The Christmas holiday is approaching, but many investors find themselves facing daunting challenges. The US stock market rebounded on the last trading day of last week, but this was not enough to overcome the twin blows of the threat of a government shutdown and the Fed's hawkish stance on interest rate cuts. Last week, the Dow Jones Industrial Average ended a ten-day decline, down a total of 2.3%; the Nasdaq and S&P 500 Index fell 1.8% and 2% respectively.

After a dramatic week, investors will receive fewer economic data releases this week. Important data includes the US Conference Board Consumer Confidence Index for December to be released on Monday, and the number of initial unemployment claims in the USA for the week ending December 21, to be announced on Thursday.

US markets will close early on Tuesday and will not reopen until Thursday. However, this week's shortened trading hours due to the holiday will still give Wall Street the chance to interpret the Fed's expectations for interest rate decisions in the coming year. Fed officials are now predicting a smaller cut in 2025. In the last few trading days of this year, the Fed will revert to a 'higher for longer' policy stance.

In light of the Fed's hawkish interest rate cuts, investors are questioning whether the 'Christmas rally' will be absent. The 'Christmas rally' refers to the last five trading days of the year and the first two trading days of the new year. Historically, the US stock market tends to perform positively during these seven days.

Some analysts believe that the US stock market may face certain pullback and volatility pressure, depending on whether US Treasury yields rise further. Matt Maley, Chief Market Strategist at Miller Tabak, stated that besides the uncertainty regarding the Fed's interest rate cut path, another concern for the US stock market is the rising yield on US government bonds. Data shows that the benchmark 10-year Treasury yield reached 4.55% last Monday, the highest level in more than six months.

The market is still grappling with the effects of the Fed's hawkish interest rate cuts. Data released last Friday indicated that the Fed's preferred underlying inflation indicator was mild in November, leading to a rebound in US stocks on that day.

The recent performance of the Fed indicates concern about ongoing inflation in the coming months. Some market participants point out that threats which could undermine the Fed's anti-inflation efforts include economic policies proposed by the incoming Trump administration such as tax cuts, expelling illegal immigrants, and imposing tariffs.

Some analyses suggest that the Fed's change in attitude is a Trump-like preemptive move rather than merely a reactive one to the inflation data. Fed Chair Powell insists that the Fed will not react to potential policy changes unless those policies are actually implemented and can be properly analyzed.

David Alcaly, Chief Macro Economic Strategist at Lazard Asset Management, stated: "The market and the Fed's hawkish stance is less related to the inflation trajectory, and more related to the possibility of changes in inflation policies such as new tariffs." FWDBONDS Chief Economist Chris Rupkey mentioned that Trump's spending, tax cuts, and tariff plans may hinder the downward trend of inflation, "After three consecutive rate cuts, it is expected that the frequency of rate cuts by the Fed in its eight meetings in 2025 will significantly decrease."

However, a lot can happen in terms of policy. Chris Zaccarelli, Chief Investment Officer at Northlight Asset Management, stated: "The only thing we can be sure of is that there will be more uncertainty at the beginning of 2025."

Notably, Bank of Japan Governor Kazuo Ueda will deliver a speech this Wednesday. The Bank of Japan chose to remain unchanged last week and expressed a cautious attitude towards rate increases. Kazuo Ueda stated at the press conference following the Bank of Japan's rate decision that more information regarding Japanese wages and Trump's policies is needed before the central bank decides to raise rates. Whether Ueda's speech will signal a rate increase in January next year has become a focal point for the market.

Charu Chanana, Chief Investment Strategist at Saxo Markets, believes that Ueda's statement maintains "maximum flexibility" for the January decision, which is not entirely unexpected. After the Bank of Japan announced its rate decision last week, analysts from Bank of America and Nomura Holdings pushed back their expectations for the next rate hike by the Bank of Japan from January next year to March. Analysts believe that if the Bank of Japan decides to raise rates in March or later, the yen Exchange Rates may face further weakening risks.

Editor/ping