Aberdeen: The market is expected to react lukewarmly to the updated dot plot from the Federal Reserve in June

According to the Zhitong Finance APP, Ray Sharma-Ong, head of the Southeast Asia Multi-Asset Investment Strategy at Aberdeen, stated that during the Federal Reserve's Federal Open Market Committee (FOMC) meeting in May, the Fed abandoned its accommodative stance and indicated that the impact of tariffs and trade policies has led to uncertainty in the outlook, making it difficult to assess. Given this uncertainty, Chairman Powell emphasized the need to refer to actual economic data before determining the direction of monetary policy.

This shift in tone has several implications:

First, the interest rate dot plot released in March 2025 indicated two rate cuts in 2025, but it can no longer serve as a market guide. The Fed will consider the increasing uncertainty and provide the market with a revised economic forecast summary and dot plot at the June 2025 meeting. However, given that President Trump’s 90-day delay on imposing new reciprocal tariffs will expire on July 8, 2025, after the June meeting, the bank expects the market to react lukewarmly to the updated dot plot in June 2025.

Second, due to heightened uncertainty, the threshold for rate cuts has been raised. This makes it more difficult for the Fed to cut rates in advance to support economic growth, as the impact of tariffs poses a high risk of rising inflation.

Finally, the Fed is only willing to take action when actual economic data declines (such as rising unemployment rates and weak employment data), indicating that if the Fed cuts rates, it is likely to happen in July 2025 or later. This is because the impact of tariffs on the overall economy takes months to reflect in actual data, and this occurs after the expiration of Trump’s 90-day tariff delay.

Ray Sharma-Ong noted that given the Fed's inaction during this period, the bank prefers regions outside the U.S., such as Europe and China, which have strong fiscal and monetary policy support. These policy tools will help offset the negative drag of tariffs on economic growth. The bank is also focused on regions that are engaged in in-depth negotiations with the U.S. regarding trade tariffs and are drafting memorandums of understanding, such as India, Japan, and South Korea.

In terms of interest rate-related assets, Aberdeen favors regions with strong monetary policy support, such as India and China, as these markets are less correlated with the pressures from U.S. Treasury yields, which have been influenced by Fed uncertainty, inflation pressures, and rising risk premiums. In corporate credit, the recent rise in developed market bond yields has provided opportunities to allocate to corporate bonds with very robust credit fundamentals that are less affected by the macroeconomic environment, yielding higher returns.

As we enter May 2025 and the U.S. Congress's recess period ends, Aberdeen expects that some of Trump's earlier campaign agendas will receive more attention, including tax cuts and deregulation. Given that the Republican Party controls the presidency, the House of Representatives, and the Senate, the likelihood of achieving positive legislative outcomes in these areas is high. Since the reform of supplementary leverage ratios is a top priority for the Trump administration, and there is a push to exclude low-risk assets such as Treasury bonds and central bank reserves from SLR calculations, if successful, the bank expects U.S. financial stocks to perform well Aberdeen also expects that the performance of the Chinese stock market will remain resilient relative to the Federal Reserve's policy decisions. In addition to fiscal and monetary policy support, China's economic activity growth (as indicated by actual economic data) remains resilient, and China also has additional leverage from stock market support programs. Given that both China and the United States acknowledge that the current tariff levels between the two countries are unsustainable, the bank expects that the trade tensions between China and the U.S. will gradually but ultimately ease, which will be welcomed by the market