gold’s macro‑significance in terms of signaling the day’s shift away from pure hedging and toward risk‑taking.
Europe and the UK: Cautious Central Banks Confront Improving Data
European data and central‑bank signals also played an important role in shaping global sentiment. In the euro area, French business confidence for December surprised to the upside, rising to 102 versus a consensus forecast of 97 and a prior reading of 98. The improvement suggested that corporate sentiment is stabilizing and perhaps even beginning to recover after a period of sluggish growth and high uncertainty.
Switzerland reported a solid trade surplus of around 3.0 billion for November, modestly above expectations and an improvement on the prior month. The figures reinforced the view that Switzerland’s external position remains robust, even as global trade patterns continue to adjust.
In the UK, the Bank of England’s decision to cut rates by 25 basis points, paired with relatively hawkish guidance, highlighted the delicate balancing act facing European central banks. On one hand, slower growth and past energy shocks argue for some degree of policy easing. On the other, policymakers remain wary of declaring victory over inflation prematurely, especially after the hard‑won gains of the past two years.
The BoE’s stance, in which it openly signaled that the scope for further cuts may be limited, stands in contrast to market pricing in the U.S., where investors are more aggressively anticipating a pivot toward multiple rate reductions in 2026. This divergence in tone contributed to cross‑currency moves and underscored the theme of increasingly asynchronous global monetary cycles.
Asia-Pacific: Inflation Expectations and Growth Signals
In the Asia‑Pacific region, the day brought both inflation expectations and growth data that colored the broader macro picture. In Australia, consumer inflation expectations for December rose to 4.7%, materially above the 3.2% forecast and a touch higher than the prior 4.5% reading. The uptick suggested that inflation psychology remains sticky, potentially complicating the Reserve Bank of Australia’s path toward more neutral policy.
Persistently elevated inflation expectations could keep Australian policymakers on guard against easing too quickly, especially if wage and housing data remain firm. For markets, the data helped support the Australian dollar on the margins, particularly given the contrast with the softer U.S. inflation profile.
New Zealand’s stronger‑than‑expected GDP data reinforced the narrative that parts of the region are emerging from a soft patch, though the quality of the recovery remains under scrutiny. With household consumption still subdued, questions linger about the sustainability of growth once temporary drivers fade. Nevertheless, the upside surprise was enough to prompt some repricing of rate‑cut expectations for the Reserve Bank of New Zealand, helping to underpin the kiwi.
Emerging Themes: Disinflation, Data Quality, and AI‑Driven Growth
Several broader themes emerged from the day’s price action and macro developments:
1. Disinflation vs. Data Distortion
Markets are leaning into the disinflation narrative, even as economists warn about the noisy nature of the latest U.S. inflation print. The balance between acknowledging data distortions and trading the headline numbers is tilting toward the latter, at least in the short term.
2. Asynchronous Monetary Policy Cycles
The divergence between the Fed’s cautious communication and the market’s aggressive pricing for 2026 cuts, combined with a hawkish‑sounding cut from the BoE and sticky inflation expectations in Australia, highlights that central banks are not moving in lockstep. This divergence is increasingly important for currency and rate markets.
3. Risk‑On Rotation with an AI Core
The outperformance of technology and AI‑linked names such as Micron underscores how macro shifts in inflation and rates can amplify secular growth stories. Lower real-yield expectations provide a supportive backdrop for long‑duration assets, particularly those tied to transformative technologies.
4. Safe‑Haven Recalibration
Modest selling in gold alongside rising equities and falling yields suggests that investors are recalibrating their hedging needs. While geopolitical and macro uncertainties have not disappeared, the immediate impetus to hold large defensive positions eased in favor of growth exposure.
What to Watch Next
Looking ahead, the key question is whether subsequent data will validate the benign inflation story or expose the latest CPI report as an outlier driven by measurement issues. Upcoming releases on PCE inflation, wage growth, and labor‑market conditions will be critical in shaping the Fed’s reaction function and either confirming or challenging the market’s view of a 2026 easing cycle.
Investors will also closely monitor central‑bank communications worldwide for signs that policymakers are becoming more comfortable with the inflation trajectory. Any shift from caution to conditional openness about future cuts could further reinforce current market trends.
At the same time, corporate earnings—especially from AI, semiconductor, and other high‑growth sectors—will help determine whether equity markets can sustain gains powered by both multiple expansion and underlying profit growth. In fixed income, the durability of the rally in longer‑dated Treasuries will depend on whether growth indicators start to soften meaningfully or remain resilient.
For now, the combination of softer reported U.S. inflation, growing expectations of future Fed easing, and a strong bid for risk assets has set a constructive tone across global markets. How long that tone persists will hinge on whether data in the coming weeks confirms that the inflation fight is truly in its final chapters, rather than paused in a noisy data interlude.