Wall Street Gains as Weak Factory Data Bolsters Fed Rate Cut Bets
The 10-year Treasury yield fell to a multi-week low after the 10th straight month of manufacturing contraction, fueling investor optimism for monetary easing in 2026.
U.S. stocks advanced and government bond yields declined as signs of a cooling economy bolstered investor hopes that the Federal Reserve will move to cut interest rates in 2026.
The yield on the benchmark 10-year U.S. Treasury note fell to 4.15%, its lowest level in several weeks, as traders piled into government debt. The move in the bond market, part of a global drop in yields, signals growing conviction that the central bank will pivot to monetary easing to support the economy.
Fueling the optimism was the latest report from the Institute for Supply Management (ISM), which showed that U.S. manufacturing activity continued to languish. The ISM Manufacturing PMI registered 47.9% in December, marking the tenth consecutive month the index has been in contraction territory below the 50% threshold. The prolonged weakness in the factory sector is being interpreted by investors as a key reason for the Fed to consider lowering borrowing costs.
Lower interest rates reduce the cost of capital for corporations, which can boost earnings and support higher stock valuations. They also increase the appeal of equities relative to the fixed returns offered by bonds.
Dovish commentary from Federal Reserve officials has added to the bullish sentiment. As reported by financial news outlets, Minneapolis Fed President Neel Kashkari recently expressed concern over a potential rise in unemployment. More pointedly, Federal Reserve Governor Stephen Miran suggested that significant rate cuts will be justified in 2026 to normalize policy as inflation subsides.
Following these developments, money markets have moved to fully price in the equivalent of two quarter-percentage-point rate cuts for 2026. According to analysis from Morningstar, bond futures now imply about 50 basis points of easing over the course of that year.
However, the path to lower rates is not without potential hurdles. While the headline PMI number signaled economic weakness, the Prices Paid component of the same ISM report remained elevated at 58.5%. This indicates that inflationary pressures persist in the supply chain, a fact that will likely keep Fed officials cautious about declaring a complete victory over inflation.
For now, investors are focused on the potential for a policy pivot. Technology and other growth-oriented sectors, whose valuations are particularly sensitive to interest rate expectations, were among the market's top performers. As the market looks ahead, all eyes will be on upcoming inflation and employment data, which will be critical in shaping the Federal Reserve's stance in the coming months.