Trump Narrows Fed Chair List, Spurring Market Volatility and Rate-Cut Bets

U.S. stock futures edged higher on Monday as investors braced for a data-packed week that could shape the Federal Reserve's policy path in 2026. The delayed November payrolls report and upcoming inflation data will be closely watched, with traders seeking clues on when the next rate cut might come. Market sentiment was also influenced by reports that President Donald Trump has narrowed his list of candidates for the next Fed chair.

Investors have increasingly positioned for rate cuts amid persistent inflation concerns, despite the Fed's recent rate cuts failing to bring inflation down to its 2% target. The uncertainty around the Fed's future leadership has led to heightened volatility in markets, with traders adjusting to shifting odds between Kevin Warsh and Kevin Hassett as potential nominees. JPMorgan's Jamie Dimon reportedly supports Warsh, who is seen as a more dovish candidate.

Gold prices rose on Monday, with futures in New York up 1.1% to $4,377.40 an ounce, as investors sought safe-haven assets in an environment of growing macroeconomic uncertainty. The dollar index remained flat, while platinum and silver also saw gains. Analysts noted that the delayed economic data and the Fed's upcoming messaging will play a key role in shaping market sentiment over the next few days.

Market Reactions to Trump's Policy Signals

President Trump's comments on reclassifying marijuana as a less dangerous drug added another layer of uncertainty to market dynamics. The potential executive order sent weed stocks higher, as investors anticipated regulatory clarity and new investment opportunities in the cannabis sector. The announcement also raised broader questions about how regulatory shifts could influence financial markets, particularly in the lead-up to key economic data releases.

Meanwhile, U.S. Treasuries showed signs of nervousness about the Fed's future direction, with risk premia rising in anticipation of changes in monetary policy. The yield curve steepened to its widest in four years, reflecting growing concerns over inflation and policy uncertainty. Analysts pointed to the political risks surrounding the Fed's independence, particularly with the looming presidential appointment and the potential for conflicting signals from key economic policymakers.

What Analysts Are Watching

Investors are closely monitoring the November CPI data, which will be released within the next few hours. Economists expect headline inflation to show a slight increase, maintaining the recent upward trend since April, while core inflation is seen holding steady at 3%. A weaker-than-expected report could accelerate rate-cut expectations and weigh on the dollar, while a stronger reading may delay easing and support the greenback. The report will be closely watched as investors gauge the divergence between U.S. and global policy paths.

In the energy sector, Phillips 66 announced higher spending plans for 2026, with projected capital expenditures rising to $2.4 billion from $2.1 billion in 2025. The increase reflects the company's focus on expanding midstream and refining operations. Separately, Korea Zinc announced a $7.43 billion smelter project in the U.S., signaling confidence in long-term industrial growth.

Risks to the Outlook

Despite the near-term focus on data and central bank decisions, underlying risks to the economic outlook remain. Persistent inflation, geopolitical tensions, and shifting Fed policy expectations continue to weigh on investor sentiment. The uncertainty around Trump's Fed chair appointment has also introduced a wildcard element, with some analysts warning that political influence could reshape the central bank's approach to inflation and rate-setting.

Moreover, the upcoming BoJ rate decision is expected to have ripple effects across global markets, particularly in the context of carry trades and currency flows. If the Bank of Japan surprises the market with a larger-than-expected hike, it could trigger further volatility in equities and commodities. The risk of a weaker dollar and a more aggressive tightening cycle in Asia adds to the uncertainty as 2025 draws to a close.

What This Means for Investors

For now, investors are advised to remain cautious ahead of the CPI report and central bank decisions. The data will provide critical insights into the Fed's policy trajectory and the broader health of the economy. Traders who have positioned for rate cuts may need to adjust their strategies if inflation remains stubbornly high. Meanwhile, those with exposure to risk assets are advised to monitor central bank communication and economic indicators for early signs of market direction. As one analyst noted, the key is to stay alert to shifting policy signals and macroeconomic developments in the coming weeks.