Fed Daly's December Rate Cut Comments: Market Reactions & AI Sector Implications

San Francisco Fed President Mary Daly’s unexpected support for a December rate cut—citing fragile labor markets and non-linear deterioration risks—shifted market expectations, with CME FedWatch showing an 81-85% probability of a 25bp cut [0,1]. U.S. markets rallied: Russell 2000 (small-cap) led gains (+2.10%), followed by Dow Jones (+1.36%) [2]. Sector performance was mixed: Industrials (+1.30%) and Healthcare (+1.26%) outperformed, while Real Estate lagged (-0.83%) [3].

The AI sector saw contrasting trends: rate cut expectations could lower capital costs for AI investments [5], but Nvidia (NVDA) fell ~6.5% due to reports of Meta negotiating a Google AI chip deal [4]. Bernstein analysts noted NVDA’s GPUs remain dominant, though competition from Google’s TPUs is intensifying [4].

1. Rate Sensitivity
   : Small-cap stocks (Russell 2000) benefited most from rate cut expectations, highlighting higher monetary policy sensitivity [2].
2. AI Duality
   : Long-term AI investment may rise with lower rates, but near-term competition (Meta-Google deal) is a headwind for NVDA [4,5].
3. Policy Uncertainty
   : Delayed economic data (Oct CPI) due to government shutdown leaves the Fed with incomplete decision-making info [4].
4. Sector Rotation
   : Investors shifted to cyclicals (Industrials) and defensives (Healthcare), balancing growth optimism and risk mitigation [3].

• Fed decision deviation from market expectations could trigger a reversal [1].
• NVDA faces growing competition from Google’s TPUs [4].
• Labor market deterioration risks as flagged by Daly [0].

• Market pullbacks from policy uncertainty may offer entry points [5].
• Lower rates could accelerate AI project funding [5].

• Rate cut probability: 81-85% (CME FedWatch) [1].
• Market performance: Russell 2000 (+2.10%), NVDA (-6.5%) [2,4].
• Sector leaders: Industrials (+1.30%), Healthcare (+1.26%) [3].
• Key uncertainties: Delayed data, Meta-Google deal details, Fed split [0,4].