From March seventeenth, two thousand twenty-five to March twentieth, two thousand twenty-five

I. Foundation

resistance to change and hence greater dependability for the results shown in the past.

Historical episodes of simultaneous declines in the dollar and US equities

A key cross-market theme this year is the evolving correlation between the dollar and US equities. In fact, since mid-2, the main factors driving the sell-off in U.S. equities (both in absolute terms and relative to European markets) have also been weighing on the dollar and weakening it;

Specifically:

1/ Rising US fiscal uncertainty

2/ Tariffs are increasing the risk of US stagflation

3/ Deteriorating confidence among US businesses and consumers

4/ More optimistic fiscal prospects and attractive asset valuations in overseas markets

Over the past 25 years, simultaneous sharp declines in the dollar and US equities have been extremely rare.In fact, the only significant instance of dollar depreciation during a US equity sell-off was the bursting of the US tech bubble in 2000-2002.Although the bear market at the time was far more severe than the current market, but the current decline in the dollar (on a net basis)has already come close to that year’s level, and has occurred over a shorter period.

Chart: DXY vs. S&P500 performance during -10+% equity drawdowns (since 000)

Importantly, 00’s market adjustment also coincided with capital flows affecting the dollar and equities, and a similar situation may arise in 25; global asset allocation is already beginning to shift:

1/ Accelerating inflows into eurozone and Chinese equities

2/ Slower inflows into US equities, with a clear cooling in capital returning compared with 24 Q4

If we further examine cross-market performance during this Fed cycle and use a lower threshold for US equity pullbacks (>-4%), similar dynamics are still evident. This price action stands out, The most recent instance of the dollar and the S&P 500 index falling in tandem was in 24 7 -8, when concerns about the labor market and sticky inflation prompted the market to rapidly reprice its expectations for Fed policy, driving bets on more rate cuts.

The common thread behind the trades is rising stagflation risk.

According to Bank of America’s latest FX & Rates Sentiment Survey, investors’ perception that the US policy mix could lead to “low growth + high inflation” has changed significantly:

1/ 75% of respondents believe the current US policy environment could trigger stagflation risk, compared with only 36% two months ago

2/ 65% of respondents expect the most likely cross-asset combination in 25 to be simultaneous declines in US equities and the dollar, compared with only 36% last month

In addition, the Fed’s quarterly economic projections at the 3 meeting in FOMC also reflected policymakers’ growing concerns about upside inflation risks and slower growth. However, the Fed’s median rate expectations for 27 years ahead remained unchanged.

2025.03.20

II. Insights

Our Viewpoints and ideas on market.

The Fed’s dilemma

Ahead of the FOMC meeting, the disconnect between market pricing and macroeconomic reality is widening.Core PCE is above the Fed’s comfort zone, while signs of slowing economic data are accumulating. In particular, the recent correction in risk assets, combined with policy uncertainty, may further affect consumer spending and business investment. These data are lagging, and waiting for lagging data would only leave the Fed further and further behind the economic cycle.

The policy rate is most likely to remain unchanged this time, but the key question is whether FOMC is willing to offer a possible dovish option. The current expectation is a firm decision with a soft tone (further expressing confidence in the economy while emphasizing that the policy rate will remain at a restrictive level),If signs of slowing growth in the market continue to strengthen, dovish expectations will build.

Treasury Secretary Bessent confirmed over the weekend that the new tariffs will take effect on 4 2, while suggesting that trading partners may lower tariffs during 4-6, a possibility that the market has not fully priced in. At the same time, he described the correction in US equities as “healthy”, and continued to emphasize that the economy needs to transition to less expansionary government policy——transition to a model that relies less on expansionary fiscal policy.

If we focus on growth, the latest surveys show that businesses and consumers are pull back on spending, signs of slower economic growth have emerged since the start of the year, and the underlying weakness in the labor market is particularly worth watching. The impact of government layoffs could exceed expectations; if the economy data continue to weaken, the core of the FOMC debate will shift from “higher-for-longer” to “when to ease.”

In the baseline scenario, the median of this dot plot could be revised down, implying three 25bps rate cuts this year rather than the two previously expected by the market. The risk is that if the dot plot is unchanged, the market may react hawkishly. Even so, Powell will most likely emphasize that attention is shifting more toward growth risks and away from inflation risks.In other words, even if the Fed does not appear overtly dovish, its bias is already changing.

From a trading perspective, rate volatility may rise in the short term. The market is indeed pricing in expectations of three rate cuts, and if FOMC does not clearly signal a more dovish stance, short-term rates may undergo a brief repricing. But given the increased growth risks, any hawkish reaction could be an opportunity, and the US equity market is currently in a policy window marked by uncertainty. The key is whether Powell’s guidance can manage the market’s tone.

2025.03.17

Trump’s immigration policy and the data problem

The tightening of U.S. 25 Q1 immigration policy directly compressed the annualized inflow of humanitarian and other immigrants, which plunged from 140 ten thousand to 20 ten thousand; total annualized net immigration fell from 170 ten thousand in 2024 12 to 70 ten thousand in 2025 2.

For immigrant workers already in the United States, the effects of tighter immigration policy are more complex.

The household survey in the employment report shows that The labor force participation rate of recent immigrants has remained broadly unchanged, the unemployment rate has edged down, and the job-finding rate for immigrants overall ticked up slightly in 2.However, during the first two months of 2025, the number of immigrant respondents in the household survey fell sharply, suggesting that tighter immigration policy may have made some immigrants reluctant to respond to government surveys out of concern.Tighter immigration policy may lead some immigrants to avoid responding to government surveys out of concern. If these nonrespondents are also afraid to go to work, their unemployment will not be captured by official data, A lagged effect of the supply shock may subsequently emerge on the labor side, and the actual labor supply contraction may be more severe than official data indicate.

Chart: Survey response rate declining

Based on the current range of forecasts from various institutions, by the end of 2025, the breakeven rate for nonfarm payroll growth is expected to fall from 13 ten thousand in 3 to 8 ten thousand.

2025.03.18

FOMC Eve & FED Put

On the eve of FOMC, market sentiment remained cautious. Powell said on 1 29:

“Looking back, we can see that the current policy is restrictive. Policy is now clearly less restrictive than before we began cutting rates, by about 100 basis points. So, before considering an adjustment to policy, we will focus on tangible progress on inflation or signs of some weakness in the labor market.”

Fed Stance & Macro Setup

Based on this January statement, the Fed views policy as still being in restrictive territory. The Fed is maintaining optionality in the near term, but elevated core PCE means the dot plot may face upside risk; the market’s central trade is a recalibration of the policy path versus asset pricing. The previous discussion can be found in Notes 250317 The Fed’s Dilemma。

Market Reaction: Relief Rally or Pain Trade?

A relief rally depends on QT a soft pause and a dot plot in line with expectations. In this scenario, risk assets would be relatively strong, equities and FI would rebound, and volatility would fall. Conversely, If the Fed only signals one rate cut and QT remains unchanged, the market will see a bull-flattening move, accompanied by a revival in risk aversion, with risk-off trading taking the lead (the biggest risk).

Directional positioning is currently limited, and the market does not really believe this meeting will be a major catalyst.

QT Matters More than Dots

Current market pricing indicates a 60% probability of a pause QT, Two possible scenarios:

1. Soft Pause: reduce runoff to $10B–$20B per month.

2. Stronger Pause: reinvest maturing MBS funds in UST.

Compared with the number of rate cuts, QT adjustments have a greater impact on liquidity, The Fed’s core objective is to control market volatility amid current economic uncertainty, so QT adjustments may take priority over rate-cut expectations, If there is a strong QT pause plus two rate cuts, cyclical stocks will begin to rebound relative to the market, and cyclical-versus-defensive pair trades will reach a short-term inflection point.

In fact, investors’ current knee-jerk reaction to a hawkish decision in the market is still to buy the dip, On the one hand, the market is currently more focused on growth than on near-term inflation pressures; on the other, even if hawkish signals push interest rates higher, that impact will be brief while risk assets remain fragile.

To reiterate the baseline expectation: a moderate relief rally and lower volatility

Flows remain cautious, with selling in front-end USTs and buying in the long end. Equity cash volume is below its recent average by 20%, and client risk appetite is cooling. The market remains in wait-and-see mode; after growth expectations have weakened, asset prices lack directional trading in the near term.

2025.03.19

Bank of Japan meeting: rate hike in the base case in 7

The Bank of Japan held its monetary policy meeting on 3 18 -19 and, in line with market expectations, decided to keep its policy rate at 0.5%.

Kazuo Ueda said:Wage and price trends are generally within expectations... Although last week’s results from shunto (spring labor-management negotiations) were within expectations, they were slightly stronger than expected... Core inflation monitored by the Bank of Japan is rising moderately; it has now exceeded 1% but has yet to reach 2%.

Addressing increases in food prices, such as rice, he stressed that Prices will not be forcibly suppressed through rate hikes that broadly affect the economy and prices.He also added that The current gradual pace of rate hikes will not significantly increase the risk of the central bank “falling behind the curve”of that risk rising significantly.

On U.S. tariff policy and its effects, he believes uncertainty is rising rapidly. At the same time, the virtuous cycle in Japan’s domestic economy is strengthening. He views the recent rise in long-term interest rates as part of the market’s normal rate-formation process, and said that the situation has not yet reached the point where the BoJ needs to expand its government bond purchases further.

The BoJ still has no urgent reason to accelerate rate hikes and will continue with a gradual pace of increases; against this backdrop, A rate hike in 7 remains the base case. However, if the yen depreciates sharply and rapidly, the hike may come earlier; conversely, if the Upper House election before the 7 policy meeting leads to political instability, the timing of the hike may be delayed.

2025.03.19

Continuing the discussion of the dollar-down, U.S.-stocks-down combination

A weaker dollar and falling U.S. stocks are not an unusual combination, but this dynamic is generally difficult to sustain for a long time. And The persistence of the current episode is already approaching several of the most notable and long-lasting periods of the past 25 years.If concerns about the U.S. growth outlook continue to build and the return prospects of overseas assets become more attractive, The co-movement of dollar weakness and an equity-market correction in this episode may last longer than in similar historical periods, especially while overweight positioning in U.S. assets remains significant.

This combination is not uncommon over short periods (at a daily frequency), but cases that persist longer are relatively rare. The current market trajectory is already approaching several of the most pronounced past episodes. This time may be different, however, mainly because market positioning still favors U.S. assets, If the market continues to view U.S. policy uncertainty as a problem specific to the United States, capital may flow further out of U.S. equities and into assets in other regions.

Flows into eurozone assets have already been observed, but overall positioning remains stable, especially foreign investors’ holdings of U.S. assets have not yet undergone a major adjustment. This is also why the base-case expectation still leans toward the dollar regaining strength this year. The main rationale includes broader trade and tariff risks, as well as the possibility that the market has over-adjusted its growth outlook for the United States and the eurozone.

As mentioned before, Europe will not accelerate much in terms of underlying fundamentals; this is a long-cycle process. The rotation and catch-up between Europe and U.S. equities will probably occur during this period, and we will readjust some of our current positions.

For further reading: Notes 250307 Commentary on nonfarm payrolls & a rare macro trade combination

2025.03.20

III. Market Pulse

Our latest Comments on the economic and market environment

Action plan to boost consumption

The Action Plan to Promote Consumption, issued by CN, includes key measures such as: (1) raising household incomes, moderately increasing minimum wages, expanding income sources from financial markets and rural housing, and accelerating repayment of corporate arrears; (2) increasing social spending, establishing childcare subsidies, raising basic pension and basic medical insurance subsidies for residents, and encouraging flexible workers to join social insurance; (3) expanding the supply of consumer services, with a focus on eldercare, childcare, household services, culture, sports and tourism, while promoting the use of AI technology in consumption; (4) steadily opening the services sector to foreign participation, including telecommunications, healthcare and education, while increasing imports of services such as healthcare, culture and entertainment; (5) doubling subsidies for consumer-goods trade-ins to RMB 3000 hundred million and encouraging greater local support; (6) allowing local governments to use special-purpose local bonds to purchase existing homes and lowering provident-fund mortgage rates; (7) implementing paid leave and removing consumption restrictions such as those on car purchases; and (8) increasing central government investment in services and skills training, providing interest subsidies, and expanding personal consumer lending.

The action plan broadly follows the policy direction set at the national meeting and further details the policy measures. Specific details remain to be announced, such as the scale and scope of the widely anticipated childcare subsidies and how local governments will use special-purpose local bonds to reduce housing inventory.

However, Local fiscal capacity remains a challenge, and the scale of consumption stimulus will certainly remain fairly modest in the near term, the scale of the trade-in subsidies is in line with market views, with few elements exceeding expectations. This remains a long-term allocation position, and this area will not move quickly in the near term. At least, after everyone has completed a round of investing in technology and returns to this area, it will certainly feel unfamiliar.

2025.03.17

India’s market recorded its biggest one-day gain in nearly two months

India’s market recorded its biggest one-day gain in nearly two months, with the Nifty index rising nearly 1.5% to a one-month high and breaking above 22,800 points.Boosted by global market sentiment, the index opened higher and continued to rise, extending yesterday’s rebound. Easing U.S. recession concerns, China’s introduction of stimulus measures and strong domestic fundamentals in India have together supported the recent recovery in market sentiment.

For further reading: Notes 250313 How the India trade can look

If you have not read this supplementary piece, be sure to read it!

The index maintained its gains throughout the day, Bank stocks provided the main support, driven by the overnight rise in ADR, the market saw broad-based gains, with every sector closing higher. Real estate, autos and metals led, while IT, consumer staples and energy posted relatively smaller gains.

Small- and mid-cap stocks performed more strongly, the Midcap index rose 2.2%, the Smallcap index rose 2.7%, market sentiment was clearly bullish, and the advance-decline ratio reached 3:1.India’s market volatility index (India VIX) fell 1.5%, indicating a rise in market risk appetite.