The global financial landscape is undergoing a momentary relaxation as recent data indicated a surprising drop in the U.Score Consumer Price Index (CPI) for December 2024. This figure, which excludes volatile categories such as food and energy, fell to 3.2% from a consistent 3.3% over the past three monthsEven more striking was the super core services CPI, which saw a monthly reduction to its lowest level since July 2024, clocking in at just 0.21%. This downturn in inflation has significant implications, primarily suggesting that the Federal Reserve is unlikely to be forced into another interest rate hike anytime soon.

The financial markets reacted positively following this data releaseOn January 16, amidst a substantial recovery in U.Sstocks, Asian markets mirrored this trend, with gains seen in major indices such as the Shanghai Composite and Hong Kong's Hang Seng Index, which rose by 0.28% and 1.23%, respectively

Moreover, the U.Sdollar index weakened further, resting in the 108 range, while the offshore yuan held firm around 7.34 against the dollarInterestingly, despite the new CPI figures, the futures market for interest rates maintains a perspective that anticipates only one rate cut from the Federal Reserve throughout the year, albeit moving the anticipated timeframe from September to June.

Insights shared by various investment managers and strategists from both domestic and overseas asset management firms indicate a cautious optimism for China's equity marketAfter enduring some corrective movements, they believe that the groundwork for a rebound remains intact, driven by anticipated policy stimulus and the recent valuation adjustments, which have seen Chinese market valuations fall to less than half of those in the U.SWith the upcoming Chinese New Year traditionally heralding a season of increased liquidity, this is seen as a stabilizing factor for the markets

• Has NVIDIA's Bloom Faded?
• Outlook for the Oil Market in 2026
• Nasdaq, S&P 500 Recover as VIX Retreats
• Differentiation in Agricultural Futures Market
• Rising Uncertainty in Global Trade and Economy

Shenyu Fei, the Chief Equity Investment Officer at BlackRock, identified crucial sectors for future investments, highlighting technology, dividends, and consumer industries.

While inflation seems to have cooled slightly, the strong dollar presents a formidable adversaryAn analysis of the December 2024 CPI breakdown reveals that energy prices contributed significantly to its elevation, rising by 2.6% month-over-monthAdditionally, a notable spike was observed in transportation services, particularly airfaresRental prices, accounting for a third of the CPI weighting, have shown moderate growth with a year-over-year increase of 4.6%, maintaining a monthly rise of 0.3%. Nevertheless, these figures remain above pre-pandemic averages.

Matt Weller, Global Research Director atGAIN Capital, noted the persistent stickiness of inflation levels, attributing it largely to recovering energy prices and high housing costs

The current high-interest rate environment has diminished home-buying interests, resulting in increased rental demands and potentially sustaining elevated rental costs for an extended periodAdditionally, incidents such as the wildfires in Los Angeles have further elevated rental and reconstruction costsIt's essential to understand that even if rental prices decline, the effects might not be immediate and could take time to reflect in the CPI data.

Considering the medium to long-term outlook, the combination of domestic tax cuts and aggressive immigration policies alongside elevated tariffs could pose inflationary risks againRecent findings show that the University of Michigan's inflation expectations for the next year and the next five to ten years have both risen to 3.3%, the latter marking a peak not seen since 2008. Such increasing inflation expectations could trigger preemptive purchasing behaviors among consumers and businesses, leading to significant stocking up before the imposition of higher tariffs, thus rendering inflation declines more challenging in the short term.

As a response to inflationary trends, the Federal Reserve has been compelled to recalibrate its economic outlook, raising the inflation rate forecasts for 2025 and 2026 to 2.5% and 2.2%, respectively

Furthermore, the Fed has revised its overall interest rate cut projections to only two for the entire year, signaling a deliberate deceleration in their rate reduction paceStill, some observers have adopted a more hawkish stance, predicting only one rate cut in 2025. Weller emphasized that if the positive trends in non-farm employment figures and wage growth persist, the Fed may find it increasingly difficult to implement any rate cuts.

Against this backdrop, the prevailing strength of the dollar appears to be on shaky groundWeller highlighted that since late September 2024, the dollar index has increased nearly 10%, spurred primarily by tempered expectations for rate cutsIf the dollar can maintain its upward trend, bulls may set their sights on a significant target: the September 2022 peak of 114.8.

Meanwhile, as the U.Sappears inclined to either halt or substantially stall its rate cuts, Europe might be compelled to adopt more aggressive reduction strategies, with some institutions forecasting four to five rate cuts for the continent

The UK is expected to continue its rate easing approach, and the People's Bank of China is poised to maintain a policy of moderate monetary accommodationThese scenarios could create a supportive environment for the dollarHowever, the situation with the Bank of Japan remains uncertain, as it is the only major central bank this year with a substantial likelihood of raising rates, which could potentially overturn the dollar's strength.

From a trade perspective, the impact of government tariff policies remains crucialShould these measures be implemented with relative restraint, there’s a potential for the dollar to recede from its recent highs, with opposite outcomes if the approach is more aggressive.

As the earnings season commences, U.Sstocks are rebounding stronglyOn January 15, following a tumultuous period, the markets rallied, buoyed not only by favorable CPI data but also by robust corporate financial results.

The S&P 500 index surged by 183 points to close at 5949, while the NASDAQ-100 ticked up by 231 points, landing at 21237. The Russell 2000 index saw a gain of 199 points, closing at 2263. Additionally, the volatility index (VIX) dropped by 13.84%, settling at 16.12. The consumer discretionary and communication services sectors emerged as the big winners, climbing 302 points and 266 points, respectively, with the financial sector rising by 246 points, bolstered by strong earnings from several major Wall Street banks.

Specifically, JPMorgan Chase (JPM) posted an earnings per share (EPS) that exceeded expectations at $4.81, against a forecast of $4.10, and provided a bullish outlook on net interest income (NII) for 2025, coming in at $94 billion versus the expected $90 billion

Citigroup's stock jumped 6.5% after revealing a revenue forecast exceeding market expectations at about $83.5-$84.5 billion, combined with a new stock repurchase program worth $20 billionWells Fargo (WFC) saw an increase of 6.7%, driven by a significant NII boost that reached $11.84 billion against an expectation of $11.7 billion.

Technology stocks, a significant part of the market’s recovery, also exhibited strong performanceTesla (TSLA) jumped by 8%, Nvidia (NVDA) rose by 3.4%, and Amazon (AMZN) was up by 2.6%. Reflecting on 2024, the combined market capitalization for the major U.Stechnology firms surged by an astounding $6 trillion, with artificial intelligence (AI) developments acting as a critical driving forceNotably, Nvidia and other players in the so-called ‘super-scale’ category, such as Microsoft, Google, Meta, and Amazon, accounted for a staggering 41% of the S&P 500’s total returns for the year.

Experts project a profitability-driven growth trajectory for U.S

stocks in 2025, with earnings anticipated to rise by approximately 12%. The AI boom is expected to continue fueling the marketIndeed, the recent launches of Google Gemini 2.0 and frequent updates from OpenAI have reignited interest regarding future advancements in AI by 2025.

As the tides of Asia-Pacific markets begin to turn, analysts remain optimistic about China's prospects in the coming spring seasonFollowing a phase of corrections, U.Stech stocks’ struggles and tightening fears led to a slump across the Asia-Pacific region, including the Shanghai Composite and Hang Seng indicesHowever, recent trends suggest the market is warming up.

Those observing the Chinese market argue that seasonal trends, incremental stimulus policies, and attractive valuations will provide essential support moving forwardShenyu Fei noted how the price-to-earnings ratio for the S&P 500 stands at 24x, while A-share stocks, specifically the CSI A500, are around 12x—indicating A-shares are trading at a significantly discounted valuation.

Coincidentally, UBS Securities’ strategy analyst Meng Lei shared insights suggesting that the A-share market's valuations remain at historical lows, implying a high equity risk premium, which suggests equities may be comparatively appealing

When juxtaposed with valuations across global emerging markets, China's A-shares appear undervalued, and should there be a rebalancing, it could significantly bolster the stock market.

Furthermore, there’s a possibility of robust support from liquidity flowsMeng indicated that while trading volumes dipped at the beginning of 2025, individual investors dominate A-share market transactionsExcess savings and a rebound in market confidence could see heightened capital inflows into the market.

The critical factor, however, seems to lie in market expectations for forthcoming stimulus policiesLian Ping, chief economist and head of research at Guangfa Securities, emphasized that the government will likely pursue aggressive fiscal strategies to stimulate growth, enhance fiscal revenues, and optimize expenditure policiesForecasted fiscal deficit ratios might surge to 4.0% or more, with deficits surpassing 5.5 trillion yuan

The central government’s transfer payments to local authorities are projected to exceed 11 trillion yuan to ensure municipal fiscal stabilityAlso, the scale of special bonds is expected to reach 4.5 trillion yuan to fuel various project fundingFurthermore, the issuance of special government bonds is set to increase to 2 trillion yuan, focusing on supporting state-owned banks' capital and consumer sectors, with an anticipated broad deficit ratio elevating to about 9%.

Complementarily, a loosening of monetary policy could further support this environment, with predictions of interest rate cuts to aid in bank credit issuance and enhance liquidity in the marketLian predicts the central bank may lower the required reserve ratio by 1 percentage point in 2025, with policy rates potentially declining by 0.4 to 0.5 percentage points, while the Loan Prime Rate (LPR) is expected to dip further.

Currently, institutional enthusiasm for related themes remains vibrant, boosting trading activity

Shenyu Fei identifies three prominent areas for investment: the tech sector, which appears ripe with potential; dividend stocks, particularly appealing in an environment of steady economic recovery; and the consumer industry, driven by policy supports and emerging consumption trends like emotional purchasing, hinting at underlying growth opportunities.

A consensus is emerging that Chinese firms are poised to benefit significantly from the global AI surge, with possibilities of capital beginning to shift from U.Stech giants by 2025. This notion has evolved from skepticism prevalent in market discussions just a year or two prior.

UBS Securities' software industry analyst, Zhang Weixuan, indicated that China's advancements in large language models (LLMs) have exceeded expectationsInnovations from companies like ByteDance with Doubao and DeepSeek V3 have made notable advancements in inferential capabilities and multimodal generation (like visuals, voice, and video). Moreover, recent third-party benchmarking shows that performance gaps between leading Chinese foundational models and OpenAI’s GPT-4 are narrowing