The Federal Reserve, as expected, announced a 25-basis-point rate cut early this morning Beijing time, lowering the federal funds target rate range to 3.5%–3.75%. This marks the third rate cut this year, bringing the cumulative reduction to 75 basis points. Despite earlier market doubts about a December rate cut, recent weaker U.S. economic data solidified expectations for this move.
Fed Chair Jerome Powell stated during the post-meeting press conference that the central bank would act further if necessary but effectively ruled out additional rate hikes. He attributed lingering high inflation partly to tariffs, noting that excluding tariff effects, U.S. inflation would be around 2%—close to the Fed's target.
The Fed adjusted its economic outlook compared to October. Powell acknowledged the challenging policy decision, emphasizing that policymakers remain data-dependent and that rate hikes are not currently anticipated. His remarks eased market concerns about hawkish signals suggesting this cut might conclude the easing cycle.
Powell also indicated plans to hand over responsibilities to a successor upon completing his term, as President Trump begins final interviews for the next Fed chair this week. Given Trump's persistent calls for aggressive rate cuts, a more dovish policy stance—potentially including accelerated easing—could emerge under his nominee.
Despite internal committee disagreements, Powell noted consensus that risks to both employment maximization and price stability objectives remain, with upside risks to both unemployment and inflation persisting.
U.S. stocks rallied on the expected cut, with the S&P 500 nearing record highs. Markets now anticipate further Fed easing in 2026, which could prompt global central banks—including China's—to maintain accommodative policies. PBOC Governor Pan Gongsheng recently reaffirmed supportive monetary measures to bolster economic recovery.
The Fed's successive cuts have eased China-U.S. yield differentials, supporting yuan appreciation. Breaking the 7-per-dollar threshold appears likely in 2026, potentially attracting foreign inflows into yuan-denominated assets.
Looking ahead to 2026, we expect the Fed's easing cycle to continue, driving dollar weakness and yuan strength. This may trigger global capital rebalancing from overvalued U.S. markets toward undervalued Chinese equities (A-shares and H-shares), creating a "East rises, West falls" dynamic that enhances Chinese asset revaluation potential.
China's top 10 tech stocks collectively trade at just one-tenth the $25 trillion market cap of U.S. tech peers—less than half Nvidia's valuation alone. Despite 2025's rally, Chinese tech valuations show no excessive froth, positioning the sector as a 2026 investment highlight alongside potential catch-up plays in renewables and consumer sectors.
Domestically, policymakers have signaled steady growth measures for 2026, featuring proactive fiscal policy and accommodative monetary conditions. Property policies will continue optimizing, with tier-1 cities likely seeing transaction rebounds—albeit moderately—as core area prices stabilize.
The slow-bull market should persist in 2026, drawing more household savings (currently ¥165 trillion) into capital markets as deposit rates plunge below 1%. This shift from real estate to equities provides sustained momentum, though the rally may maintain its "two steps forward, one step back" rhythm rather than turning frenzied.
Notably, while tech dominated 2025 returns, 2026 should bring broader participation across sectors, improving investor profitability. The market's third 4000-point breakthrough still leaves many skeptical due to its "barbell" structure—tech growth plays versus high-dividend banks—with numerous sectors lagging.
Gold remains compelling amid dollar skepticism, with prices potentially testing $5,000/oz as global central banks (including China's 10+ month accumulation streak) boost reserves. U.S. debt surpassing $38 trillion—with interest consuming 20%+ of federal revenue—fuels this trend.
On trade, eased Sino-U.S. tensions reduce export headwinds, though diversifying markets and value-added products remains crucial. China's record $1 trillion+ trade surplus and "dual circulation" strategy balance external and domestic demand drivers.
With 2025 GDP growth firmly above 5% and similar 2026 projections, China's economic resilience underpins the capital market's gradual bull run.
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