The Fed is Flying Blind
Investors are celebrating a ghost. On December 10, the Federal Reserve delivered its third consecutive 25-basis-point rate cut, bringing the target range to 3.50% to 3.75%. On the surface, the Dow Jones Industrial Average responded by surging 646 points to a new record high on Thursday. But the internal mechanics of this rally are broken. The Federal Reserve is making these decisions with massive holes in its dashboard. Because of the 43-day government shutdown that only recently resolved, the Bureau of Labor Statistics has been unable to provide definitive data for October and November. Chair Jerome Powell admitted as much, noting that the labor market is likely weaker than the stale reports suggest. The Fed is cutting rates not because inflation is dead, but because they are terrified of a labor cliff they cannot see.
The Oracle Warning Shot
While the Dow hit records, the Nasdaq composite fell 0.3% yesterday. The culprit was Oracle (ORCL), which cratered 11% in a single session. The hardware giant reported a massive surge in capital expenditure, which means they are spending billions on AI infrastructure, but their revenue and operating income missed expectations. This is the canary in the coal mine for the AI trade. For two years, the market has rewarded companies for spending on GPUs. Now, the bill is coming due, and the productivity gains are not showing up on the bottom line. This triggered a violent rotation. Money is fleeing the high-flying tech names and hiding in value stocks like Visa (V), which jumped 6.1% after a Truist upgrade, and Goldman Sachs, which rose over 2%.
The Bear Steepener and the 2026 Dot Plot
The bond market is not buying the soft landing narrative. We are seeing a classic bear steepening of the yield curve. On December 11, the 10-year Treasury yield climbed back to 4.15% even as the Fed cut the short-term rate. This happens when investors demand higher compensation for long-term inflation risks. The December 10 FOMC statement revealed a deeply divided committee. The 9-3 vote was the most contentious since 2019. Austan Goolsbee and Jeffrey Schmid dissented, wanting to hold rates steady, while the White House’s new appointee, Stephen Miran, pushed for a 50-basis-point cut. The most alarming data point is the 2026 projection. Despite the current cutting cycle, the median Fed official now expects only one single cut for the entirety of next year. The market is pricing in two or three. That gap is where the next crash lives.
Tariffs and the Nvidia Tax
Geopolitics is now a direct line item in corporate earnings. On December 8, a Truth Social post from the White House suggested that Nvidia (NVDA) would be granted permission to sell H200 chips to China. However, the catch is a 25% government cut on all sales. This is a massive shift from the previously discussed 15%. Nvidia shares dropped 1.5% to $180.96 on Thursday because investors realize these ‘deals’ come with heavy tolls. If the U.S. government is taking a quarter of the top line, the margins that justified Nvidia’s trillion dollar valuation are under threat. Furthermore, the 43-day shutdown delayed the implementation of several tariff schedules, meaning a massive inflationary shock is likely sitting in a queue at the ports, waiting to hit the CPI in early 2026.
The Valuation Trap
Small caps are finally moving, but for the wrong reasons. The Russell 2000 rose 1.2% on Thursday, outperforming the S&P 500. This is not a sign of economic strength, it is a desperate search for yield in ‘oversold’ sectors. Investors are ignoring the fact that initial jobless claims just jumped to 236,000 for the week ending December 6. This is the highest level of the year. If the labor market is truly cooling this fast, the small companies with high debt loads in the Russell 2000 will be the first to break, regardless of where the Fed sets the overnight rate. The risk is that the market is buying the ‘pivot’ while ignoring the ‘recession’ that usually follows it.
| Sector / Asset | Dec 11 Performance | Contextual Risk |
|---|---|---|
| Dow Jones Industrial | +1.3% | Driven by rotation into non-tech blue chips. |
| Nasdaq Composite | -0.3% | Oracle earnings miss (-11%) weighing on AI sentiment. |
| Visa (V) | +6.1% | Value rotation beneficiary; upgraded by Truist. |
| 10-Year Treasury Yield | 4.15% | Yields rising despite Fed cuts (Bear Steepening). |
| Initial Jobless Claims | 236,000 | Highest reading of 2025; signaling labor weakness. |
Watch the bond market closely as we move into the final weeks of the year. The current spread between the 30-year yield and the 3-month bill has widened to 1.05%, the largest gap since July 2022. This suggests that while the Fed is desperately trying to lower short-term borrowing costs, the market is pricing in a future of persistent inflation and high government deficits. The ‘pivot’ of 2025 may go down in history as the moment the central bank lost control of the long end of the curve. The real test comes on January 13, 2026, when the first clean CPI report in months is released. That data point will determine if the Fed’s December gamble was a masterstroke or a blind mistake.
