The "Super Week" is coming, with global focus on China and the United States! China's GDP and the U.S. CPI are about to be announced, and the U.S. earnings season is kicking off

This week can be described as a "super heavyweight week" for the financial markets, with global investors focusing on the two superpowers, China and the United States. China's GDP data for 2024 and the total retail sales of consumer goods in December will be released this week, while the three crucial economic data points for the U.S. — December's CPI, PPI, and retail sales — which are vital for the trends in U.S. stocks and the Federal Reserve's interest rate cut expectations, will also be announced this week. Meanwhile, a new round of earnings season for U.S. stocks will kick off this week, with financial giants on Wall Street and the "king of chip foundries," TSMC, set to report their earnings. The performance of these U.S. listed companies and the management's outlook for future performance will have a significant positive or negative impact on U.S. stocks and even the global stock market.

The highly anticipated full-year GDP for China in 2024 will be released this week, along with important economic data such as the year-on-year retail sales of consumer goods in December and the year-on-year industrial value added above designated size in December. Additionally, the State Council Information Office will hold several globally watched press conferences, including a series on "The Achievements of High-Quality Economic Development in China." Global investors will gain insights into the latest developments regarding China's economic fundamentals and are expected to receive the latest outlook and guidance on future fiscal policies, which are crucial for Wall Street and the broader foreign investment focus on A-shares and Hong Kong stocks since September 2024.

In the United States, a hot December non-farm payroll report will conclude the "Labor Market Data Week." Last week's strong services PMI, better-than-expected JOLTS job openings data, and non-farm payrolls, along with the Michigan consumer long-term (five to ten years) inflation expectations reaching the highest level since 2008, have significantly heightened concerns among investment institutions that "the Federal Reserve will maintain high interest rates for a longer period" (i.e., "higher for longer"). This has driven the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," to soar to 4.79%, the highest level since October 2023, putting significant selling pressure on broader risk assets such as stocks, cryptocurrencies, and high-yield corporate bonds.

Since Trump's victory in November, the "anchor of global asset pricing" has risen alongside U.S. stocks, serving as the "sword of Damocles" hanging over U.S. and global stock markets. Under the continued upward pressure of the 10-year U.S. Treasury yield, the S&P 500 Index, NASDAQ Composite Index, and Dow Jones Industrial Average all fell by about 1% last week. Furthermore, the S&P 500 Index has retraced all gains since Trump's victory in November.

The biggest concern driving market trends currently is that the overall inflation rate in the U.S. has not continued to decline towards the Federal Reserve's 2% target, which could lead the Federal Reserve to remain "on hold" throughout 2025 — that is, pausing interest rate cuts for the entire year to maintain high rates, rather than continuing to cut rates as the market expects. Last week's various labor market data overall indicated that the U.S. labor market remains "robust," with a continuously expanding labor market and long-term rising wage data providing immense support for the core of the U.S. economy — consumer spending Therefore, after last week's "Labor Market Data Week," the interest rate futures market expects the Federal Reserve to cut rates only once in 2025, and to continue pausing the rate-cutting process until July, with some traders even beginning to price in "no rate cuts for the entire year" in 2025.

In the coming week, the financial market will welcome two key inflation data releases, especially the December 2024 CPI data, which will not only determine how far the 2024 U.S. CPI is from 2%, but also whether the market's expectations for the Federal Reserve's rate cuts in 2025 will further cool to "no rate cuts for the entire year." PPI data will be released on Tuesday, while the more closely watched Consumer Price Index (CPI) will be announced on Wednesday morning Eastern Time. The latest data on U.S. retail sales and housing activity will also be released as scheduled.

The new round of U.S. earnings season officially kicks off this week, with the fourth-quarter performances and management outlooks of JPMorgan (JPM.US), Citigroup (C.US), Wells Fargo (WFC.US), Bank of America (BAC.US), BlackRock (BLK.US), Goldman Sachs (GS.US), Morgan Stanley (MS.US), and TSMC (TSM.US) becoming the focus of earnings disclosures this week.

China's 2024 GDP Shock is Coming

CICC expects that the overall economic operation in December will remain stable, possibly continuing the "hot and cold" differentiation characteristic of November. It is expected that areas directly related to policies (such as trade-in consumption, real estate sales, and infrastructure investment physical workload) will still show good growth momentum under phased policy support; while areas strongly correlated with fundamentals, where current policies are difficult to directly reach (such as non-trade-in consumption, prices, and real estate investment) will continue to show weak operational trends. CICC predicts that with the increased policy support since late September, the GDP growth rate in the fourth quarter may be 5.3% (annual GDP growth rate of 5%).

From the 13th to the 15th, the central bank will intermittently release financial data such as December social financing and new RMB loans. In addition, data such as the year-on-year retail sales of consumer goods in December and the year-on-year industrial added value above designated size in December will also be released soon. The State Council Information Office will hold several press conferences this week, which may have an important impact on the A-shares and Hong Kong stock market trends. This includes a series of press conferences on "The Achievements of High-Quality Development of the Chinese Economy," introducing the full-year import and export situation for 2024, financial support for high-quality economic development, and the national economic operation situation.

Michael Hartnett, a well-known strategist at Bank of America on Wall Street, believes that the downward trend in U.S. stocks will force the Trump administration to make concessions on tariffs, and February or March will be a good time to start going long on U.S. Treasuries and stocks in China, the UK, and emerging markets. Moreover, the Bank of America strategy team led by Hartnett believes that the recent breakthrough in copper prices reflects a recovery trend in Chinese consumption, and increasing exposure to international markets such as China is the best strategy to hedge against the downside risks of U.S. stocks.

JPMorgan's equity strategy team recently stated that as the Trump administration's policies towards China and China's responses become clearer, the Chinese stock market is expected to see a reversal around the end of January. Another Wall Street giant, Goldman Sachs, holds an "optimistic bullish stance" on the Chinese stock market for 2025, predicting that under the continued strong growth of the Chinese economy, the MSCI China Index, which includes core Chinese assets such as Alibaba, Tencent, and Kweichow Moutai, will rise to as high as 75 in 2025 At the same time, maintain an "overweight" stance on the Chinese stock market. In contrast, the MSCI China Index recently closed around 60 points.

Goldman Sachs stated that the Chinese Ministry of Finance's plan to significantly increase fiscal spending to stimulate consumption and further drive economic expansion is a key factor behind the institution's optimistic outlook for the Chinese stock market in 2025. Goldman Sachs' equity strategy team expects the overall profit scale of the MSCI China Index to grow by 7% in 2025, with an anticipated growth of about 10% in 2026.

U.S. December CPI is crucial for interest rate cut expectations

The December U.S. non-farm payroll report shows that the state of the U.S. labor market is much more solid than initially imagined by economists. Although the number of continuing unemployment claims indicates that some Americans are taking longer to find jobs, the non-farm payroll numbers and initial unemployment claims show that the scale of new jobs in the U.S. remains robust, and companies are more inclined to raise salaries to retain employees rather than lay them off. Data released by the U.S. Bureau of Labor Statistics last Friday showed that 256,000 new jobs were added in December, far exceeding economists' general expectations (165,000) and also higher than November's 212,000.

Meanwhile, the unemployment rate fell from 4.2% last month to 4.1%. Data revisions also bolster the narrative of a "soft landing" for the U.S. economy. The cyclical peak of the unemployment rate was initially 4.3% in July, but in the data released on Friday, this figure was revised down to 4.2%. The "Sam Rule" seems to have been a "feint," as the overall data from the U.S. labor market has shown resilience once again after several months since July, and inflation unexpectedly rebounded.

Overall, last week's labor market data report led many economists and interest rate traders to believe that the Federal Reserve will likely pause further interest rate cuts until July. The CME "FedWatch Tool" even shows that one-third of interest rate futures traders are betting that the Federal Reserve will not cut rates in 2025. Some economists on Wall Street even believe that this report may open a door for the Federal Reserve to consider raising rates in 2025.

Torsten Slok, chief economist at Apollo Global Management, recently warned that the Federal Reserve may have to return to the path of rate hikes in 2025 due to the continued strength of the U.S. economy and the policies planned by President-elect Trump that could significantly raise inflation.

"Our baseline forecast is that the Federal Reserve will keep rates unchanged for an extended period." Aditya Bhave, an economist for the U.S. market at Bank of America, wrote in a report to clients on Friday. "However, we believe that the risks of the next Federal Reserve policy action are more tilted towards rate hikes."

However, Bhave pointed out that since the Federal Reserve has noted that rates remain somewhat restrictive, the threshold for rate hikes is quite high. But if the Federal Reserve's preferred inflation measure—the core Personal Consumption Expenditures (PCE) index, which excludes volatile categories like food and energy—re-accelerates, or if inflation expectations rise, then rate hikes may increasingly be put on the agenda by more Federal Reserve officials.

Wall Street economists generally expect that the overall inflation rate for December, to be released on Wednesday, will be 2.9% (year-on-year basis), up from 2.7% in November. According to economists' forecasts, the overall CPI is expected to rise by 0.3% month-on-month, remaining roughly flat from the previous month, indicating that overall prices in the U.S. will continue to rise, especially with housing rents and the service sector being core contributors to high inflation Economists expect that the "core CPI data," excluding food and energy prices, may grow by 3.3% year-on-year in December, which is anticipated to be the fifth consecutive month of core CPI maintaining a growth rate of 3.3%.

"On the road to a 2% inflation rate, we are approaching another difficult stretch of disinflation," the Wells Fargo economic team wrote in a weekly report to clients. "The steady rise in energy and food prices by the end of 2024 supports our forecast of a 0.4% month-on-month increase in the Consumer Price Index (CPI) for December. If this forecast, which is higher than general expectations, is realized, the annual inflation rate will climb to a five-month high of 2.9%."

On Thursday, the market will receive a key measure of U.S. consumer spending levels for the end of 2024. Economists generally expect that U.S. retail sales will increase by 0.5% month-on-month in December. As the CPI and retail sales data are released, multiple indicators show that the growth trend of the U.S. economy in the fourth quarter is strong. Supported by a resilient labor market and still robust consumer spending, the Atlanta Fed's GDPNow indicator currently predicts that the annualized quarterly rate of U.S. GDP in the fourth quarter will reach 2.7%. In the U.S. GDP measurement system, 70%-80% of the detailed statistical items are closely related to consumer spending.

Will the earnings season become a "savior" for U.S. stocks amid the surge of the "anchor of global asset pricing"?

As the 10-year U.S. Treasury yield, known as the "anchor of global asset pricing," soared to a new high since October 2023, the U.S. stock market has seen significant declines in recent weeks. This trend further manifested last Friday, with the 10-year U.S. Treasury yield rising by about 5 basis points, approaching 4.8%.

Recently, U.S. Treasury yields and stocks have shown a comprehensive negative correlation, meaning that when the 10-year U.S. Treasury yield rises, the three major U.S. stock indices decline significantly. Therefore, any positive economic news that can push up U.S. Treasury yields—such as a stronger-than-expected labor market and CPI, retail sales—are bearish for stocks and other risk assets.

From a theoretical perspective, the 10-year U.S. Treasury yield is equivalent to the risk-free interest rate indicator r in the important valuation model of the stock market—the DCF valuation model. If other indicators (especially the cash flow expectations on the numerator side) do not show significant changes, a higher denominator level or sustained operation at historical highs will lead to a collapse in the valuations of risk assets such as technology stocks, high-yield corporate bonds, and cryptocurrencies, which are already at historical high valuations.

However, if the cash flow expectations on the numerator side can continue to exceed expectations, it can significantly raise the market's pricing range for stocks and other risk assets. The cash flow expectations on the numerator side are largely based on the performance of earnings during the earnings season, so upward revisions in corporate profits are crucial for the pricing trends of stocks and other risk assets As the earnings season kicks off, when the constituent companies of the S&P 500 gradually announce their Q4 actual performance and future profit guidance, data that meets or even exceeds the general expectations of strategists is expected to significantly boost investor sentiment in the U.S. stock market. For a stock market that persistently looks to the future, one of the key reasons for funds to be bullish on U.S. stocks is the expectation that corporate profit levels will continue to show a strong growth trend—this is also an important logic supporting the high valuations of large tech stocks like Nvidia, Tesla, and Meta. Additionally, according to econometric models, the performance factor often has a greater impact on stock prices during earnings season than U.S. Treasury yields.

Scott Chronert, a U.S. equity strategist at Citigroup, wrote in a report to clients that "the backdrop of economic good news often serves as a market negative and is likely to persist for a long time."

However, the question remains: what can rescue the market from this pricing backdrop? Mark Hackett, Chief Market Strategist at Nationwide, wrote in a report to clients that the upcoming U.S. earnings season may be the "best opportunity" to change the pessimistic sentiment in the stock market.

Overall, Wall Street strategists generally expect U.S. stocks to experience another strong quarter of corporate profit growth. Broad predictions from Wall Street indicate that the overall profits of the S&P 500 are expected to grow by 11.7% year-on-year, and if this is realized, it would be the strongest profit growth pace for U.S. stocks in three years. Strong corporate profits are also the core logic behind Wall Street's bullish outlook for U.S. stocks in 2025, with expectations that corporate profit growth in 2025 will be stronger than in 2024. Although these strategists anticipate that volatility in U.S. stocks in 2025 may be greater than in previous years, they generally expect the S&P 500 index to be above 6,600 points, compared to the S&P 500 index closing at 5,827.04 points last week.

"In my view, investors are always mistakenly overly focused on how many times the Federal Reserve will cut interest rates this year," said Michael Aron, Chief Investment Strategist at State Street Global Advisors. "Corporate earnings are continuing to grow strongly, and I believe that is what we should be focusing on."