Will the grand narrative be reversed?

Core Viewpoints:

1. Big trends, small forces. From tariffs to the dollar, and then to technology, numerous grand narratives have run through the global economy over the past year, continuously creating new histories and leading to a significant "divergence" between financial markets and traditional fundamentals. However, recent disturbances seem to show signs of adjustment. Will the grand narratives on the supply side continue or reverse? What does this mean for the traditional fundamentals on the demand side?

2. With Trump's approval ratings declining, especially after the Republican Party's losses in multiple elections, his future focus may return to domestic issues. Inflation and affordability have become the primary concerns for the American public. The drag of tariffs on the global economy is bound to significantly weaken. The Federal Reserve's "hawkish rate cuts" imply that the dollar may not depreciate unilaterally and could even have a chance of strengthening in the short term.

3. Historically, the development of technological innovation often goes through a process from infrastructure construction to software and applications. The aforementioned penetration of AI technology is still ongoing, and the broad trend of innovation is difficult to disprove in the short term. Unlike the last internet revolution, where technology simply improved economic efficiency, this round of technological narratives also contains richer strategic connotations related to great power competition and national security.

4. Looking ahead to next year, as the midterm elections approach, domestic factors will strengthen constraints on Trump, and the impact of tariffs will further converge. De-dollarization has not reversed, but the twists and turns of the rate cut path may indicate a two-way fluctuation of the dollar in the short term. The impact of technology on market risk appetite may not have ended. Of course, the most direct feelings for our micro entities are still the improvement or lack thereof in domestic total demand and prices.

Main Text:

From tariffs to the dollar, and then to technology, numerous grand narratives have run through the global economy over the past year, continuously creating new histories and leading to a significant "divergence" between financial markets and traditional fundamentals. However, recent disturbances seem to show signs of adjustment. Will the grand narratives on the supply side continue or reverse? What does this mean for the traditional fundamentals on the demand side?

Figure 1. What are the primary concerns of the American public?

Note: The proportion of the public selecting "inflation" as the most important issue.

1. What does the temporary suspension of tariffs mean?

With Trump's approval ratings declining, especially after the Republican Party's losses in multiple elections, his future focus may return to domestic issues. Inflation and affordability have become the primary concerns for the American public. Correspondingly, the drag of U.S. tariffs on the global economy is bound to significantly weaken. It is worth mentioning that during the trade friction period, China's export share in the global market still demonstrated strength.

Figure 2. What about tariffs?

Note: Global includes 41 major economies.

1. Will the dollar remain weak? In the past, interest rates could explain short-term fluctuations in the US dollar quite well. However, since the second quarter of this year, the US has imposed additional tariffs, coupled with concerns about the independence of the Federal Reserve and exchange rate security, leading to a weakness in the dollar that cannot be explained by interest rates. However, as Trump's "maximum pressure" in various aspects has somewhat eased, the deviation of the dollar may also alleviate. The Federal Reserve's "hawkish rate cuts" suggest that the dollar may not necessarily depreciate unilaterally and may even have a chance of strengthening in stages.

Figure 3. US Dollar, returning to fundamentals?

Note: The federal funds rate is the implied level for the end of 2026 based on futures.

III. How long will the tech narrative last?

Historically, the development of technological innovation often goes through a process from infrastructure construction to software and applications. The aforementioned penetration process of AI technology is still ongoing, and the broad innovation trend is difficult to disprove in the short term. Unlike the last internet revolution, where technology simply improved economic efficiency, this round of technological narrative also contains richer strategic connotations related to great power competition and national security.

Figure 4. Has this round of technology reached its end?

Note: Infrastructure includes electricity, communication and computer equipment, data centers, etc., while downstream applications are mainly software.

Looking ahead to next year, as the midterm elections approach, internal factors in the US will strengthen constraints on Trump, and the impact of tariffs will become more convergent. The trend of de-dollarization has not reversed, but the twists and turns of the rate cut path may indicate a two-way fluctuation of the dollar in the short term. The impact of technology on market risk appetite may not have ended. Of course, the most direct feelings of our country's micro entities are still the improvement or lack thereof in domestic total demand and prices.

Authors of this article: Eric Wu, Gao Tong, et al., Source: Eric Wu's Economic Notes, Original title: "Will the Grand Narrative Reverse?"

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