March third, two thousand twenty-five
I. Foundation
resistance to change and hence greater dependability for the results shown in the past.
II. Insights
Our Viewpoints and ideas on market.
The reason for falling interest rates is crucial
Policy uncertainty, combined with the lagged effects of high interest rates and persistently elevated consumer prices, is further weighing on U.S. market sentiment. Meanwhile, resistance at 6,100 remains formidable, leaving markets choppy at the start of the year.
The latest consumer data and individual investor sentiment index also reflect the impact of these factors.
These multiple factors have also changed the correlation structure between interest rates and stocks—as the 10-year Treasury yield has stabilized below 4.50%, the U.S. stock market has become somewhat less sensitive to interest rates. In other words, because The main reason yields are falling now is that growth expectations are weakening, so lower interest rates are boosting stock-market returns less than they were a few weeks ago.
This means, At present, economic growth and corporate earnings growth are the core variables driving equity-index performance.
Further reading: Notes 250109 Stocks and Interest Rates: The Paradigm Logic of the Ten-Year Bond Range and Changes in the Stock-Bond Relationship
2025.03.03
The Fed will take a cautiously dovish stance and the characteristics of this round of expectations data
U.S. consumer expectations declined in both the University of Michigan and Conference Board surveys, In fact, consumer-expectations data are usually quite volatile and often follow, rather than lead, consumer spending.
What is truly noteworthy is that both surveys show a significant recent rise in inflation expectations, This change did not occur during the trade shock of 2018-19, but it was a feature of the pandemic recovery in 2021-23.The rise in expectations in 21-23 played a role in the Fed's rate-hiking cycle, accelerating the pace of rate hikes in the second half of 2022.
Tariffs will keep U.S. inflation near 3% and make the Fed cautious about considering further rate cuts. However, with a stronger dollar and slower wage growth, The risk of a sharp acceleration in U.S. inflation (above 3.5%) remains low.
The Fed will also show greater sensitivity to downside growth risks. Although weak labor demand is not part of the current forecast, if the Fed sees a material threat to economic expansion, it will not hesitate to cut rates even while inflation remains elevated.The U.S. 2-year real yield fell 45 basis points this month, reaching its lowest level since 2022 8, despite rising consumer inflation expectations, but The market has begun pricing in expansion risks.
2025.03.03
III. Market Pulse
Our latest Comments on the economic and market environment
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