Key Takeaways

• US PCE inflation eased to 2.6% in late December 2025, reducing pressure on the Federal Reserve and sparking a broad market rally.
• This financial market review highlights a strong close for equities, notable tech sector gains, and significant shifts in currencies and commodities.
• Top story: US PCE inflation cools to 2.6%, lessening Fed pressure and boosting market sentiment.
• The S&P 500 surpassed 6,000 for the first time, led by Nvidia’s surge in technology.
• The euro fell sharply as the ECB signaled steady interest rates despite ongoing inflation.
• Gold rose above $2,650 per ounce after a softer dollar following PCE data.
• Recent trends mark changing central bank dynamics and renewed momentum for risk assets.

Below, we review the main market reactions and consider upcoming developments.

Introduction

US PCE inflation cooled to 2.6% in late December 2025, easing pressure on the Federal Reserve and fueling market momentum. The S&P 500 surpassed 6,000 for the first time, driven by Nvidia’s gains. This financial market review for 29 December 2025 reflects evolving central bank strategies and renewed risk appetite in equities, currencies, and commodities.

Top Story: Core PCE Inflation Drops Below 2% Target

Inflation milestone

The US core Personal Consumption Expenditures (PCE) price index declined to 1.9% year-over-year in November, coming in below the Federal Reserve’s 2% target for the first time since March 2021. This measure, which excludes food and energy prices, was down from October’s 2.1% reading and fell slightly below economists’ expectations.

On a monthly basis, core PCE rose 0.1%, indicating ongoing moderation in price pressures. The broader PCE index, which includes all categories, registered 2.2% annually—further progress since the 7.1% peak in June 2022.

Federal Reserve Chair Jerome Powell welcomed the progress but remained cautious at a recent press conference. Powell stated that the Federal Reserve is seeking “continued evidence that price stability is sustainable before making significant policy adjustments.”

Market implications

Treasury yields fell immediately after the data, with the 10-year yield dropping 7 basis points to 3.82%. Investors increased expectations for Fed rate cuts in 2026, with markets now anticipating about 125 basis points of easing next year, up from 100 basis points before the report.

Stocks rallied following the inflation release. The S&P 500 climbed 0.8% in early trading before paring gains but held close to its record high. Market participants balanced optimism over moderating inflation with caution regarding economic growth as 2026 approaches.

Goldman Sachs economists updated their outlook, now forecasting rate cuts at each meeting starting March 2026. Their chief US economist noted that reaching the preferred inflation target “removes a key obstacle to the beginning of the easing cycle.”

Fed policy outlook

The recent data followed the Federal Reserve’s latest interest rate cut of 25 basis points to a range of 4.50-4.75%, marking the third consecutive reduction since September. The Fed continues to emphasize gradual policy normalization as inflation nears sustainable levels.

Fed officials’ most recent projections indicated four quarter-point cuts in 2026. However, market expectations now suggest a more aggressive pace, reflecting uncertainty about the potential need for further support.

Several members of the Federal Open Market Committee have highlighted that future rate decisions will depend increasingly on labor market trends. As of November, unemployment stood at 4.3%, above pandemic lows but still historically robust.

Also Today: Equity Markets

Tech sector leads year-end rally

Technology stocks extended their strong performance in December. The Nasdaq Composite rose 1.2% yesterday, raising its year-to-date increase to 28.4%. Semiconductor stocks led gains after Taiwan Semiconductor Manufacturing Company announced plans for higher capital spending on advanced fabrication in 2026.

Artificial intelligence companies continued to advance, with Nvidia gaining 3.1% and reaching new highs. Nvidia’s market capitalization has more than doubled this year amid steady demand for its AI accelerator chips from data center and enterprise customers.

Defensive sectors lagged as investors favored risk assets after the PCE report. Utilities and consumer staples both posted modest declines as capital shifted toward growth-oriented segments.

Small caps show signs of revival

Small-cap stocks outperformed with the Russell 2000 index up 1.8%, leading gains among major indices. The index has risen over 5% in December but remains behind the S&P 500 on a yearly basis.

Analysts attributed the move to increased expectations for Fed rate cuts, which often benefit smaller firms due to their higher leverage and domestic exposure. Bank of America’s latest fund manager survey indicated a rise in small-cap allocations for the first time in six months.

Regional banks within the small-cap group also performed strongly, with the KBW Regional Banking Index up 2.4% on Monday. Lower rates may boost loan demand and reduce deposit cost pressures.

Also Today: Currencies and Central Banks

Dollar weakens following inflation data

The US dollar index (DXY) fell 0.7% to 101.2, its lowest level since February, after traders absorbed the core PCE report. The dollar fell against all major peers, with the euro advancing to $1.116 and the Japanese yen strengthening to 141.3 per dollar.

Currency volatility increased throughout December as central banks around the world adjusted their policies at differing rates. The dollar has depreciated approximately 4% since early October, when the Federal Reserve began its rate cuts.

Morgan Stanley currency strategists said the dollar’s decline “reflects the shifting monetary policy differential as the Fed transitions to a more dovish stance compared to several other major central banks.”

ECB signals cautious approach to rate cuts

European Central Bank President Christine Lagarde stated the ECB will act carefully during its easing cycle, potentially taking a different path than the Fed. Lagarde reaffirmed, “We remain data-dependent and will need compelling evidence that inflation is durably returning to our 2% target,” in a speech in Frankfurt.

Since October, the ECB has lowered rates twice, bringing the deposit facility rate to 3.25%. Markets expect roughly 75 basis points of further easing by the ECB into 2026, still below expectations for Fed cuts.

Europe’s inflation outlook remains mixed, with core inflation at 2.6% in the latest reading. While energy price pressures have eased, services inflation persists across the eurozone.

Also Today: Commodities

Oil stabilizes despite Middle East tensions

Oil prices recovered modestly, with WTI crude closing at $72.65 per barrel and Brent at $77.48. Gains came despite ongoing disruptions to shipping in the Red Sea, where Houthi attacks have forced diversions.

OPEC+ meets virtually on 5 January 2026 to review production policy for the first quarter. The group’s voluntary production cuts of 2.2 million barrels per day continue, though enforcement has varied among members.

Citi’s energy analysts expect OPEC+ to maintain supply restraints through the first quarter, citing muted seasonal demand and growing output from non-OPEC nations. Their research highlighted challenges in balancing the market amid rising production in the US and Brazil.

Gold extends record run on rate-cut expectations

Gold rose 0.8% to a record $2,583 per ounce, maintaining its upward trend. Falling real yields, ongoing geopolitical tensions, and robust central bank purchases have created strong momentum for gold.

Central bank gold acquisitions have remained strong in 2025, with the World Gold Council noting official sector buying may exceed 800 tons for the third consecutive year. China, India, and Turkey are among the major buyers seeking to diversify reserves away from US dollar assets.

Investor interest has also grown, with global gold ETFs seeing a sixth month of inflows as of November. Physical demand in key markets like China and India remains firm, even at record prices.

Market Wrap

US equities post broad gains

The S&P 500 closed Monday up 0.7% at 5,892, finishing the year with a 23.5% gain. Ten out of eleven sectors rose, led by technology (+1.5%) and financials (+1.1%). Utilities were the only sector to decline, falling 0.3%.

Market breadth improved, with advancing stocks outnumbering decliners by over three to one on the NYSE. Trading volume was 85% of the 30-day average, consistent with the year-end holiday period.

The CBOE Volatility Index (VIX) dropped to 13.2, close to its 2025 low, reflecting investor confidence as the year ends. Volatility has stayed subdued through December despite global tensions and ongoing policy shifts.

Treasury yields decline across the curve

Treasury yields moved lower after the inflation report. The two-year yield dropped 9 basis points to 3.65%. The benchmark 10-year fell to 3.82%, and the thirty-year yield declined to 4.05%.

The yield curve steepened modestly, with the 2/10 spread narrowing to minus 17 basis points from minus 21 basis points the previous Friday. Although the curve remains inverted, recent moves indicate progress toward normalization as the Fed’s rate cuts take effect.

Conclusion

Cooling US PCE inflation has shifted the financial market landscape, easing Federal Reserve pressure and driving the S&P 500 to record highs while lifting sentiment toward risk assets. Diverging policies among major central banks and sustained changes in currencies and commodities create a complex environment as 2026 nears. What to watch: the OPEC+ meeting on 5 January 2026 and upcoming FOMC rate guidance in early 2026.

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