The global financial landscape finds itself in a precarious state, yet recent developments may signal a temporary reprieveIn an unexpected turn, the core Consumer Price Index (CPI) in the United States for December 2024, which excludes food and energy costs, has dropped to 3.2%. This marks a shift from the previous three months, where it remained steady at 3.3%. Further underscoring this trend, the super core CPI, which eliminates rental costs from the core services category, witnessed a significant decline, reaching its lowest level since July 2024 at just 0.21% on a monthly basis.

This decline in inflation suggests that the Federal Reserve may not feel compelled to initiate further interest rate hikes in the immediate termFollowing this announcement, a substantial rebound was noted in the Asian stock markets on January 16, mirroring the robust recovery observed in U.Sequity markets

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The Shanghai Composite Index and the Hong Kong stock exchange saw increases of 0.28% and 1.23%, respectively, while the U.Sdollar index weakened, settling in the 108 range, and the USD/CNY exchange rate remained relatively stable around 7.34. Market expectations regarding the Federal Reserve's monetary policy for the year have not altered significantly post-inflation report; however, bets for only a single interest rate cut have now shifted from September to June.

Investment managers and strategists from various domestic and international asset management organizations have voiced optimism regarding the potential for a rebound in Chinese stocks following recent pullbacksThe combined impact of anticipated policy stimulus and a subsequent decline in valuations—returning to less than half of their American counterparts—creates a favorable backdrop for recoveryThe seasonally loosened liquidity surrounding the Chinese New Year further aids in stabilizing market sentiments

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Notably, Shenyu, Chief Equity Investment Officer at BlackRock, identified key sectors such as technology, dividends, and consumer industries as worth investing in moving forward.

Despite the cooling of inflation, the strength of the U.Sdollar poses additional challengesA closer look at December 2024’s CPI composition reveals that energy prices were the primary driver of inflation, rising 2.6% month-over-monthMoreover, among service categories, transportation services—especially airfare—saw the most pronounced price increasesConversely, rental prices, which account for roughly a third of the CPI, exhibited softer growth, with a year-on-year increase of 4.6% (monthly change of 0.3%), still surpassing pre-pandemic averages.

Matt Weller, head of global research at Forex.com, highlighted the persistent impact of high energy prices and elevated housing costs on inflation in the short term

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The reluctance to purchase homes amidst high interest rates has driven robust demand for rentals, thereby maintaining rental prices at elevated levels for the foreseeable futureAdditionally, the ongoing wildfires in Los Angeles are expected to add pressure to rental markets and rebuilding costsEven if rental prices decrease, a significant time lag is anticipated before any reductions materialize in CPI data.

From a medium- to long-term perspective, policies aimed at domestic tax reductions, coupled with high tariffs on imports, suggest the potential for renewed inflationary pressuresRecent projections from the University of Michigan indicate high inflation expectations over the next one to five to ten years, reaching 3.3%—the highest since 2008. Such expectations can provoke preemptive buying behavior among businesses and consumers aiming to stockpile goods before tariffs take effect, complicating any future deflationary trajectory.

Therefore, the risks associated with inflation in the U.S

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cannot be fully dismissedIn December 2024, the Federal Reserve adjusted its economic outlook, raising its inflation forecasts for 2025 and 2026 to 2.5% and 2.2%, respectively, while also signaling a reduction in projected interest rate cuts from earlier expectations of three to a mere twoThis move clearly indicates a deceleration in the pace of easing monetary policy.

Some market participants lean toward a more hawkish perspective, suggesting that only a single rate cut will occur in 2025. Weller argued that recent non-farm payroll data and wage growth, which exceeded expectations, may complicate the Fed's capacity to lower rates furtherAs a result, institutional perspectives remain entrenched in the belief that the strong U.Sdollar will persist for the time beingSince the end of September 2024, the dollar index has appreciated nearly 10%, driven by cooling expectations surrounding rate cuts

If the dollar can maintain its upward trajectory, bulls are eyeing a significant target near the September 2022 high of 114.8.

Meanwhile, while the U.Sconsiders holding off or even pausing rate cuts, Europe may find itself forced to implement more substantial reductions, with many institutions predicting four to five rate cutsThe Bank of England is also anticipated to continue its rate-cutting initiatives, and China's central bank is expected to maintain a modestly accommodative monetary policyAll these factors could bolster the dollarHowever, Japan’s central bank represents a variable in this scenario; as the only major central bank with substantial rate hike potential this year, its hawkish stance could invariably alter the dollar's stronghold.

The commencement of earnings season on Wall Street has resulted in a sharp rebound in U.SequitiesOn January 15, following fluctuations, the market responded positively not only to the CPI data but also to extraordinary corporate earnings reports

The S&P 500 index surged 183 points to reach 5949, with the Nasdaq 100 climbing 231 points to settle at 21237. Additionally, the Russell 2000 index experienced a rise of 199 points, while volatility, as measured by the VIX index, decreased by 13.84% to 16.12. The consumer discretionary and communication services sectors exhibited the strongest performance, gaining 302 points and 266 points, respectivelyFinancial stocks also had a robust showing, increasing by 246 points due to several noteworthy earnings reports from top Wall Street banks.

Specifically, JPMorgan Chase's stock rose by 2% on stronger-than-expected earnings per share (EPS) of $4.81 compared to the anticipated $4.10, alongside a favorable outlook for net interest income (NII) in 2025, projected at $94 billion against a $90 billion estimateCitigroup saw a substantial increase of 6.5%, fueled by revenue guidance that surpassed estimates, ranging from $83.5 billion to $84.5 billion, against market expectations of $83 billion, and an announcement regarding a $20 billion stock buyback plan

Wells Fargo's stock also rose by 6.7%, attributed to a significant beat on NII expectations, reaching $11.84 billion compared to the anticipated $11.7 billion.

Technology stocks were particularly noteworthy in their performance, with Tesla surging by 8%, Nvidia by 3.4%, and Amazon by 2.6%. This year, the "Big Tech" companies in the United States have collectively seen their market capitalization increase by $6 trillion, driven largely by the AI narrativeNvidia and other "majors" such as Microsoft, Google, Meta, and Amazon are responsible for a significant 41% of the S&P 500’s total return of 25%.

Institutions forecast that equity gains in the U.Sfor 2025 will increasingly depend on earnings growth, with anticipated profit increases of around 12%. Moreover, the excitement surrounding AI technologies is set to persistThe recent launches of Google’s Gemini 2.0 and OpenAI's numerous updates have reignited enthusiasm for AI advancements anticipated in 2025.

Meanwhile, the Chinese stock market is poised to experience a favorable spring season

Despite recent volatility, many believe that the impending spring rally, increased stimulus measures, and low valuations will offer essential supportNotably, Shenyu highlighted that the S&P 500's price-to-earnings (P/E) ratio stands at 24, while the A-shares in China are at a mere 12—suggesting an undervalued stock market in A-shares.

This sentiment is echoed by Meng Lei, a strategist at UBS Securities, who pointed out that A-shares are trading at historically low valuations amid elevated equity risk premiums, indicating attractive stock valueCompared to other emerging markets globally, the valuations of Chinese A-shares are significantly lower; any convergence in valuation disparities could induce an uptrend in the stock market.

Additionally, the availability of capital is likely to act as a supportive factorMeng noted that dropping trading volumes at the beginning of 2025 do not overshadow the dominant presence of retail investors in the A-share market

The retention of excess savings and improving overall market sentiment could channel additional funds into the market.

Perhaps, the anticipation surrounding future stimulus policies remains a salient issueLian Ping, Chief Economist at Guangfa Securities, expressed confidence in the government's intention to implement more aggressive fiscal policies aimed at stimulating the economy by boosting fiscal revenues and consumption whilst optimizing expenditure structuresFiscal deficit ratios are expected to exceed 4.0%, with deficit volumes surpassing 5.5 trillion yuanCentral government transfers to localities are also projected to exceed 11 trillion yuan to ensure fiscal stability at the grassroots levelFurthermore, local special debt issuance could reach 4.5 trillion yuan, supporting various project financing initiativesSpecial treasury bonds may see issuance scale increase to 2 trillion yuan, targeting capital for state-owned banks and consumer sectors, while the broad fiscal deficit ratio could rise to approximately 9%.

Moreover, an accommodative monetary policy is anticipated to accompany these efforts, with possibilities of reserve requirement ratio (RRR) cuts and interest rate drops to bolster bank lending and enhance market liquidity

Lian has predicted a 1% reduction in the RRR by the central bank in 2025, alongside a 0.4% to 0.5% reduction in policy rates and a further potential decrease in the loan prime rate (LPR).

At present, institutional interest surrounding related themes remains strong, driving active tradingShenyu identified three major themes that hold promise: the technology sector continues to emerge as a focal point for investment; from a perspective of reliability, dividend stocks look appealing, especially in the context of a steadily recovering economy; and in view of policy support and newfound consumer momentum, particularly in areas like sentiment-driven spending, the consumption sector offers considerable potential for growth.

Various sectors are confident that Chinese firms will benefit from the global AI wave, with a notable shift of capital anticipated away from U.Stech giants by 2025. This judgment contrarily was less accepted by the market consensus a year or two prior.

According to research by Zhang Weixuan, a software industry analyst at UBS, the advancements in domestic large-language models (LLMs) have exceeded expectations