The impact of the Fed's hawkish rate cut continues, with "higher for longer" back in the investors' sights.

The Christmas holiday is approaching, but many investors find themselves facing daunting challenges. The US stock market saw a rebound on the last trading day of the past week, but this was not enough to overcome the dual impact of the threat of a US government shutdown and hawkish Fed rate cuts. Last week, the Dow Jones index ended a ten-day consecutive decline, falling by 2.3%; the Nasdaq index and the S&P 500 index also fell by 1.8% and 2% respectively. After a dramatic week, investors will receive fewer economic data this week. Some important data to watch out for include the US Conference Board Consumer Confidence Index for December, to be released on Monday, and the initial jobless claims data for the week ending December 21, to be released on Thursday. The US stock market closed early on Tuesday and will only reopen on Thursday due to the holiday. However, the shortened trading hours this week will still give Wall Street an opportunity to interpret the Fed's expectations for next year's rate decisions. Fed officials are now predicting smaller rate cuts in 2025. In the last few trading days of the year, the Fed will likely revert back to a "higher for longer" policy stance. Under the impact of the hawkish Fed rate cuts, investors are skeptical about whether the "Santa Claus rally" will be absent. The "Santa Claus rally" refers to the last five trading days of the year and the first two trading days of the new year. Historically, the stock market has shown positive trends during these 7 days. Some analysts believe that the US stock market may face some pullback and volatility pressure, depending on whether US bond yields continue to rise. Matt Maley, Chief Market Strategist at Miller Tabak, stated that besides the uncertainty of the Fed's rate cut path, another factor that concerns the stock market is the rise in US Treasury bond yields. Data shows that the benchmark 10-year Treasury bond yield reached 4.55% last week, the highest level in over six months. The market is still grappling with the impact of the Fed's hawkish rate cuts. Data released last Friday showed that the Fed's favored measure of potential inflation in November was moderate, leading to a rebound in the stock market on Friday. The recent behavior of the Fed indicates concerns about sustained inflation in the coming months. Some market observers point out that threats that could undermine the Fed's anti-inflation efforts include the Trump administration's upcoming policies such as tax cuts, expelling illegal immigrants, and imposing tariffs. Some analysts view the Fed's shift in attitude as a preemptive move in the Trump style, rather than a simple response to what they see in inflation data. Fed Chairman Powell insists that the Fed will not react to potential policy changes unless these policies are actually implemented and thoroughly analyzed. David Alcaly, Chief Macro-Economic Strategist at Lazard Asset Management, said, "The market and the hawkish stance of the Fed have little to do with the trajectory of inflation and more to do with the possibility of new inflation policy changes like new tariffs." Chris Rupkey, Chief Economist at FWDBONDS, stated that Trump's spending, tax cuts, and tariff plans may prevent a decline in inflation, "After three consecutive rate cuts, it is expected that the frequency of rate cuts in 2025 will greatly decrease." However, there could be many developments in the policy area. Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, stated, "The only certainty is that there will be more uncertainty in early 2025." It is worth noting that Bank of Japan Governor Haruhiko Kuroda will deliver a speech on Wednesday. The Bank of Japan chose to stand pat last week and expressed a cautious attitude towards raising rates. Kuroda stated in a press conference following the Bank of Japan's rate decision that more information on Japanese wages and Trump policy is needed before deciding on a rate hike. The focus of the market will be on whether Kuroda's speech will signal a rate hike in January next year. Charu Chanana, Chief Investment Strategist at Saxo Markets, believes that Kuroda's statement maintains the "maximum flexibility" for the January decision, which is not entirely unexpected. Analysts from Bank of America and Nomura Holdings have postponed their expectations for the next rate hike by the Bank of Japan from January to March. Analysts believe that if the Bank of Japan decides to raise rates in March or later, the yen exchange rate will face further risks of weakening.