From January twenty-seventh, two thousand twenty-five to January thirtieth, two thousand twenty-five

I. Foundation

resistance to change and hence greater dependability for the results shown in the past.

The Four Quadrants of the Macro Cycle

There are four macroeconomic cycle regimes: Disinflationary Boom, Inflationary Boom, Stagflation, and Deflationary Bust.

1）Disinflationary Boom

A Disinflationary Boom is defined by rising growth alongside falling inflation, A Disinflationary Boom is a typical early-cycle stage; at this stage, financial conditions tighten and credit availability declines, reducing spending and, in turn, weighing on profit growth, prompting central banks to ease policy and the yield curve to bull-steepen.

2）Inflationary Boom

An Inflationary Boom is defined by rising growth alongside rising inflation, an Inflationary Boom usually occurs in the middle of the cycle, or the mid-cycle stage; at this stage, central banks are still easing policy, and the influx of liquidity pushes interest rates down and compresses risk premiums.This self-reinforcing expansion drives cash flow growth, but later in this stage central bank policy gradually shifts toward tightening and the output gap narrows.

The market characteristics of an Inflationary Boom are relatively clear, the market narrative behind it is the recovery of cyclical sectors, including industrials (XLI), materials (XLB), energy (XLE), financials (XLF), technology (XLK), and small caps (IWM),The relative performance of these sectors versus the S&P 500 Index can be one criterion for making this assessment.

3）Stagflation

Stagflation is defined by slowing growth alongside rising inflation, Stagflation usually occurs late in the cycle, or in the late-cycle stage; at this stage, economic growth remains above potential but has peaked, and central banks begin to turn hawkish. Risk assets are usually in their final melt-up phase.Later in this stage, monetary tightening pushes yields higher, and the market’s response to adverse news and events is amplified.

The stagflation phase of the cycle is a macroeconomic regime in which growth momentum weakens while inflation momentum accelerates, This is one of the most difficult stages to navigate; the challenge is not which assets to hold, but how much beta risk the portfolio should carry.

The reason is that growth slows while inflation rises during this stage. This causes sales to fall over the business cycle while input costs or wage costs rise, dealing a double blow to margins.In this environment, corporate earnings come under pressure, weighing on the stock market and company profits.

This stage is also relatively difficult to distinguish, because Stagflation may also be a temporary distortion caused by tighter financial conditions, and the market could shift back to an Inflationary Boom at any time as financial conditions ease.

4）Deflationary Bust

A Deflationary Bust is defined by slowing growth alongside falling inflation, A Deflationary Bust is a typical economic slowdown or recession phase In this stage, monetary tightening widens risk premiums and gradually transmits to the real economy, with a lagged impact on corporate earnings. The output gap is large at this point.

2025.01.28

How did the Federal Reserve view tariffs during the last trade war?

A review of Federal Reserve meeting minutes and staff analyses from the first trade war in 2018 and 2019 yields three conclusions:

1）Federal Reserve staff and FOMC members took a relatively relaxed view of tariffs’ effect on inflation

2) Staff estimates of the impact of broader tariff plans The estimated impact on GDP was far more severe than the market had predicted.

3) Although FOMC ultimately chose to cut rates, some members were skeptical that “the impact of tariffs was sufficient to warrant an adjustment to monetary policy.”

This is also why one of the least-watched FOMC in months, covered in Notes250129, says that “tariffs will not constrain FOMC’s policy adjustments over the long term.”

2025.01.29

II. Insights

Our Viewpoints and ideas on market.

The United States can no longer sustain the narrative of its technological hegemony on its own

The Stargate project, a 5000-billion-dollar gamble intended to dominate the AI infrastructure race, presents a paradox:It is both inevitable and seemingly impractical. Its success does not depend on a technological breakthrough, but on whether it can navigate the maze of sovereign competition, financial dependence, and geopolitical red lines.

The United States cannot, and will not, fund the Stargate project alone.Even with 1000 hundred million dollars in federal loans and 1250 hundred million dollars of investment from Microsoft/NVIDIA, the project’s first phase still faces a funding gap of 2750 hundred million dollars. To fill that gap, the United States will have to strike a “Faustian bargain” with foreign sovereign wealth funds.These funds will trade infrastructure for equity, and capital injections for ownership of Stargate data centers. For example, the 750-billion-dollar investment proposed by MGX would give Abu Dhabi an 15% stake and control over server operations in the Middle East.

Chart: Stargate’s ownership structure

Meanwhile, SoftBank may restructure its debt through the Stargate project, with 400 hundred million dollars of related Vision Fund debt secured by Stargate project assets.In exchange, SoftBank may give U.S. regulators access to ARM chip designs in return for looser antitrust oversight.

Stargate’s “American” branding is inherently contradictory.It relies heavily on foreign capital, whose participation inherently undermines the U.S. sovereign interests it claims to promote.By 2030, non-U.S. entities may hold between 55% and 60% of Stargate’s equity, giving them veto power over AI Pentagon contracts and chip-export policies.

On the other hand, Stargate depends on 80% of the AI chips produced by TSMC and Samsung, and these companies themselves rely on Chinese rare-earth imports, leaving their supply chains highly vulnerable to Chinese leverage. China holds 92% of the global market share in rare-earth processing, giving it the ability to halt chip production through export controls.This strategy already showed its effectiveness during the trade war in 2020. If China retaliates against U.S. technology sanctions by restricting exports of magnesium or gallium, Stargate’s supply chain could grind to a halt.

Another potential threat concerns data sovereignty. G42 data centers located in Abu Dhabi are an important part of the Stargate network, but these facilities are governed by UAE law. This legal gray area makes it difficult to enforce U.S. privacy laws and export controls.

The Stargate project therefore reveals a harsh reality: the United States can no longer sustain the narrative of its technological hegemony on its own.By bringing in MGX and SoftBank, the United States gains short-term capital but also faces long-term risks that may run counter to its goal of winning the AI competition. Yet this also reflects a reality of transition: global AI leadership no longer depends on unilateral advantage, but on collaboration. Stargate’s ultimate legacy is that, even as the AI competition rages, capital has no borders, and power—as the new Trump administration demonstrates—always flows to those who control the money.

2025.01.27

One of the least-watched FOMC in months?

At this point, this may really be the least-watched one in months, The 1 FOMC meeting is not expected to provide much new information. The statement may mention a stabilizing labor market, but is unlikely to offer clear guidance on a rate cut in 3.

A few key points to watch at the press conference:

1) Whether the Federal Reserve believes that further disinflation (expected over the coming months) could open the door to rate cuts

2) Whether the Federal Reserve remains convinced that the current level of interest rates“is significantly restrictive”, and therefore unsuitable as an endpoint

3) How FOMC assesses potential tariffs increases and their impact on future prices

The current baseline expectation is for a 25bp rate cut in each of 6 and 12 this year, followed by another cut in 2026.Inflation is likely to continue falling, and tariffs will not constrain FOMC’s policy adjustments over the long term.

The main uncertainty is the precise timing of Federal Reserve rate cuts, for two reasons: first, the economic outlook (inflation and the labor market) still cannot provide clear policy guidance; second, it is not yet clear how FOMC intends to respond to this round of tariffs.

However, one thing we can be fairly confident about is that market pricing is currently too hawkish in reflecting possible future paths for FOMC, particularly because the market-implied probability of rate hikes is too high.

We are skeptical that the new administration’s policies will generate enough inflationary pressure, and FOMC is unlikely to readily consider raising rates further from a level already seen as “restrictive.” In addition, The market may also be overlooking the lesson from 2019: tariff uncertainty then hit the stock market and prompted FOMC to make insurance cuts.

2025.01.29

III. Market Pulse

Our latest Comments on the economic and market environment

Rate-hike expectations are completely off the table

The latest Fed policy meeting mainly put forward these views: 1) keep interest rates unchanged 2) no rush to cut rates 3) future guidance will depend on the data 4) rate-hike expectations are completely off the table

FOMC is in no rush to cut rates and is staying cautious until the future policy direction is clear, This means that, at least for now, the possibility of a rate cut in 3 is essentially ruled out.After market data were strong in 12, the unemployment rate stabilized, making the Fed more comfortable with the current level of interest rates.The Fed is more comfortable with the current level of interest rates.

The statement removed the wording "inflation moving toward the 2% target." Although Powell emphasized at the press conference that the latest two inflation readings were good, he remained somewhat reserved in his optimism about disinflation.

Powell’s remarks at the press conference were somewhat dovish, with the view that the current level of interest rates is "meaningfully restrictive", suggesting more room for rate cuts in the future while rate hikes are completely off the table. He said, "If inflation is not moving toward the target, the most reasonable course is to hold steady."

See our Notes from yesterday for more Notes250129 the most overlooked FOMC in months?

Image: yesterday’s Notes

In fact, the overall outcome of the meeting was broadly consistent with the views we shared yesterday: the macro environment remains bullish, the Fed has easing tools at its disposal + Powell’s policy is steady, while the fiscal deficit can withstand higher interest rates.

Powell’s performance this time was excellent, 2-year Treasury yields have moved almost in tandem with the Fed (federal funds rate 4.25% vs. 2-year Treasury 4.1%), disregarding Trump’s calls for rate cuts, successfully containing inflation expectations and market risk, while eliminating rate-hike expectations and giving U.S. equity valuations room to breathe.The U.S. equity valuation environment can breathe a little easier.

Private-sector debt is in good shape. The private sector deleveraged after the 08 financial crisis, companies locked in low-cost long-term debt during the pandemic, and household debt is concentrated mainly in 30-year fixed-rate mortgages. The fiscal deficit is driving economic growth and can withstand the current "higher for longer" policy. Compared with 08, when the problem was mainly private-sector debt, current fiscal pressures remain manageable.Fiscal pressures remain manageable.

The macro environment remains bullish, the Fed is prepared to ease policy, and economic growth has slowed but remains resilient. Inflation is trending favorably (mainly because housing costs are easing). Powell is currently paying closer attention to the year-over-year data for CPI to rule out the effects of seasonal adjustments.

At this point, core inflation and PCE probably need to fall to 2.5% year-over-year before rate cuts can truly return to the agenda; the 2% target is not a hard requirement.

After the meeting, risk assets strengthened in the market reaction, and attention turned to corporate earnings. The Fed has ample ammunition for rate cuts, while rate hikes are completely off the table. The yield curve bull-flattened, with short-end yields falling; the Fed is keeping the front end restrictive, and market expectations for long-term economic growth and inflation are declining. Risk appetite recovered, credit spreads narrowed, volatility fell, gold and copper prices rose, and the dollar weakened as Treasury yields declined.

The Treasury market is currently pricing in two rate cuts this year, which is broadly reasonable.

Although 2s and 10s are bull-flattening, the overall expectation is still for steepening this year, because the effects of disinflation and the rate-cutting cycle are structural, while the fiscal situation has not improved under Trump (despite the DOGE phenomenon). Debt refinancing pressures are rising; short-term yields will continue to fall, while the long end may face increased fiscal pressure.

Long bonds remain attractive; the 4.5%-year Treasury yield is still relatively high, and 2-year Treasuries are also a good hedge, performing well during rate-cutting cycles. The U.S. economy’s relative advantage remains intact. Given Trump’s return and increased rate-cut expectations, cyclical and value stocks still have the stronger investment case going forward.

Gold’s macro environment is following a perfect path, performing exceptionally well during the rate-cutting cycle as economic growth slows, central banks continue buying, and fiscal concerns in particular drive demand for hard assets.

Chart: The removal of the rate-hike narrative is a major positive for gold

Chart: With Powell still holding steady, expectations for growth and inflation are falling at the long end; the bull market in 2s and 10s is easing, but steepening is set to continue

Chart: Credit spreads are narrowing: corporate balance sheets are healthy and can withstand a higher-rate environment

Chart: Inflation expectations fall: after the Fed held interest rates unchanged, the market’s pricing of future inflation declined further

2025.01.30

The European trade continues

Although LVMH’s earnings fell short of expectations, European markets continue to attract interest, European bank stocks are breaking through key resistance levels across the board, and several important earnings releases are also due today.

The market is looking for opportunities to diversify investment exposure away from the highly concentrated U.S. market.If the macro environment continues to feature solid U.S. growth, high interest rates, and a low equity risk premium, cyclical and value stocks still have room to rise.European markets remain underweighted, and Europe may continue to outperform as concerns about large-cap technology stocks increase.