Facing uncertainty, the market has developed a "data dependency syndrome"

Over the past month, the US dollar index has plummeted by 5%, once again approaching a new low for the year, nearly recording its worst monthly performance since 2011. Behind the weak performance of the dollar are Trump's ever-changing tariff policies and market concerns about a recession in the US economy. Currently, it is difficult for China and the US to reach a consensus on tariff issues, which also means that the US economy will face a "fact check" in the second quarter.

This week, the US will release its first-quarter GDP data. Although the market expects weak growth in the first quarter, GDPNow indicates that the US economy may experience negative growth in the first quarter. If negative growth occurs, the second quarter will become the most critical economic moment for Trump, and clearly, he would not want to lead the US economy into a deep abyss in the first two quarters of his presidency.

For Trump, one of the challenges he faces is that even if the US economy falls into recession, his fiscal policy space will be limited. On one hand, the push for tax cuts still requires time; on the other hand, excessive fiscal policy overreach could affect the stability of the US bond market. Therefore, the likelihood of improvement in the US economy in the second quarter is relatively low. In contrast, the market has priced in about a 60% chance of the Federal Reserve starting to cut interest rates in June. The performance of the US economy will undoubtedly be the most critical factor influencing the Federal Reserve's decision-making.

Another issue that the market has been grappling with is the inverse movement of US bonds and the dollar, where both the dollar and US bonds have been declining simultaneously. However, this inverse trend has recently seen some recovery, as US bond yields have also declined alongside the dollar. In other words, the sell-off of dollar assets seems to have entered a cooling period. Fundamentally, US bonds are still backed by the US Treasury and the Federal Reserve, so the likelihood of US bonds going out of control is relatively low; however, the dollar faces a crisis of trust, which does not seem to be something the Treasury and the Federal Reserve can fully control.

Of course, relative to the weak performance of the dollar index, the performance of Asian currencies, except for the yen, does not appear particularly strong. The reason behind this is that exports remain highly important for major Asian economies. In this context, the market needs to wait for trade data from Asian countries to test the impact and shock of tariffs on the economy. Regardless, after a series of sensational headlines, the market needs to start focusing on hard data. This also reminds us of several moments of crisis, such as during the COVID-19 pandemic, when we needed to assess the speed of economic recovery through foot traffic. However, it is worth mentioning that the likelihood and scale of fiscal stimulus from the Trump administration will probably be far lower than during the pandemic.

The US dollar index is once again approaching a new low for the year, having plummeted by 5% over the past month, nearly recording its worst monthly performance since 2011. Behind the weak performance of the dollar are Trump's ever-changing tariff policies and market concerns about a recession in the US economy. Currently, it is difficult for China and the US to reach a consensus on tariff issues, which also means that the US economy will face a "fact check" in the second quarter How significant is the impact of tariffs on inflation and the economy? Data released in the near future will gradually reveal such scars.

This week, the United States will announce its first-quarter GDP data. Although the market expects weak growth in the first quarter, GDPNow indicates that the U.S. economy may experience negative growth in the first quarter. If negative growth occurs, the second quarter will become the most critical economic moment for Trump, and clearly, he would not want to lead the U.S. economy into a deep abyss in the first two quarters of his presidency.

For Trump, one challenge he faces is that even if the U.S. economy falls into recession, his fiscal policy space will be limited. On one hand, tax cuts still require time to implement; on the other hand, excessive fiscal policy overreach could affect the stability of the U.S. bond market. Therefore, the likelihood of improvement in the U.S. economy in the second quarter is relatively low. In contrast, the market has priced in about a 60% chance that the Federal Reserve will begin cutting interest rates in June. The performance of the U.S. economy will undoubtedly be the most critical factor influencing the Federal Reserve's decisions.

Another issue that the market has been grappling with is the inverse movement of U.S. bonds and the dollar, where both the dollar and U.S. bonds have declined simultaneously. However, this inverse trend has recently shown signs of recovery, with U.S. bond yields declining alongside the dollar. In other words, the sell-off of dollar assets seems to have entered a cooling period. How long this situation can last is also a concern for the market. Fundamentally, U.S. bonds are still backed by the U.S. Treasury and the Federal Reserve, so the likelihood of U.S. bonds spiraling out of control is relatively low; however, the dollar faces a crisis of trust, which does not seem to be something the Treasury and the Federal Reserve can fully control. Overseas investors voting with their feet indicates that the issues with the dollar are just beginning. From the specific movements of the dollar and U.S. bonds, U.S. bond yields remained roughly stable or even slightly declined in April, while the dollar index fell sharply by 5%, seemingly forming the first scar on the market regarding the U.S. economy and dollar credibility. Whether this scar can be healed still depends on the performance of the U.S. economy and Trump.

Of course, relative to the weak performance of the dollar index, Asian currencies, except for the yen, do not appear particularly strong. The reason behind this is that exports remain highly significant for major Asian economies. In this context, the market needs to wait for trade data from various Asian countries to test the impact and shock of tariffs on the economy. On the morning of May 1, South Korea will announce its trade data for April, and this data is expected to provide some early guidance to the market. From the data already released for the first 20 days of April (a year-on-year decline of 5.2%), the likelihood of negative export growth for the entire month has increased significantly. Meanwhile, some high-frequency data from Chinese ports will also be closely monitored by the market. From these perspectives, after a series of sensational headlines, the market needs to start focusing on hard data. This also reminds us of several crisis moments, such as during the COVID-19 pandemic, when we needed to assess the speed of economic recovery through passenger flow. However, it is worth mentioning that the likelihood and scale of fiscal stimulus from the Trump administration will likely be far lower than during the pandemic

Authors of this article: Zhou Hao, Sun Yingchao, Source: GTJAI Macro Research, Original title: “【Guotai Junan International Macro】Facing Uncertainty, the Market is Suffering from 'Data Dependency Syndrome'”

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