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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

For markets, US Federal Reserve chief Jay Powell is the Grinch who stole Christmas. But the festive shakeout in bonds, currencies and stocks now under way in the wake of the US central bank’s latest pronouncements is a mini-crisis of investors’ own making.

Fed meetings, and the minutiae of its public statements, are always marquee events for investors, setting the tone across all major asset classes. Wednesday’s meeting, the last of 2024, always came with the potential for greater punch, given the timing — right on the cusp of Donald Trump’s second stint in the White House. 

The decision on rates itself — a quarter-point chop off the benchmark — was in line with expectations. But it went downhill from there, as the central bank’s apparent cooling on further cuts next year — an allusion to the potentially inflationary impact of Trump’s economic policies — has gone down like a mouldy mince pie.

US stocks nosedived, wiping out almost all of the gains in the S&P 500 benchmark index since Trump’s re-election day. The following morning brought a similar sea of red across Asian and European stocks too. The dollar popped higher, sending the euro and yen tumbling awkwardly hard, and US government bonds weakened, sending the yield on 10-year Treasuries forcefully above 4.5 per cent.

The Fed chair is facing some flak here. His comment in the post-meeting press conference that the year-end projection for inflation has “kind of fallen apart” is not the sort of self-assertion that investors seek in a Fed chair, and the pick-up in some inflation measures comfortably predates the reinauguration of Trump.

But markets are going through the wringer in no small part because the consensus among investors about the next steps for markets had become so intense — curdling hard around the themes of American exceptionalism in stocks and the vanquishing of inflation keeping bonds well supported. The path to an easy run in markets in 2025 had become exceptionally narrow and extremely crowded with like-minded views, and it has taken only a gentle push from the Fed to tip that out of balance.

The annual spectacle of year-ahead market outlooks from the big banks and asset managers demonstrated a near-unanimous set of views. Deutsche Bank is towards the top of the pack with its assessment that the benchmark S&P 500 index of heavyweight US stocks will ascend to 7,000 by the end of next year. After the overnight shock, that projection is 20 per cent above where we are now. It is punchy, but not wildly out of line. Core fundamental differences of opinion are hard to find. “The degree of uniformity in year-ahead projections has broken all previous records,” notes TS Lombard’s Dario Perkins.

The trouble with that was two-fold. First, it meant much, if not all, of the narrative was already baked in. Second, crowding around core themes tends to exaggerate the scale of market reactions when stuff goes wrong. Enter Powell stage left.

“Everyone’s portfolio is pointed towards US exceptionalism,” said Mike Riddell, a portfolio manager on Fidelity’s Strategic Bond Fund, speaking with some foresight the week before the Fed decision. “The consensus can be right, and we don’t see much to derail it. But if you see anything to move the narrative, you can get really violent market moves.”

We have been here before, in a range of different markets, but that does not prevent investors from making the same mistake over and over again. This time last year, Powell caught the market off guard in the opposite direction, dropping a hint of interest rate cuts that investors went on to exaggerate hugely out of proportion.

Crowded bets among investors also stung in early August, when a downbeat US labour market report blasted in to several popular and correlated market bets. In late September, deeply unloved Chinese stocks rocketed higher after Beijing unleashed stimulus measures to try and turn the hobbled economy and markets around. Investors had given China such a wide berth that stocks leapt 40 per cent in just a few days as funds piled in to a narrow entrance.

The latest ructions are a useful reminder that despite the disarming simplicity of the American exceptionalism theme, rakes are scattered all over markets for investors next year.

The assumption that the US economy will sail through the first year of Trump 2.0 is brave. Ignoring the (actually pretty obvious) banana skins, particularly around inflation, is “the ultimate ‘trust me’ trade” says Greg Peters, co-chief investment officer for PGIM Fixed Income. “It seems off to me.”

Now, investors should not assume that the Christmas holiday season will put all this angst to bed. As the final days of 2018 showed, portfolios can and do shake around wildly even when a lot of core markets are shut, on half-days, or on the go-slow. If anything, thinned-out trading volumes at this time of year can make matters worse. 

Some fund managers will be feeling sore about this year-end beating. But Powell has done us all a favour in reminding us that next year will not be for the faint of heart, and the wisdom of crowds is not always your friend.

katie.martin@ft.com

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Perplexity, an artificial intelligence-driven search engine, has closed its fourth funding round this year, tripling its valuation to $9bn as it seeks to compete with offerings from Google and OpenAI.

The $500mn round was led by Institutional Venture Partners, with involvement from Nvidia, New Enterprise Associates, B Capital and T Rowe Price, according to multiple people with knowledge of the deal. Previous investors have included SoftBank’s Vision Fund 2, Nvidia and Amazon founder Jeff Bezos, as well as several prominent names from the AI industry such as OpenAI co-founder Andrej Karpathy and Meta’s chief AI scientist Yann LeCun.

The San Francisco-based group has grown rapidly this year, with its product receiving hundreds of millions of queries a month. It has 15mn monthly active users with most of that traffic coming from the US.

The new funding will help Perplexity compete with west coast rivals in an increasingly fierce fight for engineers. “The talent war for AI is like no other time before,” according to Ali Ghodsi, co-founder and chief executive of Databricks, the AI and data analytics company that announced a $10bn fundraising round on Tuesday.

Perplexity is seeking to capitalise and improve on the search advertising system pioneered by Google, in which marketers bid to have a sponsored link placed against search queries. It is in talks with major brands to pilot advertising on its platform.  

In a sign of growing competition in the space, AI companies have recently targeted the search market by linking up chatbots to the internet. This week, OpenAI rolled out web searching for its popular ChatGPT product, while Anthropic’s Claude can perform searches through a feature called “computer use”.

Google and Microsoft, which are leaders in the $300bn digital advertising world, have also recently incorporated large language models, which power AI chatbots and make results more conversational, into their search offerings.

The latest round has pushed Perplexity’s valuation higher by nine-fold since the start of the year, in another sign of how hot start-ups developing new AI tools can draw in hundreds of millions or even billions of dollars in investment. 

After OpenAI’s $6.6bn fundraising in October — one of the largest in Silicon Valley — one person close to the company said Perplexity was inundated with unsolicited interest from new investors.

Run by former Google intern Aravind Srinivas, Perplexity raised $250mn this summer, on top of previous funding rounds in January and April.

Perplexity makes money through subscriptions. It says its annualised revenues — a projection of full-year revenues based on extrapolating the most recent month’s sales — have grown from $5mn in January to $35mn in August.

The spate of deals for lossmaking AI start-ups has stoked concern among some investors that rising valuations in the sector show all the hallmarks of a bubble, however. But even those who argue most AI valuations are increasingly detached from reality are willing to stake bets on companies they believe could be winners.

Perplexity and T Rowe Price declined to comment. IVP, B Capital, NEA and Nvidia did not immediately respond to a request for comment. The closing of the round was first reported by Bloomberg.

If you’re hoping to wake up on Christmas morning to white fluffy stuff on the ground, there’s a chance you might get your wish.

Christmas magic won’t bring snow to the majority of the country, but some parts might just get lucky, according to Scott Kleebauer, a meteorologist with the National Weather Service Weather Prediction Center.

“If you are one of those people that does get a chance to enjoy a white Christmas, definitely feel very lucky and very blessed to be able to enjoy something like that, as it looks like a lot of people this year will not be able to,” Kleebauer tells NPR.

While hopes for a white Christmas are on many minds each year, experts say the chances of experiencing one may diminish in the future, in part because of shifts in weather patterns driven by global warming.

Here is what the weather is likely to look like on Christmas Day across the country and how a changing climate may impact Christmases to come.

Will you have a white Christmas?

The areas that have the highest chances for a white Christmas — when there is at least 1 inch of snow on the ground on Christmas morning — will be out west in the Rockies, around the Great Lakes and in higher terrain in northern New England, Kleebauer says. Parts of the Appalachian Mountains across the high country of West Virginia, western Maryland and into western Pennsylvania also have a chance for snow.

There’s hope for a white Christmas in a few parts of the U.S.

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There’s also a high chance of “heavy precipitation and high elevation snow” in northern California and parts of the Pacific Northwest on Christmas Eve that will start again on Dec. 26, according to the NOAA Climate Prediction Center, or CPC.

“A storm system in the Pacific Northwest could bring mountain snow as Santa is making his rounds, and the CPC features a moderate potential for Heavy Snow Hazards in the northern Rockies, especially in the Cascade Mountains and the Bitterroot Range of Idaho,” Erica Grow Cei, meteorologist and spokesperson for the National Weather Service, tells NPR.

Most of the country is also expected to have temperatures that are “milder than average” on Christmas Eve and Christmas Day, according to NOAA. Temperatures are expected to be near normal to slightly above normal across portions of the Plains and into the southeastern portion of the country. States including Texas and Florida are forecast to see temperatures in the 70s.

This map by the Climate Prediction Center shows areas at risk of heavy snow from Christmas Day to the end of the year.

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So far, 2024 has been the warmest year on record globally and is likely to beat the record set just last year, according to NOAA. The year is also on track to be one of the warmest two years ever recorded in the contiguous U.S.

Warmer temperatures could impact future white Christmases

Historically, parts of the northern U.S., the Rockies and the Sierra Nevada Mountains have had the highest likelihood of experiencing a white Christmas, according to Kleebauer and a map by NOAA’s National Centers for Environmental Information.

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The last time the majority of America woke up to a white Christmas was nearly 15 years ago, Kleebauer says. On Dec. 19, 2009, a large snowstorm blanketed parts of the Northeast starting in Virginia and dumped more than 12 inches of snow on Boston, with snow lingering through Christmas Day. Snow also fell in other parts of the country during that time, resulting in “large snow coverage across the United States, even into those areas that don’t see white Christmases too often,” he says. Texas was one of those areas.

But because of warmer temperatures driven by climate change, the coldest temperatures are becoming less frequent in parts of the country.

This map by NOAA shows the historical probability of at least 1 inch of snow on the ground on Dec. 25. The agency says actual weather conditions on Christmas Day will vary each year.

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When looking at changes in monthly and seasonal temperatures — along with the number of snowy days — “it is clear that winter is the fastest warming season across 74% of the United States, with the northeastern United States and Upper Midwest,” says Elizabeth Burakowski, a research assistant professor at the University of New Hampshire.

Since the 1970s, the U.S. has seen rapidly warming temperatures, according to the federal government’s most recent National Climate Assessment, released by the U.S. Global Change Research Program.

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“As the world’s climate has shifted toward warmer conditions, the frequency and intensity of extreme cold events have declined over much of the US, while the frequency, intensity, and duration of extreme heat have increased,” the assessment says. “Across all regions of the US, people are experiencing warming temperatures and longer-lasting heatwaves. Over much of the country, nighttime temperatures and winter temperatures have warmed more rapidly than daytime and summer temperatures.”

As temperatures rise, more precipitation is expected to fall as rain instead of snow, particularly in areas in the western part of the U.S., the assessment also found. These temperatures will also lead to “earlier snowmelt, altered rates of snowmelt and evaporation directly from the snow, and longer snow-free periods,” the assessment says.

So far this winter, snowfall across parts of the U.S., including areas of the Prairie Pothole region including North and South Dakota, southern portions of Minnesota and Wisconsin, has been below normal, according to Shawn Carter, Winter Hydrology Desk lead at NOAA’s Weather Prediction Center. Government data shows that snowfall in the Sierra Nevadas and the Cascades are well above normal, while the Rockies are seeing a mix of normal to slightly below normal levels, Carter also says.

White Christmases are a sentimental favorite, but they are also a powerful example of how the world’s climate is changing.

“Seeing changes in the chances of a white Christmas is one of so many ways we may experience climate change,” Burakowski says. “When we come together as a community to address climate [change], we’re preserving so much more than snow on Christmas day.”

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