In a surprising turn of events, the global market has been granted a moment of reprieve as the core Consumer Price Index (CPI) in the United States recorded a lower than expected rate of 3.2% in December 2024. This marks a decrease from the earlier three-month period that maintained the rate at 3.3%. Furthermore, the super core service CPI, which excludes housing rental costs, experienced its lowest monthly rate since July 2024 at just 0.21%. This development takes pressure off the Federal Reserve, who as analysts suggest, will likely forgo further interest rate hikes for the foreseeable future.

On January 16, as American stocks surged in their dramatic rebound, the Asian markets mirrored this optimism with most indices rising

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Specifically, the Shanghai Composite Index and Hong Kong stocks rose by 0.28% and 1.23% respectively, with the US dollar weakening to the 108 regionThe dollar to offshore yuan remained steady at about 7.34. In the wake of the inflation data release, the rate markets sustained their bets on the Federal Reserve reducing interest rates only once throughout the year, though the timeline has shifted from September to June.

Multiple investment managers and strategists from both domestic and foreign asset management firms expressed to reporters their cautious optimism regarding the Chinese stock marketFollowing a period of adjustment, the rationale for a potential rebound remains intactThe anticipated stimulus from policies, combined with a drop in valuations after January’s decline (now less than half that of the US stocks), alongside seasonal liquidity improvement around the Lunar New Year, could stabilize the market

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The Chief Equity Investment Officer of BlackRock, Shen Yufei, emphasized that the technology, dividend, and consumer sectors are poised to be rewarding areas for future investment.

While Inflation Eases, A Strong Dollar Remains Elusive

In assessing the components of the U.SCPI for December 2024, it becomes clear that a significant driver of the overall CPI uptick is the 2.6% month-on-month increase in energy prices

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Transportation services, particularly airfare, also saw substantial price hikesNevertheless, rental prices, which account for approximately one-third of the CPI, exhibited moderate growth with an annual increase dropping to 4.6% (month-on-month growth at 0.3%), still surpassing pre-pandemic averages.

Matt Weller, Global Head of Research at GAIN Capital, noted that short-term inflation pressures may be linked to rising energy prices alongside persistent housing costsThe reluctance to buy homes due to high-interest rates has contributed to growing rental demand, suggesting that rents may remain elevated for a prolonged periodAlso, disasters such as the recent fires in Los Angeles could further raise rental and structural rebuilding costsIt's noteworthy that even if rents eventually drop, this adjustment will likely occur with a lag before becoming apparent in CPI data.

In the medium to long term, the combination of policies aimed at internal tax reductions along with the expulsion of illegal immigrants, coupled with high external tariffs, could amplify inflation risks

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Recent figures from the University of Michigan revealed inflation expectations for the next year and over the next 5 to 10 years have risen to 3.3%, with the latter figure hitting its highest since 2008. This anticipated inflation uptick could drive businesses and consumers to stockpile goods ahead of higher tariffs, complicating efforts to lower inflation in the short term.

Therefore, one cannot assert that the risks surrounding U.Sinflation have been wholly alleviatedThe Federal Reserve has made adjustments in response to these dynamics, as seen with their December economic outlook where forecasts for inflation rates in 2025 and 2026 were increased to 2.5% and 2.2% respectivelyIn addition, they reduced their expectations for interest rate cuts to two instances for the year, signaling a deliberate slowdown in their rate reduction trajectory.

Yet, there remains a more hawkish sentiment within the markets, anticipating that there may only be one rate cut in 2025. Weller indicated that recent data on non-farm payrolls and wage growth significantly exceeding expectations may challenge the Federal Reserve's ability to implement rate cuts.

Consequently, institutional perspectives lean towards the belief that a robust dollar will be difficult to reverse in the near term

Weller indicated that the dollar index has surged nearly 10% since the end of September 2024, attributed to waning expectations of rate cutsIf the trend holds, the bullish targets in focus could aim for milestones previously reached, such as the September 2022 peak at 114.8.

Moreover, while the U.Smay be pausing or slowing rate cuts, Europe might be compelled to enact more substantial reductions (with forecasts suggesting 4 to 5 rate cuts), while the UK looks set to maintain its downward trajectory and China’s central bank appears poised to continue with moderate easingAll these elements could favor the dollar's stabilityHowever, the Bank of Japan’s policies remain a wildcard; they are the only major central bank this year likely to pursue a significant rate hike, which could embolden the dollar's strength.

Earnings Season Kickstarts with a Resounding Rebound in U.S

Stocks

Following an earlier downturn, the U.Sstock market saw a significant rebound on January 15, driven not only by favorable CPI data but also by robust earnings reports.

The S&P 500 index climbed 183 points to reach 5949 points, while the Nasdaq 100 index increased by 231 points, hitting 21237 pointsThe Russell 2000 index also jumped by 199 points to 2263. Notably, the volatility index (VIX) plummeted 13.84% to 16.12. The consumer discretionary and communication services sectors showed excellent performance, rising 302 points and 266 points respectivelyThe financial sector stood out as well, gaining 246 points, exhibiting a strong performance buoyed by favorable earnings reports from several major Wall Street banks.

Specifically, JPMorgan Chase (JPM) saw a rise of 2% following a better-than-expected earnings per share (EPS) of $4.81 against an anticipated $4.10, along with an optimistic net interest income (NII) guidance of $94 billion compared to the $90 billion market expectation

Citigroup surged 6.5% due to favorable revenue guidance between $83.5 billion to $84.5 billion, outperforming market estimates of $83.3 billion, while announcing a $20 billion share buyback planWells Fargo (WFC) jumped 6.7% as their NII exceeded expectations significantly at $11.84 billion against projections of $11.7 billion.

Tech stocks also reported impressive gains, with Tesla (TSLA) rising by 8%, NVIDIA (NVDA) gaining 3.4%, and Amazon (AMZN) increasing by 2.6%. In 2024, the ‘Big Seven’ technology companies in the U.Ssaw a staggering market value increase of $6 trillion, powered primarily by the artificial intelligence (AI) narrativeNotably, NVIDIA and other large-scale enterprises such as Microsoft, Google, Meta, and Amazon together contributed to an impressive 41% of the S&P 500 index’s total returns of 25%.

Several institutions are predicting that the growth trajectory of the U.S

stock market in 2025 will depend increasingly on profit-driven fundamentals, estimating an approximate 12% increase in overall earnings for that yearThe enthusiasm surrounding AI technologies continues unabated, with the formal release of Google’s Gemini 2.0 and frequent updates from OpenAI reigniting excitement about advancements in AI for 2025.

The Chinese Stock Market Poised for Spring Surge

In the past two weeks, U.S

stocks faced a downturn, exacerbated by declining tech stocks and concerns over the Federal Reserve tightening their policies, which in turn impacted Asian markets, causing declines in both the Shanghai Composite Index and stocks in Hong Kong.

However, as of this week, a noticeable recovery has emerged within Asian stock marketsAnalysts continue to express confidence in the Chinese market’s potential for a spring rally, driven by anticipated stimulus policies and attractive valuations.

Shen Yufei pointed out that the price-to-earnings ratio (P/E) of the S&P 500 stands at 24, whereas the A-shares in China hold a P/E ratio of only 12, indicating that the latter remains in a valuation trough.

Coincidentally, Meng Lei, a strategist at UBS Securities, highlighted that the valuation within the A-share market is at a historical low, with equity risk premiums remaining at elevated levels, suggesting a favorable risk-reward ratio for stocks

Compared to other emerging markets, China’s A-share valuations are distinctly lower; a narrowing of this valuation gap could provide an impetus for stock market growth.

Additionally, recent liquidity conditions could act as further supportMeng mentioned that despite a decline in transaction volumes at the start of 2025, individual investors dominate the A-share market; pent-up savings and a recovery in market confidence might drive more funds into the stock market.

Crucially, market expectations surrounding future stimulus policies are still pivotalLian Ping, Chief Economist at Guanghua’s Research Institute, indicated that government plans to introduce more vigorous fiscal policies to stimulate the economy will aim at increasing fiscal revenue and consumption while optimizing expenditure

Deficits are projected to reach rates of 4.0% or higher, exceeding 5.5 trillion yuanThe central government’s transfer payments to local governments are expected to surpass 11 trillion yuan for maintaining local fiscal stabilityAdditionally, special local bonds are anticipated to reach 4.5 trillion yuan, supporting various projects, with the issuance of special treasury bonds expected to increase to 2 trillion yuan covering state bank capital increases and improving consumer spending, leading to a potential broadening of deficit ratios to around 9%.

With the promise of monetary easing, further actions may include lowering reserve requirements and interest rates to facilitate bank lending, thereby enhancing market liquidityLian predicts that the central bank may reduce reserve ratios by 1 percentage point in 2025 and cut key policy rates by approximately 0.4 to 0.5 percentage points, along with further lowering the Loan Prime Rate (LPR).

Currently, institutional enthusiasm for relevant investment themes remains robust, stimulating market activity

Shen Yufei expressed optimism in three main areas of focus – technology continues to be the standout sector; defensive dividend stocks are favored as the economy gradually recovers; and the consumer sector still shows room for improvement as new consumption drivers emerge bolstered by policy initiatives.

Experts believe that Chinese companies are poised to benefit under the global AI wave, with funding potentially shifting away from U.Stech giants by 2025. This notion which may have raised eyebrows a year or two ago, seems to be gaining traction.

Research conducted by UBS Securities’ software analyst, Zhang Weixuan, has highlighted that the advancements in China’s large language models (LLM) have exceeded expectations

Notably, ByteDance’s Doubao and DeepSeek V3 are making remarkable strides in inference capacities and multimodal functionalities, such as visual, auditory, and video generationExternal benchmarking has suggested that the leading foundational models in China are progressively narrowing the performance gap with OpenAI’s GPT-4. Simultaneously, innovation in hardware and software has significantly reduced training and inference costsCurrently, there is a rapid increase in generative AI applications within both consumer and enterprise sectors.

The efficiency of AI also enhances the competitive edge of Chinese enterprisesZhang anticipates that advancements in training and inference technologies will lower the entry barriers for AI applications, leading to a surge in new suppliers and users entering the market