CICC released a research report stating that it expects the China-US liquidity environment to continue resonating from September to October, with the US dollar in a downward cycle, creating favorable conditions for various asset classes (stocks, bonds, gold, commodities). Similar to the September market performance, October may still be a relatively favorable macro period, suggesting maintaining relatively high risk appetite and overweighting Chinese equities. Currently, the CSI 300 Index's dynamic P/E ratio is close to its historical average, with valuation still having expansion room compared to previous bull market peaks. Considering comprehensive risk-return profiles, A-shares and Hong Kong stocks offer better allocation value compared to US stocks. Due to increasingly loose macro liquidity and damage to Fed independence and US dollar credibility, CICC maintains its overweight stance on gold. Gold has risen rapidly since the beginning of the year, exceeding levels matching fundamentals. With recent rapid gains again, short-term correction risks have increased. The firm suggests downplaying gold's trading value while focusing on long-term allocation value and adding positions on dips.
**Fed Rate Cut Pace May Switch Between "Fast-Slow-Fast" Pattern**
The Fed restarted rate cuts in September, entering a new phase of the US dollar easing cycle, which may have profound impacts on domestic and international economic operations and asset performance. The baseline expectation is that the Fed's rate-cutting cycle may be divided into three "fast-slow-fast" stages:
The first stage through Q4 2025 features a faster cutting pace. Since inflation just confirmed an upward inflection point in August with relatively low absolute levels, and the Fed can downplay inflation pressure as a "temporary" phenomenon, while employment downside risks are more urgent than inflation upside risks, "stabilizing growth" takes priority over "controlling inflation."
Chart 1: US inflation has confirmed an upward inflection point and may continue rising for the next three quarters Source: Haver, CICC Research
Combined with significant political pressure from Trump, the Fed is expected to cut rates at a faster pace, potentially with 3-4 consecutive cuts.
The second stage in H1 2026 sees a slower cutting pace. As inflation continues rising, the Fed may need to rebalance growth downside risks with inflation upside risks, unable to continue rapid cuts, possibly using the cessation of "balance sheet reduction" to appease financial markets.
The third stage in H2 2026 sees accelerated cutting pace again. With Powell's term expiring in May 2026, the Trump administration is likely to nominate a more dovish Fed chair, and tariffs' inflationary impact may also subside, allowing the Fed to accelerate rate cuts again.
In summary, Fed easing is the general trend over the next year, with easing trades being the main theme in global markets, potentially driving US dollar depreciation and generally benefiting various domestic and international assets including stocks, bonds, commodities, and gold.
Chart 2: During US dollar downtrends, gold, commodities, and stocks tend to rise, with non-US stocks outperforming US stocks Source: Haver, CICC Research
However, at switching points of Fed easing pace, such as year-end or mid-2026, there may be impacts on global asset trends. Since current Fed policy-making doesn't rely solely on economic data but is also influenced by the Trump administration, Fed independence faces some impact, weakening the predictability of US monetary policy. The possibility that actual policy paths deviate from the above baseline forecast cannot be ruled out. Based on current economic and market conditions, the "fast-slow-fast" easing rhythm may be the policy path with the highest probability and least resistance.
**Economic Path After Fed Rate Cuts: Comprehensive Tracking Framework for Economic Indicator Inflection Points**
The US economy is currently moving toward stagflation (declining growth + rising inflation) or recession (declining growth + declining inflation), with stagflation being more likely than recession. However, considering the Fed has restarted its easing cycle and fiscal deficits may return to expansion in 2026, policy support should eventually drive US growth to turn upward at some future point.
Chart 3: US deficit ratio may decline in 2025 but return to expansion in 2026 (more negative values indicate higher deficit ratios) Source: CBO, Haver, CICC Research
During periods of rising inflation, if growth turns upward, it will create a new market scenario—overheating (rising growth + rising inflation).
Chart 4: Three scenarios for the US economy: excessive policy expansion leads to stagflation or overheating, insufficient policy support leads to recession Source: CICC Research
If policies provide more economic support, growth and inflation rise simultaneously; if support is insufficient, growth declines. Therefore, recovery ("soft landing" or "goldilocks," rising growth + declining inflation) has low probability and is not discussed here.
Reviewing 11 Fed rate-cutting cycles since the 1970s, an average of 12 months is needed from the start of rate cuts to growth upward inflection points. This round of Fed rate cuts began in September 2024, exactly 12 months ago, suggesting the growth inflection point may not be far away. Therefore, asset allocation needs to consider the possibility of the economy turning toward overheating.
Chart 5: In Fed rate-cutting cycles, the sequence of core economic variable inflection points is roughly "real estate → surveys → employment → consumption → investment → inventory → credit" *Note: Numbers in the chart represent the monthly intervals between various indicator inflection points and GDP growth inflection points in historical rate-cutting cycles. Negative numbers indicate indicator inflection points occurred before GDP inflection points, positive numbers indicate after. Indicators are arranged from top to bottom in order of "leading-lagging" relative to GDP inflection points. Source: Wind, Bloomberg, CICC Research
Further research shows that the time interval from rate cuts to growth inflection points has large variance, ranging from simultaneous occurrence to 30-month differences. Simply applying historical average intervals makes it difficult to accurately predict growth inflection point timing. The firm suggests tracking key economic indicator inflection point sequences, using relatively stable leading-lagging relationships between different economic variables to predict the general rhythm of economic transitions.
Specifically, using 16 core economic data points, a database of indicator inflection points was constructed, tracking inflection point patterns in the past 11 rate-cutting cycles. Growth upward inflection points often follow the sequence "real estate → surveys → employment → consumption → investment → inventory → credit." Consumption and employment data are the most worthy of attention; after their inflection points are confirmed, the overall economy generally confirms growth upward inflection points quickly.
In employment data, the unemployment rate is actually a lagging variable, with inflection points occurring after growth inflection points. Therefore, if the Fed relies too heavily on unemployment rate inflection points for decision-making, it may mislead policy direction. Bank credit is theoretically interest-rate sensitive, but inflection points are also quite lagging and may not provide timely forward-looking signals.
Real estate data is a clear leading indicator, but the variance in intervals between real estate and economic inflection points is large. For example, in the 1984 and 2000 rate-cutting cycles, growth inflection points appeared 1-2 years after real estate inflection points.
Chart 6: US historical rate-cutting cycles and overall economic inflection points Source: Wind, Bloomberg, CICC Research
Therefore, despite recent signs of rebound in US new home sales, without cross-verification from other data, conclusions cannot be drawn that economic growth inflection points are approaching.
Chart 7: US new single-family home sales rebounded significantly in August Source: Haver, CICC Research
Based on the above indicator system, the following strategy is recommended: Before consumption and employment data confirm upward inflection points, conduct easing trades or stagflation trades; after consumption and employment inflection points, consider switching to overheating trades.
**How Do Fed Rate Cuts Affect Markets? October Remains a Window Period for China-US Liquidity Resonance**
October may still be a window period for liquidity resonance, with easing trades as the market mainline. In August, due to loosening US and Chinese liquidity and still some time before the next round of China-US negotiation deadlines in November, September-October was identified as a possible window period for loose liquidity trading, providing relatively favorable macro environments for domestic and international stocks, gold, US bonds, and other major asset classes. Chinese and international stocks were expected to continue rising rather than remain in sideways consolidation.
In September, the Hang Seng Index rose 5%, Shanghai and Shenzhen indices rose 3%, ChiNext rose 9%, Hang Seng Tech rose 10%, and gold rose 10%, validating the judgment.
Chart 8: Global major asset classes welcomed broad gains in September Source: Wind, Bloomberg, CICC Research
Looking forward, October may still be a window period for liquidity resonance with easing trades as the market mainline, but attention should also be paid to the sustainability of the rally and market volatility risks:
Without incremental policies, China's government bond issuance pace may begin to slow, driving M2 and social financing growth rates to inflection points.
Chart 9: This year's fiscal front-loading efforts led to faster Chinese government bond issuance pace Source: Wind, CICC Research
Macro liquidity turning restrictive may eventually affect market liquidity and risk appetite. In liquidity-driven markets, stocks and other risk assets have already had significant rallies, and asset volatility may also increase, with risks and opportunities coexisting.
Looking at overseas markets, leading indicators show upward pressure on US inflation. If inflation rises faster than expected, causing the Fed's rate-cutting cycle to switch from the first to second stage earlier than anticipated, this would be unfavorable for the loose environment and may cause market volatility.
**Asset Allocation Recommendations: Continue Overweighting A-Shares, Hong Kong Stocks, and Gold in October**
The firm expects the China-US liquidity environment to continue resonating from September to October, with the US dollar in a downward cycle, benefiting various asset classes (stocks, bonds, gold, commodities). Similar to September market performance, October may still be a relatively favorable macro period, suggesting maintaining relatively high risk appetite and overweighting Chinese equities. Currently, the CSI 300 Index's dynamic P/E ratio is close to its historical average, with valuation still having expansion room compared to previous bull market peaks.
Chart 10: CSI 300 P/E ratio is below historical bull market peaks Source: Wind, CICC Research
From a capital perspective, household deposit migration and individual investors are still in the process of entering markets, while active foreign capital remains underallocated to Chinese stocks. The money-making effect may continue in a positive cycle with capital inflows, supporting Chinese stock performance. Since stocks have already risen considerably and economic fundamentals await improvement, stock volatility may increase. The firm favors ChiNext and Hang Seng Tech, which have relatively low valuation percentiles and relatively high technology content.
During the Fed's faster rate-cutting phase, maintain standard allocation to US stocks. Historically, during US dollar downward cycles, US stocks often underperform non-US markets after factoring in dollar exchange rate losses. This year, US stocks underperforming Chinese stocks aligns with historical patterns during dollar downward periods.
From a valuation perspective, US stocks remain relatively expensive compared to US bonds and non-US stock markets, with the S&P 500's equity risk premium near 0%, reflecting that investors may be overly optimistic about US economic and technological revolution prospects.
Chart 11: US stocks remain relatively expensive compared to US bonds and non-US stock markets Source: Bloomberg, CICC Research
US stock volatility is also too low and mismatched with the interest rate environment, potentially creating latent risks.
Chart 12: US stock VIX is severely underestimated relative to term spreads Source: Bloomberg, CICC Research
Therefore, considering comprehensive risk-return profiles, A-shares and Hong Kong stocks offer better allocation value compared to US stocks.
Due to increasingly loose macro liquidity and damage to Fed independence and US dollar credibility, maintain overweight stance on gold. Gold has risen rapidly since the beginning of the year, exceeding levels matching fundamentals. With recent rapid gains again, short-term correction risks have increased. The firm suggests downplaying gold's trading value while focusing on long-term allocation value and adding positions on dips.
Chart 13: Compared to historical gold bull market rally magnitudes and durations, current gold market evolution may still be insufficient, possibly still in the early stages of a gold bull market Source: Wind, CICC Research
Chinese interest rates have declined too rapidly relative to economic fundamentals over the past two years, with valuations still expensive. When risk appetite improves, the "stock-bond seesaw" effect is evident, and rates may face periodic upward pressure, converging toward economic fundamentals. However, in the second half of the credit cycle, with declining growth and inflation centers, rate centers may also struggle to rise significantly. Considering multiple bullish and bearish factors, standard allocation to Chinese bonds is recommended.
Chart 14: Bond rate declines over the past two years have been too fast relative to economic fundamentals Source: Haver, Budget Lab, CICC Research
Chart 15: Declining growth and monetary easing have led to continued rate declines, with median decline of 255bp in the 5 years after credit cycle inflection points *X-axis represents year X before and after credit cycle inflection points Source: Wind, CICC Research
Although US bond supply pressure is small this year, the possibility of 10-year US bond yields falling below 4% cannot be ruled out. However, inflation risks and US bond issuance pressure may gradually rise in 1-2 quarters, adding market uncertainty. Maintain standard allocation to US bonds.
The above allocation recommendations assume continued loose liquidity, but as analyzed earlier, the sustainability of the liquidity window depends on policy paths. Investors are also advised to closely monitor China-US policy changes in October-November, manage positions well, and adjust asset allocation appropriately if the liquidity window changes.