A Perfect Setup for Volatility — and Most Investors Don’t See It Coming

Key Takeaways

• A 43-day U.S. government shutdown erased major economic releases, forcing markets to trade without CPI or jobs data.¹

• Fed officials are split on a possible December rate cut, keeping volatility elevated and narrowing market leadership.²

• Europe shows rare stability: PMIs remain above 50 and inflation sits near the ECB’s 2% target, while the UK continues to stagnate.³⁹

• Japan inches closer to a historic policy shift as inflation stays above target and exports surprise higher.⁴¹¹

• China’s slowdown contrasts with India’s strong, disinflationary growth trajectory, while Latin America prepares its easing cycle.

Markets spent the past week sorting through a macro environment that suddenly lost its most important signals. A 43-day federal shutdown wiped out key U.S. data releases, including October’s CPI, and pushed the jobs report into next month.¹ The vacuum created fertile ground for speculation over whether the Federal Reserve might move toward a December cut.² Stocks slid early, with the S&P 500 down roughly 2% before a late-week rebound softened the losses.²

The missing U.S. data overshadowed a steadier global backdrop. Europe’s expansion continued, with the eurozone flash PMI marking its eleventh straight month above 50.³ Inflation hovered close to the ECB’s 2% target.³ Japan, meanwhile, showed renewed price pressures as core CPI accelerated to 3.0%—its highest in more than three years.⁴ Risk appetite cooled accordingly: global equity inflows fell to their lowest level in over a year, while bond funds attracted nearly $9 billion as investors leaned defensive.⁵ Treasury yields eased, steepening the curve slightly but leaving it firmly inverted, a reminder that markets still harbor doubts about the growth outlook.⁶

United States: Flying Blind Into Year-End

The shutdown left markets without a crucial read on price levels or employment conditions. The October CPI never arrived.¹ Employment data were delayed. That absence forces investors to trade around narratives instead of numbers. What we do know: unemployment rose to 4.4% in September, a four-year high.⁷ Inflation at last check was hovering near 3%, still above target.

This uncertainty spilled directly into monetary policy expectations. Some Fed officials argue that rising unemployment supports a December cut. Others insist inflation remains too sticky.² Futures pricing has swung between optimism and skepticism and now sits near coin-flip odds. Volatility has crept higher as traders attempt to reconcile conflicting storylines, and the VIX recently touched its highest level since April.²

Fund flows reflected the same indecision. Equity inflows collapsed after strong early-November enthusiasm.⁵ Bond funds continued to attract fresh capital as investors looked for stability.⁵ Treasury yields drifted lower, with the 10-year settling near 4.0%, but the curve remains deeply inverted—around –45 basis points—suggesting markets still see growth risks ahead.⁶

Market leadership remains narrow. Mega-cap tech stabilized after strong earnings from Nvidia, yet the recovery lacked breadth.² Defensive pockets—utilities, healthcare, and energy—drew measured buying, and healthcare funds logged their first inflow in a month.⁵ Growth remains dominant year-to-date, but the quiet rotation toward quality indicates investors are hedging their optimism.

Europe: A Rare Period of Predictability

Europe, unusually, has become the calmest part of the global macro picture. Business activity expanded again in November, with the composite PMI unchanged near 52.³ Inflation has largely converged to the ECB’s target range.³ With price stability restored and growth holding, the ECB has paused for three consecutive meetings and signaled that its tightening cycle is effectively finished.⁸

The euro has traded near its strongest levels in almost two years.⁶ Fiscal policy across the region is set to turn slightly restrictive in 2026, but not enough to derail the recovery. Barring an energy-related setback, Europe seems positioned to enter next year with moderate growth, stable inflation, and much-improved visibility.