March seventeenth, 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 Fed’s Dilemma

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

The policy rate is unlikely to move 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 (expressing greater confidence in the economy and emphasizing that the policy rate will remain restrictive),If signs of slowing growth in the market continue to strengthen, dovish expectations will intensify.

Treasury Secretary Bessent confirmed over the weekend that the new tariffs will take effect on 4 month 2, while suggesting that trading partners may lower tariffs during 4-6, a possibility the market has not fully priced in. Meanwhile, he described the correction in U.S. equities as “healthy”, and continued to emphasize that the economy needs 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 slowing economic growth have appeared since the start of the year. The potential weakness in the labor market deserves particular attention; the impact of federal government layoffs could exceed expectations. If the economic data continue to weaken, the core of the FOMC debate will shift from “higher-for-longer” to “when to ease.”

In the base case, the median of the dot plot could be revised lower this time, 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, markets may react hawkishly. Even so, Powell will most likely emphasize that the focus is shifting more toward growth risks, rather than stressing inflation risks again.In other words, even if the Fed does not appear overtly dovish, its bias is already shifting.

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

2025.03.17

III. Market Pulse 

Our latest Comments on the economic and market environment

Consumption Stimulus Action Plan

CN’s Action Plan to Promote Consumption sets out key measures, including: (1) raising household incomes, moderately increasing the minimum wage, broadening income sources from financial markets and rural housing, and speeding up the settlement of corporate arrears; (2) increasing social spending, establishing childcare subsidies, raising basic pension benefits and basic medical insurance subsidies for residents, and encouraging people in flexible employment to join social insurance; (3) expanding the supply of services for consumption, with a focus on elder care, childcare, housekeeping, culture, sports, and tourism, and promoting the use of AI technology in consumer markets; (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 yuan and encouraging local governments to provide more support; (6) allowing local governments to use special local government bonds to purchase existing housing stock and lowering housing provident fund loan 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 consumer lending to individuals.

The Action Plan broadly follows the policy direction set at the national meetings, while further specifying the policy measures. Details remain to be announced, including the size and scope of the closely watched childcare subsidies and how local governments will use special local bonds to reduce housing inventory.

However, local fiscal capacity remains a challenge, so the scale of consumption stimulus will certainly remain relatively modest in the short term; the scale of the trade-in subsidies is in line with market expectations, with little that is surprising. This is still a long-term allocation position; this area is not going to move quickly in the short term. At least, after everyone has gone through a round of tech, coming back to this will definitely feel unfamiliar.

2025.03.17

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