This week, the biggest variables in the U.S. stock, bond, and Bitcoin markets

Before the Federal Reserve's December meeting, there is a potential "black swan."

On December 6, the U.S. Bureau of Labor Statistics released November non-farm data slightly exceeding expectations. Analysts believe that the current environment of low interest rates, declining inflation, and growing corporate profits in the U.S. may drive the U.S. stock market to continue rising at the end of the year. However, investors still need to closely monitor the November CPI to be released this Wednesday, which could be a "black swan" event that disrupts market expectations for the Federal Reserve's interest rate cut in December.

Analysts stated that if the CPI shows that U.S. inflation has not risen significantly, then the likelihood of a rate cut in December is very high. However, swap pricing indicates that the Federal Reserve may pause rate cuts at its January meeting next year.

Thomas Hainlin, senior investment strategist at Bank of America Asset Management, said in a phone interview:

"We did not get any surprises from Friday's labor market data or inflation data, nor did we see any downside surprises in corporate profits. This situation supports risk assets, including stocks and cryptocurrencies."

Last Friday, the U.S. stock market closed higher, with both the S&P 500 and Nasdaq indices reaching all-time highs. Meanwhile, Bitcoin broke the $100,000 mark last Wednesday and set a new record of $103,853 per coin on Thursday.

Unless CPI unexpectedly rises, the likelihood of a Federal Reserve rate cut this month is high

Last Friday's employment data indicated that the U.S. economy is cooling—despite an increase in hiring in November, the unemployment rate unexpectedly rose, and the time to find a job lengthened.

Analysts believe that this non-farm data may provide room for the Federal Reserve to cut rates again in December, unless there is an unexpected acceleration in inflation data this Wednesday.

Currently, the market generally expects the upcoming CPI to show that U.S. inflation has not risen significantly. According to Bloomberg's economic model predictions, the core inflation for the U.S. in November is expected to remain flat compared to October, with a month-on-month increase of 0.2% and a year-on-year increase of 2.6%.

According to the Chicago Mercantile Exchange's FedWatch tool, futures traders believe there is an 85% probability that the Federal Reserve will cut rates by 25 basis points in December, up from 71% a day earlier and 66% a month ago.

Amar Reganti, fixed income strategist at Hartford Funds, stated:

"All signs indicate that there will be a rate cut in December, but inflation remains an important factor, so there is some tail risk in the CPI data."

Gennadiy Goldberg, head of U.S. interest rate strategy at TD Securities, stated:

"If the core CPI month-on-month increase reaches 0.5% or higher, you may see the market reassess the Federal Reserve's December meeting, which could also prompt investors and the Fed to reconsider whether to cut rates... If the core CPI data is unexpectedly high, this could lower market expectations for a rate cut in December to 50% or lower."

Have U.S. Treasury Yields Peaked?

Last Friday, U.S. Treasuries continued their recent rebound after the non-farm payroll data was released. Gang Hu, managing partner at Winshore Capital Partners, stated:

"Unless the CPI is significantly higher than expected, the Fed's baseline plan remains to cut rates this month, as they believe current policy is still restrictive, so I think U.S. Treasury yields have peaked."

This expectation has given investors a breather from the selling pressure on U.S. Treasuries—after Trump's victory, his tariff and tax cut plans raised market concerns about a resurgence of inflation, leading to rising Treasury yields. However, the market then speculated that the Fed would cut rates again in December to achieve a soft landing for the economy, causing yields to retreat.

Currently, the 10-year U.S. Treasury yield has fallen from a high of 4.5% on November 15 to 4.15%.

However, due to significant uncertainty regarding future policy direction, this calm may not last long—Trump's tax cuts could inject more stimulus into an already strong economy, further increasing the deficit and accelerating Treasury sales, putting pressure on the bond market. At the same time, Trump's tariff policies remain an unknown factor that could push up import prices and drag down global trade.

In the face of these uncertainties, traders and Fed policymakers may take a wait-and-see approach, limiting yields in the Treasury market. For example, swap pricing indicates that policymakers may pause rate cuts at the January meeting. Tracy Chen, portfolio manager at Brandywine Global Investment Management, stated:

"The U.S. economy is resilient, and the Fed may be approaching a pause point in the rate-cutting cycle, potentially pausing early next year to recalibrate based on Trump's policies and upcoming data."