Chances of Fed rate cut in December cool and cracks appear in AI narrative

As of November 15, 2025, global financial markets experienced significant volatility this week.The U.S. federal government has experienced the longest shutdown in history (43 days in total from October 1 to November 12, 2025), resulting in the permanent loss of key data such as October non-farm employment and October CPI. The market is trading in a data vacuum, with recurring emotions.

1. The probability of the Federal Reserve cutting interest rates in December drops sharply to less than 50%

After the September FOMC meeting, the market was 100% pricing in a 25bp interest rate cut in December, mainly based on the dot plot of that month where most officials expected the median federal funds rate to be in the range of 4.25-4.50% by the end of 2025 (that is, another 50bp cut, one of which was in December).However, the minutes of the October interest rate meeting and the statements of many Fed officials since November have completely changed this expectation.

1. Latest statements from key officials (November 4-14, 2025)

• Federal Reserve Governor Waller (2025.11.13): There is currently no sufficient reason to continue cutting interest rates in December unless future data deteriorates significantly.

• Richmond Fed President Barkin (2025.11.12): Prefers to pause in December and observe the implementation of the tariff policy.

• Boston Fed President Collins (2025.11.8): The labor market remains stable, inflation has not returned to 2%, and there is no rush for further easing.

• Minneapolis Fed President Kashkari (2025.11.14): Remain highly vigilant about the risk of inflation accelerating again.

2. Current latest market pricing (CME FedWatch Tool, November 15)

• Probability of maintaining 5.25-5.50% at the December 17 interest rate meeting: 52.4%

• Probability of interest rate cut by 25bp: 47.6%

• Probability of interest rate cut by 50bp: almost 0

3. core points of dispute

• Inflation: CPI is permanently missing in October, but core PCE is still 2.7% in September, with an annualized rate of 2.6% in the past six months, still above the 2% target.

• Employment: Nonfarm payrolls increased by only 123,000 in September (significantly lower than expected), and the unemployment rate rose to 4.2%. However, data for October is missing, and the number of people continuing to apply for unemployment benefits continued to rise moderately in the first two weeks of November.

• Impact of tariffs: The market generally expects that Trump will implement 10-20% general tariffs + 60% tariffs on China during his second term.The traditional view is that tariffs push up inflation, but the latest research paper “Empirical Evidence from 150 Years of U.S. Tariff History” released by the Federal Reserve Bank of San Francisco on November 11 points out: Historically, the net impact of tariffs on CPI is -0.2 to -0.5 percentage points, while significantly increasing the unemployment rate, which is a combination of “supply-side tightening + demand suppression”, which often eventually leads to the Federal Reserve to cut interest rates more significantly.

4. The debate over the real neutral interest rate. The current federal funds rate is 5.33%, and the market has extremely different estimates of the actual r* (equilibrium real interest rate):

• The latest estimate of the New York Fed ACL model: r* is about 1.0-1.2%

• If r*=1%, the current actual interest rate is about 5.33%-2.4%=2.93%, which is obviously restrictive

• If r* has risen to 2% due to productivity improvements, the actual restrictiveness drops significantly

Because of the above four uncertainties (inflation path, true employment situation, actual impact of tariffs, r* level), there are obvious differences within the FOMC, and the interest rate cut in December has changed from “certain” to “50-50”.

2. Two obvious cracks appear in the AI capital expenditure narrative.

Since 2025, AI-related capital expenditures have been the main narrative driving US stocks (especially the Magnificent 7), with the cumulative announced amount exceeding US$1.5 trillion.However, since November, the bond market and accounting disputes have posed dual pressures.

1. Bond Market: Credit Default Swaps (CDS) Significantly Broader

• Oracle 5-year CDS: about 45bp at the end of October → hit a maximum of 152bp on November 14 (an increase of 237%)

• CoreWeave (AI computing power leasing unicorn, plans to issue $15 billion in bonds/loans in 2025) 5-year CDS: about 280bp in early November → up to 980bp on November 14

• Comparison: CDS of core ultra-large-scale cloud service providers such as Meta, Google, Amazon, and Microsoft still remains at a historical low of 20-40bp.

Bond market signals indicate that investors’ confidence in the “pure AI concept + high-leverage data center construction” model is wavering, while they still maintain confidence in ultra-large-scale players with abundant cash flow.

2. Accounting controversy: Is the GPU depreciation life too long? Well-known short seller Michael Burry publicly questioned on his new Twitter account on November 12:

• Currently, Meta, Google, and Microsoft generally use 4-6 years of GPU depreciation life (mostly 5 years)

• However, in AI training clusters, more than 90% of the computing power requirements are concentrated on the latest generation of chips, and the utilization rate of older generation chips is declining rapidly.

• Historical experience: The average depreciation life of Facebook data center servers from 2018 to 2022 is only 3.2 years

Estimated impact (taking Meta as an example): Meta’s capital expenditure guidance for 2025 is US$145-160 billion, of which approximately 60-70% is AI-related servers/GPUs.If the depreciation period is shortened from 5 years to 3 years:

• Depreciation charges will increase by approximately $18 billion to $22 billion in 2026

• Equivalent to a reduction of approximately 9-11% in 2026 EPS (based on current analyst consensus expectations)

3. Latest capital expenditure data (2025 Q3 financial report and latest guidance)

• Microsoft: Fiscal 2025 CapEx guidance raised to $75 billion (+25%)

• Meta: CapEx 60-65 billion in 2025 (median +55% year-on-year)

• Google: Expected to be US$55-60 billion in 2025

• Amazon (AWS): Expected to reach over $70 billion in 2025

• The four companies’ combined AI-related CapEx is expected to exceed US$270 billion in 2025

Despite the depreciation controversy, the market currently still tolerates extremely high valuations:

• Meta 2026e P/E 24x (10-year average 18x)

• Microsoft 2026e P/E 32x

• Nvidia 2026e P/E 38x (latest Wall Street price target range $140-$220)

3. Technical aspects and seasonal factors

S&P 500 Index:

• On November 13, it hit the lowest level of 5728 points. It once again accurately stepped back on the 50-day moving average (5718 points) and then rebounded quickly.

• It is currently located near 5950 points, down 1.8% for the whole week, and still up 3.2% during the month.

• The average value of VIX from November to now is 18.5, which is significantly lower than that in October.

• Historical data: Since 1950, the S&P 500 has risen by an average of 1.7% between Thanksgiving and New Year (the holiday effect is real)

4. Key events next week (November 17-21)

1. data

• October non-farm employment report (delayed release): expected +220k (to make up for the low base in September)

• Retail sales, PPI, industrial production in October

• November Philadelphia Fed Manufacturing Index

2. financial report

• Nvidia (after-hours on November 19): The market expects Q3 revenue to be US$38 billion (+94% year-on-year), and Q4 guidance is US$41-43 billion. The current consensus is that EPS for fiscal year 2026 is US$4.25. If the guidance exceeds expectations by 10%, the corresponding target price can reach more than US$200.

5. Summary and Prospects

The core contradiction in the current market:

1. Whether the Fed cuts interest rates in December depends on whether data in the next two weeks are significantly lower than expected

2. AI Narrative has credit concerns among fringe players, but remains strong supported by the cash flow of core hyperscale players

3. The 50-day moving average has been successfully supported three times + seasonal forces are still bullish

Baseline scenario (probability 60%): Although the non-agricultural sector may be strong in October due to filling the gap, there is a high probability that the data will fall back in November and December. The actual implementation of superimposed tariffs will have limited economic disruption in the early stage. The Federal Reserve still cuts interest rates by 25bp in December. Nvidia’s financial report exceeds expectations. The S&P 500 will challenge the 6500-7000 point range before the end of the year.

Pessimistic scenario (25% probability): If the October data is stronger than expected, the suspension of interest rate cuts in December is a foregone conclusion, and the AI depreciation controversy is brewing, the index may backtest around 5,500 points.

Optimistic scenario (probability 15%): Data is weaker than expected + Nvidia guidance is significantly raised, interest rate cuts in December return to pricing, and a direct impact on 7,200 points before the end of the year.