2025-12-22 12:01

Key takeaways With exports galloping ahead, much of ASEAN delivered resilient growth in recent quarters… …but as trade begins to weaken, private consumption and investment will need to take up the slack. Fortunately, monetary and fiscal easing should help deliver a kick to growth in the Year of the Horse. Despite external headwinds, from weaker commodity prices to US tariffs, Indonesia’s growth may tick up thanks to greater fiscal spending. In Thailand, a looming election could mean renewed delays in fiscal disbursements, though exports have been a surprising bright spot. Malaysia remains among the star performers, not only continuing to gain global market share in sectors, like electronics, but also being a magnet for tourists that help power services. Singapore, like its manufacturing peers, was riding high in 2025, with extra spending for its 60th anniversary adding a further kick. A global trade downturn poses the biggest risk. For all the noise about tariffs, Vietnam keeps chugging along, not only thanks its vaunted export machine, but also due to vigorous reforms at home. Economy profiles Key upcoming events Source: LSEG Eikon, HSBC Indonesia Growth urgency Indonesia’s post-pandemic GDP growth has been sluggish, led partly by tight monetary and fiscal policy in the few years following the pandemic. We estimate that at the end of 2025, GDP will be c7% below its pre-pandemic trend. Having said that, the recent policy softening is clear. Bank Indonesia’s (BI) policy rate has been cut by 150bp in this cycle, and a string of fiscal stimuli have been announced through 2025. Indeed, recent data shows that domestic demand has started to improve. The latest PMI details show that new domestic orders are growing faster, even though new export orders are not. Other indicators, like consumer sentiment and truck sales, also point towards an improvement in activity. In 2026, a payback from front-loading could keep exports soft, but this weakness could be offset by a rise in domestic demand as the reduction in policy rates transmits through the system, and social welfare schemes see improved implementation. We forecast GDP to grow at 5.2% in 2026, a shade higher than the 5% in 2025. Yet, we think the output gap will remain open through the year. For growth to rise more sustainably, investment must rise, which drives the capacity of an economy to create jobs and incomes. Here, we find that households are dipping into savings to fund consumption. As a result, not much surplus remains for kickstarting investment. Corporates have excess savings, but investment depends on other factors, such as household demand visibility, global growth, and commodity prices, which do not seem too dependable. Government saving is falling as well, led by rising social welfare spending. Who will lead Indonesia’s investment? In good news, there is Danantara, the new sovereign wealth fund. Its key objective is to manage the country’s State-Owned Enterprises (SOEs) efficiently, and act as a vehicle for investment in strategic sectors. It plans to invest USD10bn in its first few months of operation, starting in October 2025. Alongside, it also aims to boost liquidity on Jakarta’s stock market. In the short-run, the challenge will be to efficiently implement the domestic investment projects announced. For a sustained rise in Danantara’s investment, revenue sources need to be diversified outside of the fiscal accounts. Here, the fund can look at other places. One, returns from investment projects should rise. Two, FDI inflows should gradually increase. We model the determinants of FDI inflows and find that they boil down to political and macro stability, and economic reforms. New domestic orders are rising faster Source: S&P Global PMI, HSBC Underlying inflation is near BI’s 2.5% target Source: CEIC, HSBC Malaysia ASEAN’s possible silver medallist While the tariff saga has been the dominant theme since “Liberation Day”, growth in some tradedependent economies has been, ironically, rather resilient. Malaysia is a notable example, with GDP growth accelerating to 2.4% q-o-q seasonally adjusted in 3Q, translating to 5.2% y-o-y. While it may be tempting to attribute this to trade front-loading, the economic strength is actually more broad-based. However, no doubt, trade helps, as net exports reversed to a positive growth contribution in 3Q25. Despite trade volatility, there are two notable trends. First, Malaysia’s exports to the US have moderated, reflecting the fading impact of front-loaded trade. However, second, Malaysia has benefitted from still-elevated AI-driven demand. While commodity exports remain in the doldrums, electrical machinery & electronics (E&E) exports continue to expand at an impressive double-digit pace. On top of trade, the recently signed Reciprocal Trade Agreement (RTA) between Malaysia and the US also reduces trade uncertainty, with Malaysia being the first economy in ASEAN to sign a deal. Outside of trade, Malaysia’s domestic strength provides much-needed resilience. While both public and private investments have moderated from their earlier double-digit growth, the moderation has been modest. They continue to benefit from an infrastructure push and data centre construction. Elsewhere, private consumption remains the backbone of Malaysia’s growth, growing consistently at c5% y-o-y. For one, the labour market continues to recover, with the unemployment rate falling to 3% and wages picking up. In addition, subsidies have also played a role. With even lower petrol RON95 prices, there are good reasons to believe in the sustained momentum in private consumption. The other tailwind to Malaysia’s retail sales is its booming tourism sector. Malaysia has seen a full recovery in tourism to 2019 levels, just behind Vietnam. In particular, it leads the region in welcoming Chinese tourists, exceeding 20% of their 2019 level. This is aided by a visa-free scheme with China. All in all, we have recently upgraded our growth forecast to 5% for 2025 (from 4.2%) and 4.5% for 2026 (from 4%). In addition, inflation remains well-behaved, as the headline CPI decelerated to 1.4% y-o-y YTD as of October. Given subdued inflation momentum, we have recently revised down our headline inflation forecast slightly to 1.4% (previously: 1.5%) for 2025 but keep our 2026 forecast at 1.7%. Malaysia continues to see sustained growth in electronics exports Source: CEIC, HSBC Subsidies are budgeted to fall 14% in 2026, though still remain at high levels Source: CEIC, Ministry of Finance Budget 2026, HSBC Philippines Monetary policy taking charge With domestic engines big enough to brag about, the Philippines is perceived by many to be insulated from the headwinds in trade. But domestic demand stumbled in 3Q25. Growth decelerated to 4.0% y-o-y, which was the slowest pace since 2011, barring the COVID-19 pandemic. The numerous super typhoons during the quarter were one of the main issues: household consumption dipped as weather conditions led to frequent work and school cancellations. But the main culprit was government spending. When the ambitious Build-Build-Build programme started in 2016, government infrastructure investments became a driving force for growth. However, due to controversies over flood-control projects, public capital disbursements have been falling by more than 20% y-o-y since July – pulling growth down by as much as 1.3ppt. The fiscal drag then had a domino effect on other aspects of the economy. The most important was private investment. For instance, business sentiment has fallen to its lowest level after the COVID-19 pandemic. Consequently, the share of firms which intend to expand their production in the following quarter has fallen to a post-pandemic low. Moving in parallel is a sharp decline in FDI applications. In all, we expect growth in 2026 and 2027 to come in below potential at 5.2% and 5.6%, respectively, with both private and government investment weighing on growth. We do think private consumption will pick up once weather conditions improve. For one, cheaper imports from China and easing global commodity prices have led to low and stable inflation. We expect inflation to remain below the midpoint of the Bangko Sentral ng Pilipinas’ (BSP) 2-4% target band, even throughout 2026 and 2027. Meanwhile, job creation remains strong with services exports shielded from the onslaught of tariffs. Both have helped bring household saving rates back up, improving the country’s current account dynamics. Narrowing the country’s current account deficit further is tighter fiscal policy since fewer infrastructure projects entails less demand for capital imports. This should then give leeway for the BSP to keep monetary policy accommodative. Like the spare tyre in the boot – the one that is typically smaller in size but enough to deliver a car to the repair shop – it will be necessary for monetary policy to make up for the fiscal drag, even if only partially. We expect the BSP to ease monetary policy once more to 4.25% with room for more if the Fed were to deepen its easing cycle further. Government infrastructure spending has fallen by more than 20% since July… Source: CEIC, HSBC …bringing business confidence to its lowest point since 2009, barring COVID-19 Source: CEIC, BSP, HSBC Singapore Another strong year The script may look familiar – it was also 3Q when the market saw a big upside surprise in GDP growth in 2024. The same thing has happened in 2025, when Singapore’s growth momentum was revised upwards from 1.3% q-o-q in the advance print to 2.4% in 3Q. This translated into a strong 4.2% y-o-y expansion, even higher than some emerging market (EM) economies in ASEAN. The data breakdown showed most of the upward revision came from manufacturing, which grew over 11% q-o-q seasonally adjusted. Electronics drove industrial production (IP) growth notably. This mirrors the trend in tech-driven economies, where AI-driven demand and trade front-loading have boosted growth. However, for Singapore, diversification is the key to its manufacturing outperformance. Sectors, like transport engineering, not only contribute to the manufacturing sector but also have boosted related services, such as wholesale. In addition, the pharmaceutical sector, though volatile in nature, lifted IP growth to almost 30% y-o-y in October. Besides trade, Singapore enjoys some domestic resilience, though it is a mixed picture. Investment growth has accelerated, on the back of an infrastructure push, like Changi Airport’s Terminal 5 construction. However, private consumption has slowed, though the labour market remains resilient. Given the large 3Q25 upside surprise, we have recently raised our GDP growth to 4.1% for 2025, from 2.8%. This puts our forecast slightly above the government’s forecast of “around 4%”, which has been raised from “ 1.5-2.5%” earlier. We have also recently raised our 2026 growth forecast to 2.0%, up from 1.7%. This would put us in the middle of the government’s forecast range of “ 1-3%”. In addition, inflation has finally picked up. After being subdued at 0.5% on average in the first nine months of 2025, core inflation rose 1.2% y-o-y in October, though in part due to base effects. We expect core inflation to grow beyond 1% y-o-y from 4Q25. Overall, we recently revised upward our core inflation forecast slightly to 0.7% (from 0.6%) for 2025 and to 1.3% (from 0.9%) for 2026. While a low-inflation environment opens the door for the Monetary Authority of Singapore (MAS) to ease again, we expect the MAS to stay put through our forecast horizon. The MAS’ primary focus is no doubt growth, but fiscal policy should take the lead in prompting growth if headwinds materialise. Singapore’s IP has been strong thanks to both pharma and electronics production Source: CEIC, HSBC Singapore’s core inflation momentum has been picking up slightly Source: CEIC, HSBC Thailand Changes Uncertainty lingered over Thailand during the second half of the year, but the private sector – calm and collected – helped sustain the economy. Tensions between Cambodia and Thailand escalated in July, disrupting trade between the two neighbours, while stoking safety concerns for potential tourists. There were even concerns that the US might impose higher tariff rates on both countries if tensions did not de-escalate (SCMP, 13 November 2025). However, as tensions ensued, Thailand found itself in a difficult position. Thailand’s Constitutional Court removed then Prime Minister, Paetongtarn Shinawatra, from office over ethical charges on 29 August 2025 (Nikkei, 29 August 2025). The cabinet was then dissolved and, for the third time in three years, Thailand was in a search for a new Prime Minister. With the help of the opposition, the People’s Party, the Bhumjaithai party formed a minority government with Anutin Charnvirakul at the helm. Amid all the uncertainty in politics and policy, growth disappointed in the third quarter of 2025, falling by 0.6% q-o-q seasonally adjusted. Services exports continued to contract with the tourism sector still finding its feet after its stumble earlier in the year. Meanwhile, passing the baton from one Prime Minister to another was a two-month process, which eventually led to fiscal standstill. Government spending fell, dragging growth down by as much 1.1ppt. However, despite the uncertainty that lingered, the private sector kept its ground. Private consumption, supported by low inflation, remained steady, while private investment was robust. In fact, foreign investments flowed in – defying uncertainties around tariffs and global trade – and goods exports still grew as electronics manufacturers captured the boom in AI-related investments, all while gaining market share in the US at the expense of China. However, just like elsewhere, we expect 2026 to be a tough year. Payback from front-loading demand will likely be a headache for the economy, not to mention the potential slowdown in government spending with Thailand expected to undergo another election in February 2026. Nonetheless, growth opportunities are within reach – the economy just needs to grab them. There are still billions of baht worth of investments committed to the digital sector that have yet to materialise, the size being large enough to boost growth. Thailand is also in the position to be a vital part of the ongoing boom in data centres, with the economy having deep supply chains in producing hardware components, such as hard disk drives and printed circuit boards. Amid changes in government, the fiscal engines sputtered and growth slowed Source: CEIC, HSBC FDI surged, but there are still billions committed that have yet to materialise Source: CEIC, HSBC Vietnam In the 8% league Despite trade uncertainty, Vietnam’s growth continues to shine. After 2Q, Vietnam delivered another significant upside surprise in 3Q25, with GDP expanding 8.2% y-o-y. The outperformance easily places Vietnam as the fastest-growing economy in ASEAN, again. What surprised most is the resilience of trade, with both exports and imports growing close to 20% y-o-y in 3Q. As a result, the trade surplus more than doubled in 3Q from 1H25. This indicates that Vietnam has widened its trade surplus with trading partners other than the US, although the latter remains its biggest exporting destination with one-third of the total share. Similar to other tech-exposed economies, Vietnam has also benefitted from surging AI-driven demand. In particular, its electronics exports to the US alone jumped 150% y-o-y on a three-month moving-average (3mma) basis, pushing Vietnam’s total exports to the US up by 30% y-o-y. In addition, the services sector continues to see strong growth. Consumer-oriented retail sales are enjoying some meaningful improvements. Meanwhile, tourism-related sectors continue to boom, as Vietnam has turned into a popular destination for Chinese tourists, despite not having a visa-free scheme. That said, Vietnam is likely to miss its target of attracting 25 million tourists. On the demand side of the economy, consumption expanded over 8% y-o-y, while investment grew close to 10% y-o-y in 3Q. In particular, the focus on accelerating mega infrastructure projects has been a priority. That said, there is still room to expand further, as the disbursement rate of public investment is only 50% of the annual target as of 3Q (VNEconomy, 8 October). All things considered, we have recently upgraded our growth forecast to 7.9% (from 6.6%) for 2025 and 6.7% (from 5.8%) for 2026. The government raised its 2025 growth target to 8.3-8.5% and announced its 2026 growth target at 10%. However, trade uncertainties are not over yet. Outside of growth, inflation has decelerated to 3.3% y-o-y YTD through November. Despite some recent flood-caused food disruptions, we expect the underlying trend to remain well below the State Bank of Vietnam’s (SBV) inflation target ceiling of 5%. We have recently raised our inflation forecast slightly to 3.3% for 2025 (from 3.2%) and 3.5% for 2026 (from 3.2%). Vietnam’s monthly trade surplus has shrunk Source: CEIC, HSBC Vietnam leads ASEAN in tourism recovery but is still behind its annual target Source: CEIC, HSBC. NB: MA data as of Aug, VN as of Nov, and the rest as of Oct. https://www.hsbc.com.my/wealth/insights/market-outlook/asean-in-focus/consumption-and-investment-to-take-the-reigns/

2025-12-22 08:05

Key takeaways A weak USD is likely to persist into 2026, providing temporary support for the EUR and GBP. With the ECB expected to maintain its policy rate in 2026, the EUR will be largely shaped by external and fiscal factors. The BoE’s ongoing easing cycle may still weigh on the GBP, particularly against currencies likely to see rate increases. Assuming global economic growth remains steady, the Federal Reserve (Fed) is in no rush to hike rates, and US financial conditions remain accommodative, the USD will likely stick to a softer trajectory in 2026. In this environment, the EUR and GBP may benefit from broad-based USD weakness over the coming months, but this relative strength is unlikely to persist for the entire year. The European Central Bank (ECB) held its key deposit rate at 2% on 18 December, in line with market expectations (Chart 1). The ECB’s updated forecasts were hawkish, with growth projections raised to 1.2% for 2026 and 1.4% for 2027 (from its September forecasts of 1.0% and 1.3%, respectively) and only limited inflation undershooting for the next two years expected. This makes further rate cuts unlikely. However, ECB President Christine Lagarde did not support expectations of a rate hike as early as next year, emphasising that all options remain open. Our economists expect the ECB to maintain its current policy stance through 2026, with a possible rate increase in 2027. Given this policy stability, developments in other major economies are likely to have a greater influence on the EUR’s direction. The EUR may also face headwinds if regional fiscal measures fall short of expectations or if external conditions become less supportive. This chart shows the ECB’s deposit facility rate. Source: Bloomberg, HSBC Market data as of 18 December 2025. Source: Bloomberg, HSBC forecasts Regarding the GBP, the Bank of England (BoE) cut its policy rate by 25bp to 3.75% on 18 December, marking the sixth cut in the current easing cycle. This widely expected decision was closely contested, with a 5-4 vote split. Megan Greene, Clare Lombardelli, Catherine Mann, and Huw Pill dissented in favour of hold. The meeting’s tone was rather hawkish, as the guidance indicated that “judgements around further policy easing will become a closer call.” As the BoE is likely to continue to lower rates in 2026 (Chart 2), the GBP will probably underperform against other G10 currencies whose policy rates are already at neutral levels or are set to rise, such as the AUD and NZD. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/eur-and-gbp-ecb-on-hold-and-boe-cut-rates/

2025-12-16 12:01

Key takeaways China’s Central Economic Work Conference identified boosting domestic demand as a priority for next year. Policymakers signalled stronger property support, focusing on supply adjustments and affordable housing. Anti-involution efforts may pick up in 2026, while the 15th Five-Year Plan will be boosted by tech and infrastructure. China data review (November 2025) Retail sales recorded their slowest growth of the year in November, rising by 1.3% y-o-y. Consumer confidence remained muted, particularly regarding employment prospects, while the deeper drag in the property sector may have also contributed. Further, base effects from last year’s consumer goods trade-in programmes have affected some categories, e.g., home appliances and autos. Fixed Asset Investment weakness continued, falling 12% y-o-y in November, on par with last month’s reading. The key deterioration was in the property sector, which saw a record fall in property investment (-30% y-o-y), though some moderation in the decline for the manufacturing sector helped a touch. Infrastructure investment fell slightly faster than last month at about 10%. Industrial Production proved resilient in November, up 4.8% y-o-y, thanks to robust growth in exports, and high-tech (+8.4%) and equipment (+7.7%) manufacturing. Still, there are reasons for caution, as manufacturing investment fell 4.5% y-o-y, likely influenced by the anti-involution campaign; e.g., electrical machinery and ferrous metals grew at their slowest pace since September 2024. CPI picked up 0.7% y-o-y in November, its highest level since March 2024, mainly supported by higher food prices. Core CPI also rose, 1.2% y-o-y, boosted by rising prices of gold-related products, which were up 58.4% y-o-y. Meanwhile, PPI fell 2.2% y-o-y as sectors relating to property and infrastructure saw their prices underperform, likely owing to recent slowdowns in investment. Exports rebounded to 5.9% y-o-y in November following a contraction in October. This turnaround was mainly due to a low base and easing of trade tensions, which gave high-tech exports and those to the EU a lift. Imports also grew by 1.9% y-o-y, supported by strong demand for high-tech goods and copper, reflecting ongoing investment in technology and innovation. China’s Central Economic Work Conference 2025: Key Takeaways China’s Central Economic Work Conference (CEWC), held on 10–11 December, reviewed the year’s economic performance and set priorities for 2026. The conference emphasized progrowth strategies, focusing on high-quality development through consumption, technology, and green initiatives, aiming to ensure a strong start to the 15th Five-Year Plan. Strategic Priorities The CEWC provided clarity on several points not addressed in the December Politburo meeting. Notably, the main priority for 2026 will be on strengthening domestic demand through increased consumption and investment, supported by new policy financing tools and urbanisation projects. The urgency around stabilising the property sector was more pronounced, reflecting recent market declines. Additionally, the anti-involution campaign was referenced, signalling the potential introduction of targeted policies to address supply demand imbalances. Fiscal and Monetary Policy The conference reaffirmed a proactive fiscal approach, maintaining a fiscal deficit target of 4% of GDP and supplementing this with special government bonds. Fiscal reforms will focus on improving local tax systems and restructuring local government debt, including accelerated settlement of overdue payments to enterprises. On the monetary front, the People’s Bank of China will likely keep using interest rate and reserve requirement ratio cuts, as well as structural policy instruments and government bond purchases to support growth and price recovery. Consumption and Social Measures The primary focus identified by the CEWC is to stimulate domestic demand via consumption and investment. The rollout of the “special action plan to boost consumption” suggests further policy initiatives are forthcoming. Strengthening household incomes is expected to play a key role in restoring consumer confidence. Other structural measures – such as expanding social safety nets by extending employment insurance to gig workers and improving access to healthcare – can also help to unlock consumption. With over 240 million gig workers in China (NBS, 2024), expanding coverage for this group should reduce precautionary savings. The CEWC has also highlighted the need to “unleash the potential of services consumption”, recognising that China’s services consumption as a share of GDP remains below that of many developed economies. Next year’s policies may include expanded support for the services sector, such as targeted consumption subsidies. Investment in infrastructure and urbanisation are needed to complement rising consumption. As the 15th Five-Year Plan commences, a wave of new projects is anticipated, supported by the recent introduction of innovative financial policy tools. In October, RMB500bn in new financing instruments was issued, fully allocated across thousands of projects, potentially underpinning total investment of approximately RMB7trn. Property Sector Stabilisation On the property front, the CEWC emphasised the importance of stabilising the property market through city-specific policies by controlling new supply, reducing inventory and optimise housing mix, as well as converting existing commercial housing into affordable housing. This suggests a stronger stance than we expected. If the government were to make larger interventions – such as using central government funds to segregate housing assets from banks’ balance sheets and digest housing stock – this can more effectively stabilize the sector. Market Reforms and Green Transition While anti-involution measures have received less attention recently, the CEWC reaffirmed their importance. Plans include establishing a unified national market to facilitate the free movement of production factors and reduce local protectionism, thereby promoting fair competition. The green transition remains a priority, with accelerated energy efficiency and carbon reduction initiatives, and the expansion of the national carbon emissions trading market to cover major industries by 2027, in line with 2030/2060 carbon neutrality targets. Technology and Opening Up The CEWC also highlighted continued focus on technology development, with investment in education, research, and innovation centres, alongside the rapid adoption of advanced technologies, such as AI. Despite prioritising domestic demand, China will maintain its commitment to opening up and reform, supporting economic rebalancing through increased imports and expanded overseas investment, e.g., the Belt and Road Initiative and bilateral trade and investment agreements. Source: LSEG Eikon *Past performance is not an indication of future returns. Source: LSEG Eikon. As of 12 Dec 2025, market close https://www.hsbc.com.my/wealth/insights/market-outlook/china-in-focus/chinas-central-economic-work-conference-2025/

2025-12-15 08:05

Key takeaways USD weakness has been evident across the G10 space so far in December, with the SEK leading the gains. The SEK is supported by positive European sentiment and an expansionary Swedish budget. The AUD, NZD, and CAD benefit from a halt in central bank easing, with their outlook likely shaped by external factors. So far in December, the SEK has led G10 currency gains this month, followed by the AUD, NZD, and CAD (see the chart below). This trend reflects broad USD weakness across the G10 space (see FX Viewpoint Flash: USD: Fed’s third 25bp cut, with neutral guidance for details). Note: Data as of 11 December 2025 (19:00 HKT). Source: Bloomberg, HSBC The SEK’s gains are supported by positive European risk sentiment and expectations of improved Swedish growth, underpinned by an expansionary SEK80bn budget. For the AUD, NZD, and CAD, the likely conclusion of their respective central banks’ easing cycles has been a key factor in their relative strength. The Reserve Bank of Australia (RBA) maintained its policy rate at 3.6% on 9 December, with the governor noting that the board discussed “what might have to happen for rates to rise”. Our economists anticipate rate hikes beginning by 3Q26, although markets are already pricing in c40bp of increases by end-2026 (Bloomberg, 11 December). Near-term AUD performance is likely to be driven by external sentiment. Similarly, the Bank of Canada (BoC) held rates steady at 2.25% on 10 December. While markets expect a 25bp rate hike in October (Bloomberg, 11 December), our economists’ central case is for the BoC to remain on hold through 2026 and 2027, citing downside growth risks. The CAD’s short-term trajectory remains closely tied to US economic developments and ongoing uncertainty around US tariff policy, which could present upside risks for USD-CAD in 2026, in our view. For the NZD, the anticipated end of the Reserve Bank of New Zealand’s (RBNZ) easing cycle is expected to provide support into 2026. Domestic fundamentals are improving, with the current account deficit narrowing, the budget deficit contained, and economic activity stabilising. Considering also a potential RBNZ ratehike cycle starting in 2H26, we see scope for the NZD to outperform the EUR, GBP, and CAD next year. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/g10-fx-when-the-usd-weakens/

2025-12-12 07:04

Key takeaways The Fed delivered a 0.25% rate cut as expected, lowering the target range to 3.50–3.75%. It also introduced reserve-management purchases of short-term instruments, which will begin with roughly USD40bn in Treasury bills but they are not QE (quantitative easing) and carry no implications for the policy stance. The ‘DOTS’ chart with Fed members’ views of the future rate path was little changed, with continued wide dispersion in views. We continue to expect the policy rate to remain unchanged through 2026–27, with meaningful two-sided risks as the economy transitions into 2026. The economic projections show stronger growth and lower inflation, with a notable mechanical rebound in 2026 GDP following the shutdown. The policy rate cut is accretive to corporate earnings and should help keep valuations in check. Technology, AI, and productivity-linked sectors stand to benefit from lower real yields and improving macro conditions. The cut is also positive for rate-sensitive sectors and companies benefitting from AI-driven investment and the ongoing US re-industrialisation trend. Even if the Fed does not cut any further and P/E multiples stagnate, equities can do well as the underlying economy remains robust with corporate earnings projected to grow by roughly 14.5% in 2026. For fixed income, the Fed’s monitoring of inflation and the continued decline in inflation expectations provide a supportive backdrop, while the USD could see short-term downside before a more lasting base is formed during Q1 2026. Please refer to the full report for details about the event and our investment view. https://www.hsbc.com.my/wealth/insights/market-outlook/special-coverage/fed-likely-moving-to-a-hold-after-its-december-cut-as-fomc-is-split/

2025-12-11 12:01

Key takeaways The Fed delivered a 25bp cut, with neutral guidance; our economists expect the Fed to be on hold in 2026 and 2027. The Fed will start buying USD40bn of Treasury bills per month from 12 December. The USD may weaken further before stabilising in early 2026, in our view. As anticipated, the Federal Open Market Committee (FOMC) implemented a third consecutive 25bp rate cut at its 9-10 December meeting, lowering the federal funds target range to 3.50-3.75%. The decision passed by a 9-3 vote, with dissent from two regional Fed presidents − Austan Goolsbee (Chicago) and Jeff Schmid (Kansas City) − who preferred to maintain current rates, and Governor Stephen Miran, who advocated for a larger 50bp cut. Initial USD weakness reflected the absence of hawkish signals. The updated “dot plot” revealed a wide range of views among all 19 FOMC members, with the median interest rate projection for 2026 indicating only one further 25bp cut, compared to market expectations of two. It is worth noting that the significant dispersion of rate forecasts for 2026 (2.125% to 3.875%) highlights a lack of consensus on the pace of easing. Source: Federal Reserve Forward guidance remained unchanged, suggesting policymakers are not yet prepared to signal an end to the easing cycle. Additionally, the Fed announced USD40bn in monthly Treasury bill purchases from 12 December, to “maintain an ample supply of reserves on an ongoing basis”. While not a policy shift, this move contributes to a more dovish overall tone. Fed Chair Jerome Powell reiterated a neutral stance, noting that the current rate is within the estimated neutral range and that the Fed is positioned to observe economic developments. This approach contrasts with market pricing for two rate cuts in 2026, which the USD saw a brief rebound, but the USD Dollar Index (DXY) declined further to c98.5 (Bloomberg, 12 December). The Fed is in “wait and see” mode, so policy and the USD is data dependent. Our economists expect rates to remain unchanged through 2026 and 2027, though risks persist. We still believe the DXY may see more downside before a more lasting base is formed during 1Q26. Historically, the USD tends to weaken when the Fed cuts rates outside of recessionary periods. Besides, market expectations for further rate cuts in 2026 may increase with a new Fed Chair. Concerns over Fed independence could further contribute to USD weakness. https://www.hsbc.com.my/wealth/insights/fx-insights/fx-viewpoint/usd-feds-third-25bp-cut-with-neutral-guidance/