Global equity markets experienced a broad-based recovery on Tuesday as weak United States manufacturing data reinforced expectations for Federal Reserve interest rate cuts at the upcoming December policy meeting.
The Institute for Supply Management reported its manufacturing index fell to 48.2 in November, marking the ninth consecutive month of contraction and providing central bankers with compelling evidence of economic softening requiring monetary policy accommodation.
Asian equities led the advance with South Korea's Kospi surging 1.8 percent and Japan's Nikkei gaining 0.5 percent after Monday's sharp decline triggered by rising Japanese bond yields.
Hong Kong's Hang Seng rose 0.8 percent, while European stocks edged 0.1 percent higher, supported by strength in banking shares, amid expectations of lower funding costs from central bank easing across multiple economies.
How Weak Factory Numbers Changed Fed Rate Expectations
The manufacturing sector's continued contraction represented the longest downturn since the global financial crisis, with new orders, production, and employment components all showing deterioration from previous readings.
This comprehensive weakness across key sub-indices strengthened the case for Federal Reserve easing, pushing market-implied probabilities for a December quarter-point rate reduction to 87 percent according to CME Group's FedWatch Tool.
Traders rapidly adjusted their expectations following the data release, with December Fed funds futures pricing in significantly higher odds of monetary policy accommodation compared to earlier in the trading session.
The dovish repricing reflected market recognition that sustained manufacturing weakness, combined with softening labor market indicators, created compelling conditions for the Federal Open Market Committee to resume its easing cycle after pausing rate reductions in recent months.
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Traders now price in an 87 percent probability of a quarter-point Fed rate cut at the December 9-10 meeting, up significantly from earlier estimates following the latest manufacturing contraction data.
Asian Markets Lead Global Recovery After Japan Volatility
South Korean equities outperformed regional peers as technology and export-oriented companies benefited from both domestic monetary easing expectations and anticipated United States rate reductions that would narrow yield differentials, pressuring regional currencies.
Japanese markets recovered from Monday's selloff triggered by Bank of Japan Governor Kazuo Ueda's comments suggesting potential policy normalization discussions at the December 18-19 meeting.
The Nikkei's rebound reflected investor relief following a successful auction of 10-year Japanese government bonds that received bids exceeding the 12-month average, stabilizing yields after they reached a 17-year high of 1.88 percent.
This technical stabilization in Japan's fixed-income market removed a key source of global volatility, allowing risk assets across Asia to resume their upward trajectory, driven primarily by expectations of United States monetary policy.
Fed Officials Signal Dovish Stance on Labor Market Risks
Federal Reserve Governor Christopher Waller and San Francisco Fed President Mary Daly provided explicit support for December rate cuts last week, citing vulnerability in labor market conditions as the primary justification for policy easing.
Waller emphasized that inflation pressures appeared contained while employment indicators warranted accommodation to prevent broader economic weakening from taking hold across multiple sectors.
The coordinated messaging from multiple Federal Reserve officials created a powerful dovish signal that reinforced market expectations ahead of the critical manufacturing data release.
This preemptive communication strategy helped markets process the weak factory numbers constructively rather than reactively, establishing a clear framework where additional evidence of economic softening would translate directly into higher probabilities of monetary policy accommodation.
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Japanese Bond Auction Stabilizes Global Fixed Income Markets
The closely watched Japanese 10-year government bond auction exceeded expectations with strong investor demand that eased concerns about accelerating monetary policy normalization in the world's third-largest economy.
Bond yields retreated from recent highs following the successful auction, easing pressure on regional equities and providing global fixed-income markets with much-needed stability after Monday's volatility.
This technical stabilization in Japanese rates created constructive conditions for cross-asset positioning, allowing investors to focus on the more favorable United States monetary policy outlook rather than regional central bank divergence.
The combination of successful auction dynamics and supportive United States data created ideal conditions for risk assets to extend gains across multiple time zones and market segments.
What December FOMC Meeting Will Likely Deliver for Markets
Market participants now anticipate the Federal Reserve will deliver a quarter-point rate reduction at its December 9-10 meeting, representing the continuation of monetary policy normalization following earlier cuts earlier in the year.
The combination of manufacturing contraction, softening labor market indicators, and contained inflation pressures creates textbook conditions for the type of measured easing central bankers prefer to maintain economic stability.
Investors positioning for the FOMC decision will monitor upcoming employment data releases particularly closely, as final labor market readings could influence both the timing and magnitude of anticipated rate reductions.
The current market consensus reflects high confidence in December easing but acknowledges that unexpectedly strong jobs data could prompt Federal Reserve officials to adopt a more measured approach to subsequent policy meetings in 2026.
Global financial markets enter the final week before the Federal Reserve's pivotal December decision with constructive momentum, driven by synchronized dovish signals from United States policymakers and stabilizing technical conditions in Japanese fixed-income markets.
Equity investors appear well-positioned to benefit from anticipated monetary policy accommodation, though vigilance regarding labor market developments remains essential as final data points determine whether current rate cut probabilities solidify into consensus expectations or face meaningful revision.
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