From February twenty-fourth, two thousand twenty-five, to February twenty-fifth, 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.

Expectations for China 2 month PMI

China’s 2 manufacturing PMI and non-manufacturing PMI will be released on 3 month 1 day, This time, the data may show some noise and volatility, so they are not especially tradable. However, the data themselves are likely to exceed expectations.

This upside surprise will mainly be driven by workers returning to their jobs after the Spring Festival holiday, with manufacturing output recovering somewhat.Commodity prices in 2 clearly show strong front-loaded demand in the U.S. market, which also points to a boost for China’s export orders.

For non-manufacturing PMI, continued growth in leisure and entertainment spending after the Spring Festival is expected to provide some support and help the overall services sector remain in expansion. However, we should wait and see; the persistence of this trend remains to be observed, especially against the backdrop of an unstable global demand recovery.

Further reading:Notes 250225Asia’s sluggish consumption: growth outlook below expectations

2025.02.24

Pro-cyclical markets since the start of the year

Although markets broadly expected trade wars and policy uncertainty to put tightening pressure on global financial conditions, 2Since 025, market performance has instead displayed unexpectedly pro-cyclical characteristics. Global financial conditions have eased significantly, equity markets outside the United States have surged, and risk assets have rebounded broadly.

Chart: Market trading has essentially followed a pro-cyclical path since 25

Not only have equities performed strongly, but industrial metal prices have risen sharply, credit spreads have narrowed to multi-year lows, and market volatility has generally declined, although foreign-exchange market volatility has remained relatively stable. From this perspective, The dollar selloff since mid-1 is not a market anomaly, but part of the current procyclical market environment. The trade-war logic of 2018/2019 now appears to have broken down, and the market is moving away from the pattern expected at the time. But a final judgment must wait until a series of key tariff events play out over the next month and a half.

Chart: Some key upcoming events

2025.02.25

The case for dollar selling: the second trading phase has arrived

Looking back at the dollar’s movement since the fourth quarter of 2024, its rationale can be divided into two phases.

The first phase was a typical tariff-premium trade: the dollar trade-weighted index (TWI) rose about 7% from its local low at the end of 2024 9, far outpacing the change in interest-rate differentials.Investors’expectations still followed the market logic of 2018/2019, which held that the uncertainty premium generated by the trade war would support additional safe-haven demand for the dollar, rather than merely its fair value based on economic growth or interest-rate differentials.

The market is moving faster, but past experience still applies; this A similar high-volatility, expectations-driven trade-war trading phase to the one in the second half of 2018 now appears to have been fully priced in by the market between 2024 11 and mid-2025 1.

Dollar trading has been different since mid-January.The second phase began once the market thought the dollar had fully priced in the tariff premium. Investors began reassessing the macroeconomic spillover effects of tariffs and reached a new conclusion—In the short term, the main impact of the trade war on the United States is tilted more toward higher inflation than slower economic growth.

This shift caused short-term inflation breakevens to rise sharply. However, because the Fed continues to maintain a dovish stance, short-end nominal yields have remained broadly unchanged; yields on 2-year Treasuries even fell below their previous levels after high inflation data were released in 1.This mismatch directly weakened the real-yield support for the dollar and drove dollar selling over the past month.In other words, real yields are driving the dollar lower.

Further reading: Notes 250225 Pro-cyclical markets since the start of the year

At the start of the year, markets generally believed that U.S. “exceptionalism” was already fully reflected in asset prices, while weakness in other economies around the world had not yet been fully priced in.The market The original logic was that the dollar’s medium-term vulnerability might stem from the economic growth shock caused by the trade war, ultimately forcing the Fed to implement easing beyond what the OIS curve had priced in.However, since 2025, market attention has unexpectedly shifted toward inflation triggered by the trade war rather than an economic slowdown, a macro-level change that surprised the market.

Under the original expectations, if the Fed cut rates because the trade war slowed the economy, the dollar would come under pressure. But at present, although the Fed has not cut rates directly, it has lowered real interest rates through “benign neglect” of surging short-term inflation expectations.This means that The Fed is effectively already implementing a form of monetary easing reminiscent of 2019, but through a different channel, although real interest rates are currently still in historically restrictive territory.

Looking ahead, the dollar is unlikely to rebound sharply in the near term. Long-term inflation expectations (5Y5Y) remain anchored, and the Fed’s policy response is unlikely to change in response to short-term inflation data.Therefore, monetary policy may remain on hold over the next few months, which means The downward trend in the dollar’s real yields will be difficult to reverse in the near term.。

However, as the surge in inflation breakevens gradually stabilizes, its suppressive effect on the dollar may weaken.Moreover, bearish sentiment toward the dollar is strengthening, so It is still not suitable to go long on the dollar against the trend.

The FOMC meeting in 3 will also be a key test for the dollar’s direction. The Fed may raise its inflation forecasts and adjust its dot plot, particularly given the strength of the labor market over the past few months.If the dot plot shows that the Fed has become less tolerant of inflation, this could temporarily halt further dollar weakness.

Finally, although tariffs were briefly ignored by the market, the overall trend is deteriorating.Over the past two weeks, the direction of the trade war has had a more negative impact on global growth and market confidence. In addition to the announced fentanyl tariffs on Canada and Mexico, there are still risks of sector-specific and reciprocal tariffs across several industries, such as steel, aluminum, semiconductors, pharmaceuticals, and automobiles. Tariffs on automobiles and pharmaceuticals in particular could weaken recent optimism in European markets and affect European asset prices.The market may be underestimating the impact of value-added tax (VAT) on reciprocal tariffs. If this policy is ultimately implemented, it could be equivalent to imposing broad-based tariffs of 15%-30% on several emerging-market countries, with a very wide reach.

Further reading: Notes 250225 How far has the deleveraging of dollar longs progressed?

2025.02.25

III. Market Pulse 

Our latest Comments on the economic and market environment

Sluggish Asian consumption: a growth trajectory below expectations

In Asia, although the annual growth rate of household consumption and its share of GDP have returned to pre-pandemic levels, seemingly indicating normalization, but Two key issues are obscured beneath the recovery:

1）Declining marginal propensity to consume:The ratio of the increase in household consumption to the increase in GDP remains low in most economies, indicating insufficient drivers of consumption.

2) Weak discretionary spending:Data such as retail sales show that consumers’ spending on non-essential goods remains weak and that their spending behavior is cautious.

Take Thailand, for example, the improvement in consumption was amplified by the delayed post-pandemic recovery and weak growth in GDP other components (especially public consumption); the actual improvement mainly came from the government’s cash assistance program implemented in the second half of 2024.But overall, weak consumption reflects structural changes in the post-pandemic economy, for example: new job opportunities are increasingly concentrated in low-wage industries, household savings have declined, and rising food and public utilities costs are squeezing disposable income.

Labor-market weakness has not become widespread, but some key indicators have deteriorated. Among them, Slowing wage growth is a common problem across all major economies, offsetting the boost that falling inflation provides to real disposable income.In Malaysia and Thailand, nominal wage growth has fallen to 1-2%, roughly matching the inflation rate, and real income growth has nearly stalled. Wage growth in the Philippines is relatively faster but is showing signs of peaking. Quarterly corporate financial data compiled by the Reserve Bank of India (RBI) show a marked slowdown in labor-cost growth. South Korea is in the most severe position: wage growth is slowing while unemployment is rising, and the labor market as a whole is weakening further.

Moreover, the likelihood of wage growth picking up in Asia in the future is low.The ratio of job vacancies to unemployment is falling, indicating weak labor demand, Workers’ bargaining power is weakening. At the same time, uncertainty over U.S. tariff policy may continue to weigh on hiring and expansion decisions by manufacturing firms, limiting wage growth.

Against this backdrop of constrained wage growth, households tend to increase savings to restore their financial balance, further restraining consumption demand. However, household savings remain below normal levels. Household savings rates in India, South Korea, and Thailand fell sharply in 2022-2023, borrowing growth among households in India and South Korea slowed, and real household debt in Thailand even declined. After the pandemic, household savings as a share of income fell in Indonesia, while the proportion of households with sufficient savings declined in the Philippines.As households rebuild their savings, consumption will continue to be restrained, further weighing on overall economic growth.

In the face of weak household consumption, fiscal and monetary policy support will also be fairly limited.

Fiscal policy supports consumption mainly through tax adjustments, social spending, and cash transfers.Cash transfers can help stimulate household consumption in the short term. However, it remains uncertain whether the transfers will directly translate into consumption. Some households may prefer to save in response to tight household finances and future risks, so the actual boost to consumption will be below expectations.

Compared with fiscal policy, monetary policy has a more limited stimulative effect.Terminal real interest rates in most economies remain close to pre-pandemic levels, and in Indonesia and the Philippines they are still above those levels. This means monetary easing will provide only limited stimulus and is unlikely to boost consumption effectively.Malaysia’s terminal real interest rate has fallen substantially, but this depends on whether the government can begin adjusting fuel subsidies in mid-2025. If the subsidies are not adjusted, inflation for the year may be lower, which would push up the real policy rate and weaken the effect of monetary easing.

Against a backdrop of rising global economic uncertainty, household consumption is expected to remain weak, constrained by slowing wage growth, rising demand to rebuild savings, household deleveraging, and limited policy support. This also means that Overall, the three pillars of Asian economic growth in 2025—household consumption, exports, and investment—lack clear growth momentum, which could leave growth in the region below potential.

2025.02.24

How far has the deleveraging of dollar longs progressed?

The market is currently going through a deleveraging process in dollar-long positions, and this The extent to which this process is complete will determine whether the dollar continues to weaken or rebounds.

The deleveraging can be assessed using several market indicators, including fund flows (DTCC options trading), market positioning (G10 IMM FX positions), market sentiment (EM risk appetite), and dollar valuation models (TWI fair value calculations);

Overall, Since the end of 10 2024, roughly 3/4 of the dollar buying has been unwound, and this adjustment should limit further downside in the dollar.

Source: JPM

2025.02.25

Note: All content in this article is for reference only. It does not constitute investment advice or serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.