# Roundup of the week: 12 December 2025 _Rates are falling, China’s imbalances are growing louder, and Washington is quietly shifting towards an industrial strategy shaped by the AI race with China. Meanwhile the OBR produces yet another forecast that simply doesn’t add up — and UK “AI superpower” rhetoric looks thin next to global chip spending._ Neil Woodford · 12 December 2025 · 11 min read ![The US reaction to China's technological prowess feels increasingly like a "Sputnik moment" which spurred the US on to create NASA and ultimately put the first man on the moon.](https://cdn.sanity.io/images/v3acfbvo/production/0b6ad46399dd2f56a56cf2a4174cda4497c9dc7c-2700x2025.jpg?w=1600&fit=max&auto=format) --- **If you think we have missed something you would like to discuss or would like to send in a question for next week's podcast episode,** [**send us an email**](mailto:hello@noisecancelling.co)**.** As we approach the end of what has seemed like a long and quite volatile year, the frequency of macroeconomic and geopolitical developments remains pretty intense, and there is little sign yet of a seasonal lull. In the last few days, the scale of China’s trade surplus has been revealed, US interest rates have been cut for the third time this year, the IMF has pronounced on what China must do to rebalance its economy, and apparently, the ECB is about to upgrade its Eurozone growth forecast for 2026 for the second time from a still somewhat pedestrian 1.2%. Whilst all that was going on, President Trump has permitted Nvidia to restart exports of its H200 artificial intelligence chips to China (in exchange for a 25% surcharge), TSMC has announced consensus-beating sales for November, and more pharma/biotech deals have been announced in the US. In other words, it remains a busy time. ## Politics Inevitably, at this time of year, the forecasting industry goes into overdrive, and because the year is about to change, the feeling is that everything else must change too. Frankly, this is nonsense, and I have always thought so. That said, it is a good time to reflect on how the issues that will always impact financial markets are evolving and how that evolution might challenge consensus thinking. ### US At a time when most analysts would be inclined to highlight ongoing US policy uncertainty as a significant risk factor in 2026, and increasing political division, I think one of the most interesting things I have been reading about in recent days is the growing political consensus in the US around some of the key economic and geopolitical issues it will confront in the years to come. Many of these issues were highlighted in the recently published National Security Strategy document, which is updated every four years and which, in the past, has not received much attention. In it, there are some key strategic priorities on which there is a growing political consensus, which also extends to many of the most important issues surrounding the rapidly evolving AI industrial revolution and how the US should respond to the geopolitical challenges posed by China and its growing technology capabilities. This is a big subject and one which I will come back to in a blog in the New Year, but suffice to say here that my sense is that the consensus view that the US has a technology lead over China may well be wrong. A growing awareness of the challenge posed by China’s tech prowess is likely to have a profound impact on US politics and the economy in the future. In some respects, this is another “Sputnik moment”, which, back in the late 1950s, was triggered by the Soviet Union’s launch of the first satellite, Sputnik 1, in 1957. This event created great anxiety in the US about the perceived technological lead held by the Soviet Union. It led to the creation of NASA, the space race that followed, and by 1969, the US had landed two astronauts on the Moon. Less well known, for example, are the studies at the time that showed the Soviet Union was training two to three times as many scientists per year as the US. The fact that China filed 27x as many patents as the US in 2024 draws an obvious parallel. In some respects, the significance of this overt industrial strategy and its importance in Washington, across the political divide, is symptomatic of a profound evolution of the US political economy away from its historic free-market ideology. The significance of its proximity to the publication of China’s 15th Five-Year Plan in March next year should not be overlooked. Having said all this, I do believe that the scale of policy uncertainty confronting financial markets will diminish in 2026, particularly because of the de-escalation of trade friction between the US and China. The two planned summits next year between Presidents Xi and Trump will, I suspect, reinforce this point. ## Economics ### China Two events attracted my attention this week, and, indirectly, they both concern the same issue. First, the IMF’s annual review of China’s economy has once again highlighted its structural imbalances, deflation, a huge trade surplus with the rest of the world, and a weak currency. A couple of days before this report was published, China announced that its 2025 trade surplus in goods will exceed $1trn for the first time despite a significant fall in exports to the US this year. The IMF report highlights that the Chinese economy is too large to generate much growth from exports and that continuing to rely on export-led growth would risk increasing global trade tensions. As if to underscore this statement, Mexico today announced a package of new tariffs affecting hundreds of goods, many of which come from China. The measures will impose tariffs of up to 50% on more than 1,400 products, including metals, cars, clothing and appliances. My sense is that the Chinese government will intensify its targeted policy actions to address its domestic structural imbalances in 2026. Although we will see more in March what the priorities will be in the next five-year plan, raising household consumption must be the primary economic aim. ### US Yesterday, the Federal Reserve cut interest rates for the third time in a row to the lowest level in three years (3.5%). The media is describing the decision as divisive, in its attempt to always see the cup as half empty. In fact, nine of the twelve committee members voted for a cut, two dissented, voting to hold rates, and a third voted for a 50bps cut. In comparison with the MPC, for example, this is an overwhelming consensus. However, apparently, it was the biggest disagreement since 2019, which suggests that if one was of a different mindset, the FOMC had previously been gripped by “groupthink”, given the policy errors committed by the Fed after inflation started to rise in 2021. Nevertheless, this is good news and is an appropriate policy response given the weakness in the labour market and the lower inflation forecast for next year. It also gives me greater confidence that US growth will surprise to the upside next year. ### UK There has not been much new news in the UK this week on which to report, but I have had a bit of time to look in more detail at the OBR’s economic projections, which, as you will all know, were the basis on which important decisions in the budget were made. Not all clearly, now that we know what the Chancellor knew and when, but it is important nonetheless. Having had a bit more time to look at the numbers, I am _more_, not less perplexed. Not only do I disagree entirely with their key forecasts for productivity and growth, but I am also discovering that some of the key underlying assumptions in the forecast just don’t make any sense to me, and some appear to be inherently contradictory. In the New Year, I will write about this in a bit more detail, but for now, here are a few examples. Over the five-year period, the OBR forecasts that wage growth will average 2% pa from 2026. On the other hand it forecasts ten year gilts will yield 5% on average over the period, twenty year gilts will yield 6% and the average rate on the outstanding book of mortgages will be 5.1% (it’s currently a bit below 4%) Aside from its expectation that inflation stays above target in 2026, it has inflation over the remaining four years at 2%, which is the Bank of England’s target. So, in summary, according to the OBR, inflation is lower over this period and at target, wage growth is considerably lower than it has been for years, but interest rates are higher (ten-year gilt yields are currently at 4.4%) and mortgage rates are considerably higher. I have looked back at recent UK economic history and can find no period when this mix of low inflation and low wage growth coincided with bond yields at 5% and mortgage rates at similarly high levels. This makes no sense to me and once again demonstrates that the OBR forecast has been put together in a judgement vacuum. In my view, if inflation is at target and wage growth is next to zero in real terms, base rates will be below 3%, ten-year yields will be below 3%, and the interest rate on the outstanding book of mortgages would be tracking down, not up, from its current level. In the recent Treasury Select Committee quizzing of the OBR, all the attention was focused on the relative trivia of who told whom what and when, and what fat finger pressed what button ahead of Rachael Reeves standing up in the House of Commons. No one on the committee had the wit to interrogate the detail of this stupendously ridiculous forecast, confirming once again that this very important organisation that holds sway over key policy settings and the livelihoods of millions of households and businesses in the UK is answerable, in effect, to no one. ### EU According to the head of the ECB, at the ECB’s rate-setting committee meeting next week, the forecast for growth in the Eurozone in 2026 will be upgraded from 1.2% (to what is unclear). The forecast was also upgraded back in September from 0.9%. This is good news and reflects the impact of the aggressive interest rate cuts the committee has delivered over the last 18 months. Nevertheless, the growth outlook for the EU remains worrying, not least because of the challenges confronting the core countries of Germany, France, and Italy, and the institutional, bureaucratic, and regulatory handbrakes that the economic bloc continues to struggle with. The fact that it has taken the 27 countries four years to decide how to access frozen Russian assets held in the EU to help finance the cost of supporting Ukraine, which next year will run out of money, is a good example of the EU’s structural competitive disadvantages in relation to, for example the speed with which decisions are made in China and the US. ## Markets ### US In a relatively quiet week for corporate news, one standout was the announcement that Donald Trump will allow Nvidia to export its H200 chip to China in a reversal of his previous stance. Apparently, the sales will be to “approved customers” and will incur an effective US tax of 25%, although details of this aspect of the deal were not made clear. The President commented in the press release that the Chinese premier had “responded positively” to the announcement, which, on face value, indicates that this move fits into the portfolio of measures on both sides designed to defuse the trade tensions that erupted between China and the US earlier in the year. The other bit of news that caught my eye in a week characterised by slightly hyperbolic concerns about the AI industrial revolution was Oracle’s second-quarter results, which were at best mixed but also included raised capex estimates, which is not what the market really wanted. The share price responded poorly to the numbers, falling 11%. Since mid-September, the stock has declined by 40%, reflecting the impact of broader concerns about the scale of Oracle’s investment in AI infrastructure. Finally, the biotech sector is getting some long-overdue attention after three or more years of pretty disappointing performance. The NASDAQ biotech index is up by a third so far this year as investors have begun to recognise not only the sector's valuation appeal but also the significant acceleration in dealmaking and M&A activity that is increasingly apparent. In 2026, I expect this to continue, as large pharma companies look to rebuild their drug pipelines as the 2030 patent cliff approaches. This is the best result for the sector since 2014. ### UK Sometimes you bump into a story which just takes your breath away: > The MPs' pension scheme has less than 3% of its equity portfolio invested in UK shares, far lower than private sector peers, prompting claims that it is making "a mockery" of efforts by Chancellor Rachel Reeves to encourage investment in the London stock market. The £855.5mn Parliamentary Contributory Pension Fund had only £12.8mn allocated to UK stocks at the end of March, while £462mn was invested in equities listed in other countries, according to its latest annual report. The average allocation to private-sector defined-benefit funds in listed UK equities is 12 per cent, according to Pensions Policy Institute research. This was in the FT today and underlines not just the stinking hypocrisy of politicians and civil servants but also begs the question: what was motivating the fund manager and its trustees to believe that this was a sensible strategy, or one that passed even the most basic of sniff tests. The upside here is that, given this pension fund and so many others like it have completely deserted the UK equity market, at least their relentless selling pressure, which the UK market has endured for so long, is at an end. ![Roundup of the week: 12 December 2025](https://cdn.sanity.io/images/v3acfbvo/production/621f022abeba4cdff03cde84783066b0aadf73e5-1296x1028.jpg?w=1600&fit=max&auto=format) One other thing which caught my eye was this Bloomberg chart showing the scale of global investment in semiconductors — the essential building blocks for AI. It puts some useful perspective around the political rhetoric. The US, China and several Asian economies are committing very large sums, measured in tens or even hundreds of billions of dollars, through a mix of direct funding, loans and tax incentives. Parts of Europe are at least trying to keep pace. By comparison, the UK’s £1.3bn commitment is very modest. Sir Keir Starmer talks about the UK being a global leader in AI and an AI superpower, but judged against the level of public support being directed at chip manufacturing and related infrastructure elsewhere, we will be doing well to achieve bit-part player status! ## What to look out for next week The UK economy will feature prominently in the news over the next few days. Today, UK GDP data for October is released, and next week, we get inflation data. Also, along with the ECB, the Bank of England will decide what to do with interest rates, and that decision will be announced on Thursday. My expectation is that the ECB will not change, having already done the heavy lifting on rates, whereas the Bank of England, which, in my opinion, has been too slow to cut, will reduce rates by 25bps. Next week’s corporate diary is scheduled to be quiet.