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Video: CIO's Ulrike Hoffmann-Burchardi on investing in TRIOs (11:26)

Podcast: CIO's Dominic Schnider on the Fed, Asia FX, and more (12:30)

US stocks are sitting at record high levels as markets look to key jobs data today that could shape the Federal Reserve’s next move. The S&P 500 has risen 0.7% so far this week, bringing its year-to-date gains to 27.4%. US Treasuries have also advanced in recent weeks, with the 10-year yield falling 26 basis points since mid-November.

Ahead of the next Federal Open Market Committee (FOMC) meeting on 17-18 December, today’s labor report and next week’s inflation data for November will be critical in assessing whether the US central bank may start to slow down its pace of policy easing following two back-to-back interest rate cuts in September and November.

But while fed funds futures currently indicate a 30% chance of the Fed skipping the rate reduction later this month, recent data and comments from policymakers suggest that the Fed remains on the path to bringing monetary policy back to neutral.

The labor market has shown resilience amid an overall softening trend. Minutes from the Fed’s November meeting showed that policymakers saw “no sign of rapid deterioration” in the jobs market, and the Bureau of Labor Statistics’ Job Openings and Labor Turnover Survey (JOLTS) for October pointed to a notable increase in job openings, with declining layoffs. However, November’s private payrolls came in below expectations, with a downward revision to the previous month. The employment component of November’s weaker-than-expected ISM services index also fell. The nonfarm payrolls due today, therefore, are likely to be key in gauging how much the labor market has continued to soften amid strong growth in labor supply.

Inflation should moderate further, allowing the Fed to keep cutting rates. The personal consumption expenditures (PCE) price index rose 2.3% year over year in October, up from 2.1% in September, while the 2.8% increase in the core measure marked the highest level since April. However, these readings were in line with market estimates, and we expect overall inflation to continue to moderate toward the Fed’s 2% target as shelter inflation slows. We also expect potential tariffs to cause a one-time increase in the price level rather than triggering sustained higher inflation over the medium term, therefore not preventing the Fed from cutting rates.

Fed officials see more rate cuts ahead. Fed Chair Jerome Powell this week said the US central bank “can afford to be a little more cautious” as the US economy is in “very good shape,” but his remarks also suggested additional rate cuts as policymakers “try to find neutral.” In addition, Fed Governor Christopher Waller indicated earlier this week that he was leaning toward supporting a rate cut this month, while Chicago Fed President Austan Goolsbee said rates will “come down a fair amount from where they are now.” We think what’s important for investors is that further rate cuts are on the way, as noted by San Francisco President Mary Daly, who said “the point is we have to keep policy moving down to accommodate the economy.”

So, we continue to advise investors to shift excess cash into quality bonds and consider diversified fixed income strategies as lower rates erode cash returns. We also see room for equities to move higher as Fed rate cuts in non-recessionary periods have historically been favorable for the stock market.