2025 kicked off with turbulence in the stock market, with uncertainty surrounding the Fed’s policy direction, the upward march of the dollar and Treasury yields, and Trump’s presidential inauguration earlier this week. With these dynamics in mind, we present our annual “Top 10 Charts for the Year,” which we hope can empower you to discover data-driven insights and take charge of your decisions in the year ahead.
This also marks the final article of our 2025 Outlook Series. In this article, we summarize key points from the analyses we’ve published in this series, consolidated into 10 most crucial charts to watch this year, along with asset allocation directions based on different scenarios.
I. Should We Be Concerned About the Likely Downtrend in the Manufacturing Cycle?
First, the key distinction between 2025 and 2024 lies in the potential inflection of the manufacturing cycle, i.e., the short-term or minor economic cycle. Hence, the first essential chart to watch is the MM Manufacturing Cycle Index. After reaching a high point in May last year, the index has become more volatile, no longer maintaining an upward trajectory seen over the past two years. That said, it’s worth noting that recent index readings remain high, mainly because the downturn in this cycle will very likely differ from past patterns.
In the context of sectoral divergence, where weaker industries can benefit from low bases and stronger industries are driven by productivity gains, we expect greater resilience in this downswing cycle. In the past, manufacturing downturns usually lasted 1.5~2 years, but instances during 2002~2006 point to significantly shortened downswings, during which new demand continued to emerge. Looking at the four phases of the manufacturing cycle from the inventory perspective (passive destocking, active restocking, passive restocking, and active destocking), although restocking momentum has slowed, there is no clear indication that the cycle has entered the active destocking phase. Looking ahead, it is crucial to monitor whether the MM Manufacturing Cycle Index continues to fluctuate around zero, without slipping into a downward trend, as this would serve as a key source of support for the stock market in 2025.
Apart from the MM Manufacturing Cycle Index, as a highly export-oriented economy and a critical node in the semiconductor industry, Taiwan's export data is equally significant. It is closely linked to cyclical trends in the manufacturing sector. The sectoral divergence backdrop mentioned above is also reflected in Taiwan’s export data. Over the past two years, Taiwan's export structure has changed dramatically. Besides shifts in export destinations due to decoupling from China, the product mix has also evolved. Reflecting AI-driven demand, information and communication technology (ICT) products have emerged as a dominant segment, with export values surging significantly, while exports of electronic components, representing consumer electronics, have remained relatively flat around at around US$15~16 billion.
Looking ahead to 2025, we anticipate the AI-driven ICT segment to remain the main driver of export growth, sustaining double-digit performance. Meanwhile, growth in previously weaker segments like electronic components, or total exports excluding ICT, can steer clear of negative growth given the low base effect (especially in the first half of the year), as long as exports of these goods maintain at normal busy seasonal levels. Overall, in the context of a moderate decline in the manufacturing cycle, we expect Taiwan’s annual export growth to remain in the single digits, supporting the performance of global stock markets.
Finally, in addition to base effects, the still relatively healthy inventory levels across major semiconductor manufacturers have been the most crucial factor supporting this manufacturing cycle. Furthermore, the Customers’ Inventories subindex under the Purchasing Managers' Index (PMI) in the U.S., China, and Taiwan is currently all below the 50 baseline. Year-on-year inventory growth rates for major companies in industries like semiconductors, smartphones, and PCs also remain contained. Even companies that have aggressively increased their inventories and production due to the AI boom, such as TSMC and Nvidia, have inventory turnover days near their lowest levels over the past 2~3 years, with Nvidia even reaching new lows.
If the above trends persist in 2025, manufacturers are unlikely to face pressure to further cut production or reduce capital expenditures, even without a large-scale device replacement cycle. With special focus on the semiconductor industry, we have created a chart tracking changes in the days sales of inventory of eight major semiconductor companies in the industry’s supply chain. If the year-on-year changes remain below the zero axis with no significant spikes, it would mean the trend of lean inventories can sustain.
II. Is the Long-Term Economic Outlook Still Positive?
Shifting our focus to the long-term global economic outlook. Generally, fluctuations in the short-term manufacturing cycle do not necessarily point to an imminent global recession. The key reason is that as long as the U.S. economy, which is the largest end market, remains on solid footing to a certain extent, consumer demand can sustain. Once businesses in the manufacturing sector go through a short period of inventory adjustments, they will be back on track for expansion.
Last year, the U.S. economy outperformed its peers. Looking at the MM Economic Expectations Index, while expectations for most economies gradually shifted downward in the second half of the year, expectations for the U.S. economy remained high. This strength is also evident in labor market data. Despite a large downward adjustment of 818,000 jobs for annual nonfarm employment, the largest downward revision since 2008, in the Bureau of Labor Statistics’ (BLS) preliminary benchmark revision released in Q3 last year, as well as weather-related impacts briefly causing nonfarm payroll growth to dip below 50,000 per month, as the latest data for December suggests, monthly job gains have returned to a healthy average of 170,000 jobs over the past three months.
Going into 2025, stricter immigration controls are expected under the newly inaugurated Trump administration. Fortunately, labor supply and demand have returned to balance, and we believe tighter labor supply under a tougher immigration policy actually provides additional protection against the scenario of oversupply in the labor market. **If nonfarm payroll growth maintains at around100,000 per month, there is a chance for the unemployment rate to stabilize around 4.5%, steering clear of triggering the Sahm Rule recession threshold.
What is the Sahm Rule: Proposed by Fed economist Claudia Sahm, the Sahm Rule is a recession indicator which suggests an economy is in or on the verge of a recession when the 3-month moving average of the unemployment rate is more than 0.5 percentage point above its lowest level over the previous 12 months.
Stable employment conditions translate to greater spending capacity of households. Currently, the U.S. household savings rate remains at post-pandemic lows, driving strong consumer spending even after excess savings were exhausted. In December, retail sales maintained at a robust year-on-year growth rate of close to 4%, and sales in two key segments—auto and housing—have also shown signs of improvement recently. In terms of GDP, in its most recent Summary of Economic Projections (SEP), the Fed has revised its GDP growth forecast for 2025 to 2.1% (prev. 2.0%), slightly above the long-term average. This again reflects the strength of the U.S. economy. We can continue to monitor the Atlanta Fed’s GDPNow forecasts. If the seasonally adjusted annual rate (SAAR) for each quarter remains at around 2%, then economic growth in the U.S. will likely stay above the long-term average even against higher bases from last year.
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Related reading: 2025 Outlook Series | US Economic Outlook: What’s Next for the US Economy in 2025?
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Related reading: 2025 Outlook Series | Europe & Japan Economic Outlook
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Related reading: 2025 Outlook Series | China Economic Outlook: Three Major Challenges & Three Policy Signals to Watch
III. What Are the Key Factors Affecting Liquidity Conditions?
In terms of the financial environment, 2024 saw the Fed finally begin cutting interest rates, fueling a liquidity-driven rally that pushed the three major U.S. stock indices to all-time highs. However, with Trump’s victory and the Republican Party’s unexpected sweep of Congress at year-end, U.S. Treasury yields faced turbulence, casting a shadow over the stock market’s early momentum in 2025. Will interest rates once again emerge as a key factor of uncertainty for market performance this year? We can monitor the two charts below to find out.
The Fed has reduced its rate cut forecast for 2025 to just 50 basis points. Does that mean liquidity will tighten again? We can get a glimpse of the answer by looking at the Taylor Rule. As shown in the chart below, with inflation moving towards the Fed’s target, currently, the effective policy rate is already close to the implied rate and is also not far away from the nominal neutral rate of about 3%. This indicates that the restrictive monetary policy over the past 3 years is coming to an end. With interest rates no longer constraining economic activity, we believe the Fed’s shift towards a “wait-and-see” approach at this time is not a bad thing.
