I. Market Context and Macro Backdrop

Multiple indicators suggest the Federal Reserve is highly likely to cut rates in September, raising the question: How should investors position for it?

In last week’s report, we noted that U.S. equities had entered a sideways, choppy phase. Two potential “black swan” risks—the U.S. sanctions on Russia and the U.S.-China tariff disputes—have gradually played out without triggering systemic shocks. India’s tariff hike to 50% was a notable outcome, but President Trump once again adopted his “lift high, put down gently” approach to calm markets. The Nasdaq rebounded strongly, while the S&P 500 lagged. Apple’s pledge to invest $600 billion in the U.S. aligns with Besent’s strategic vision of driving 3% U.S. GDP growth through investment.

However, various indicators point to a cooling U.S. labor market. This has led many investors to expect a gradual downtrend in U.S. equities—especially in traditional manufacturing sectors. That said, tariff-protected industries, particularly semiconductors and digital assets, remain resilient. U.S. Treasury yields have also declined sharply.

II. September FOMC: Rate Cut Probabilities Rising

Against the backdrop of softening labor data and ongoing tariff headwinds, the September FOMC meeting takes on heightened significance. With Trump nominating his chief economic adviser to temporarily serve as a Fed governor, the probability of a rate cut in September rises significantly—particularly if this appointee can participate in the meeting.

Given this policy setup, we maintain our view of a choppy but resilient equity market. A deep correction is unlikely in the near term, and the current environment still offers attractive swing-trading opportunities.

III. Tactical Positioning: Data-Driven Entry Points

During this volatile phase:

Weaker-than-expected economic data will likely increase the size and probability of a rate cut, providing short-term equity support.

Stronger-than-expected cross-sector data could pressure equities, creating buy-on-dip opportunities.

If incoming data does not point to a September cut, we do not recommend aggressively adding exposure.

IV. Inflation, Stagflation Risk, and Monetary Space

If the odds of a September rate cut continue to rise, the key question becomes: How real is the risk of U.S. stagflation?

Currently:

The Fed’s policy rate (4.25–4.50%) remains restrictive;

Core inflation is declining;

Wage growth is slowing.

The risk of stagflation will depend partly on the pace of Fed rate reductions. Given the ample room for cuts, the Fed is well-positioned to mitigate stagflation risk. Accordingly, we maintain our year-end target of +15% for the Nasdaq.

From a fiscal perspective, the U.S. also has tools to counter tariff shocks. With tariffs rising, targeted tax rebates could be deployed to stimulate domestic demand, providing a thick policy cushion.

V. China and Global Spillover Effects

On the China side:

July export data remains robust;

U.S.-China tariffs are unlikely to change in the short term;

Large-scale drawdowns in Chinese capital markets appear unlikely—recent pullbacks have been less than 2%.

If the Fed cuts rates in September, the global market uplift would be broad-based. In such a scenario, Hong Kong equities merit close attention: they offer exposure to both China’s economic fundamentals and USD liquidity tailwinds. This could propel them to higher trading ranges.

That said, China’s July economic data, to be released this week, may be soft—likely adding short-term volatility. Nevertheless, a medium-term long bias toward China remains a valid and potentially rewarding strategy.

Bottom Line:
The probability of a September Fed rate cut is rising, but the path will be data-dependent. We expect choppy markets, where economic data surprises dictate entry timing. U.S. equities—especially Nasdaq names—retain upside potential into year-end, while Hong Kong and Chinese markets could benefit significantly from global liquidity easing.