Consumer inflation remains elevated heading into this week’s Federal Open Market Committee meeting. Fiscal stimulus continues at historic levels. After being inverted for more than 2 years, U.S. Treasury 10-year to 3-month spread has turned positive.

U.S. November Consumer Price Index (December 11) increased 0.3% in November as consumer price increases accelerated from the 0.2% headline increases in the 4 prior months. The CPI basket excluding food and energy also rose 0.3% in the month. The 6-month trend in annualized core CPI increased to 3.0% as shown in the nearby chart. In December when we roll the June 2024 easy comparison, another 0.3% core CPI print would raise the 6-month annualized trend to a worrisome 3.5% rate.

I find merit in the arguments that inflation is downstream from fiscal policy. The U.S. Treasury Monthly Statement (December 11) reported that U.S. fiscal policy is highly stimulative with the Treasury spending roughly $2 for every $1 in revenue. The first 2 months of fiscal 2025 included $629B in deficit spending increasing the national debt above $36T.

In my opinion, the bi-partisan desire to deficit spend leaves the U.S. on an unsustainable fiscal track. The surprisingly resilient U.S. economy can be directly linked to ongoing fiscal stimulus. To me this is an unserious policy position that will continue to result in currency devaluation as markets increasingly doubt long-term debt repayment without debt monetization.

The FOMC is expected to cut the overnight rate by another -1/4 point on Wednesday with the futures market currently pricing this move at 97%. An unexpected pause would likely send shock waves through both debt and equity markets. Assuming the Fed cuts a quarter point, the other highlights on Wednesday should be any change in the dot plot as well as Quantitative Tightening updates.

The September 2025 Fed Funds SEP was 3.4%. The current futures market forecast December Fed Funds in the 375-400 bps range. We should expect the dot plot to trend hawkish in the update. I expect QT to remain unchanged as Powell commented in November that “it’s something that we’re just beginning to think about.”

Quarter to date the U.S. Treasury curve has twisted from deeply inverted to almost a flat line. Short term rates have followed the FOMC rate cut path while longer duration rates have moved higher.

Finally, the NFIB Small Business Optimism Index (December 10) is the latest sentiment survey to rocket higher post-election. The report summarized that, “the Optimism Index rose by 8 points in November to 101.7, after 34 months of remaining below the 50-year average of 98. This is the highest reading since June 2021. Of the 10 Optimism Index components, nine increased, none decreased, and one was unchanged. Following last month’s record high of 110, the Uncertainty Index declined 12 points as business owners became more certain following the election.”

Mid-Cap Banks

The mid-cap bank group fell -1.95% on average last week. The median group 2025 P/E is now 13.12x which is a 10.17% premium to the recent comparable period average P/E of 11.79x. The earnings yield spread (a modified version of equity risk premium) closed at a 26.27% premium to my assessment of neutral. The valuation estimate equates to a price premium of 12.59%.