December thirtieth, two thousand twenty-four to December thirtieth, two thousand twenty-four

I. Foundation

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

II. Insights

Our Viewpoints and ideas on market.

Why the reasons for falling interest rates matter

Policy uncertainty, the lingering effects of high interest rates, and persistently elevated consumer prices are further weighing on U.S. market sentiment. Meanwhile, 6,100’s resistance level remains a strong cap, leaving markets choppy at the start of the year.

The latest consumer data and individual investor sentiment index also reflect the impact of these factors.

These multiple factors have also changed the correlation structure between interest rates and stocks—as Treasury yields stabilized below 4.50% for the 10-year maturity, the U.S. stock market’s sensitivity to interest rates has weakened. In other words, because The main reason yields are falling now is that growth expectations are weakening, so lower interest rates are boosting stock returns less than they were a few weeks ago.

This means, For now, economic growth and corporate earnings growth are the key variables driving equity index performance.

Additional reading: Notes 250109 Stocks and interest rates: the paradigm logic of the ten-year Treasury range and changing stock-bond relationships

2025.03.03

The Fed will take a cautiously dovish stance & the characteristics of this round of expectations data

U.S. consumer expectations have declined in both the University of Michigan and Conference Board surveys, In fact, this consumer expectations data are usually quite volatile and often follow, rather than lead, consumer spending.

What is truly noteworthy is that both surveys show a significant recent rise in inflation expectations, This change did not occur during the trade shock of 2018-19, but was a feature of the post-pandemic recovery in 2021-23.The rise in expectations in 21-23 played a role in the Fed’s rate-hiking cycle, prompting it to accelerate the pace of rate increases in the second half of 2022.

Tariffs will keep U.S. inflation near 3% and make the Fed cautious about considering further rate cuts, although with a stronger dollar and slower wage growth, the risk of a sharp acceleration in U.S. inflation, above 3.5%, remains small.

The Fed will also be more sensitive to downside growth risks; although weak labor demand is not part of the current forecast, if the Fed sees a material threat to economic expansion, it will cut rates without hesitation even while inflation remains high.The U.S. 2-year real yield fell 45 basis points this month, reaching its lowest level since 2022 8, despite rising consumer inflation expectations, but markets have begun pricing in expansion risks.

2025.03.03

European markets vs. the U.S.: pricing fiscal expansion and fiscal contraction

What we discussed in the Planet is increasingly becoming reality: European defense stocks have surged by double digits, driving broader market gains, This is essentially a direct reflection of expanded fiscal capacity. One could say that the core rationale for the entire European market rally since 11 of last year has been a reassessment of Europe’s ability and need to spend.

The U.S. decision last night to cut funding support for Ukraine will only accelerate this discussion, and the defense sector is likely to open higher again today; against this backdrop, some very large funding figures are sure to be floated.

Major European powers are taking further steps to seize more than 2000 hundred million euros in frozen Russian assets while drawing up a plan for a ceasefire agreement in Ukraine” (see today’s FT news).

https://www.ft.com/content/6536f4c4-42ce-4d8e-a063-5b7f708e7303

However, the market may be getting ahead of itself about the scale and feasibility of this plan. Many broader European fiscal spending plans or new funds would require unanimous approval from all EU member states, a very high bar, particularly given Hungary and Slovakia.

However, the case for European markets to outperform remains valid as long as the U.S. cannot offer attractive opportunities for future returns(Mag7 is now becoming a capex machine rather than a buyback machine… One market is pricing in fiscal expansion while the other is pricing in fiscal contraction; the outcome is obvious.

Valuation multiples will inevitably expand for the former and contract for the latter.

We have discussed Europe extensively, starting from the beginning of this rally, so I will not include the dates of the supplementary reading notes here. You can search the keywords on Planet to find them; be sure to read all of this material.

2025.03.04

A brief discussion of the “meeting”

Overall, it was in line with market expectations, The following points were all positive: preventing default risks among property developers, curbing cutthroat competition, placing strong emphasis on domestic demand, and supporting emerging industries. After the work report was released, USDCNH rose, interest rates increased by 1 basis points, and the stock market was broadly unchanged (the Hang Seng Tech Index outperformed the broader market).

First, some key data:

1/GDP growth target: 5% (market consensus: 5%)

2/fiscal deficit ratio: 4% (market consensus: 4%)

3/local government special bond quota: 4.4 trillion yuan (market consensus: 4.4-4.5 trillion)

4/special treasury bond quota: 1.8 trillion yuan (consensus: 1.8 trillion) (1.3 trillion, of which +0.5 trillion is for bank recapitalization)

5/CGSB for bank recapitalization: 5000 hundred million yuan (market consensus: 4000-5000 hundred million yuan)

6/CGSB for the consumer goods trade-in and equipment upgrade programs: 5000 hundred million yuan (slightly below expectations)

7/CGSB for consumer trade-ins: 3000 hundred million yuan (slightly below expectations)

Regarding the economic growth and inflation targets: the GDP target of about 5% and the CPI target of about 2% are in line with market expectations. Here, 2%’s CPI target is more realistic than 3%’s previous target, aiming to balance supply and demand and keep the price level within a reasonable range.

The fiscal deficit target was slightly below market expectations, with a quota of 1.3 trillion yuan in ultra-long-term special treasury bonds, an increase of 3000 hundred million yuan from last year; 8000 hundred million yuan is for critical infrastructure, 5000 hundred million yuan for equipment upgrades and consumer goods trade-ins, and an additional 5000 hundred million yuan in special treasury bonds for the recapitalization of large banks。

Local government special bond quota: 4.4 trillion yuan (3.9 trillion yuan last year), including an annual local debt swap quota of 8000 hundred million yuan.

The wording on monetary policy is more dovish than the central bank’s previous language, reaffirming a “moderately accommodative” monetary policy and mentioning “timely cuts to reserve requirements and interest rates,”This is more flexible than the central bank’s previous wording, “cut reserve requirements and interest rates at the appropriate time.”On liquidity management, it continues to emphasize “maintaining ample liquidity.”

However, the key signals are actually outside the numerical targets, with greater focus on domestic demand, the stock market, and the property market, addressing supply-demand imbalances, and specific mention of curbing “involutionary competition”, considered an important source of deflation; the National Development and Reform Commission also mentioned promoting cuts in steel production.

On property, For the first time, it explicitly stated “preventing debt default risks among property developers,” which may echo recent work related to Vanke. It pledged to “support the healthy development of the property and stock markets” and to continue working toward stabilizing the property market.

Domestic demand and consumption rose from the third priority last year to the top priority this year, followed by “new quality productive forces.” Emerging industries singled out for support include new energy vehicles, AI phones and computers, and intelligent robots.

On social welfare, it pledged to increase the medical subsidy per person by 30 yuan and the basic pension by 20 yuan; the National Development and Reform Commission also said would provide childcare subsidies, but specific details have not yet been disclosed.

Finally, this year’s report also added “promoting cultural and economic exchanges across the Taiwan Strait”; 2025’s defense spending growth remains at 7.2%, unchanged from the past two years.

2025.03.05

The dollar smile and the yen trade The USD Smile’s 3rd regime:

Market narratives have continued to change since the U.S. election. The dollar smile theory (USD Smile) can also provide a useful framework for explaining the dollar’s price movements.

So far, the market has mainly traded two patterns:

1/ Dollar strength based on “American exceptionalism” (US exceptionalism)—fiscal expansion, deregulation, and U.S. growth outpacing the rest of the world, especially as tariffs weigh on other economies.

2/Dollar weakness based on “Mag7/OpenAI/European defense spending/data bottoming elsewhere in the world while U.S. growth slows” (partly due to tariff uncertainty).

However, as tariff implementation becomes more concrete, the market may start pricing a broader, globally synchronized growth shock, rather than trading only a slowdown in U.S. growth…especially if tariff retaliation sparks a possible broader global trade war.

The market remains focused on de-dollarization, especially given the underperformance of U.S. equities. Discussions of the “Mar-a-Lago Accord” and global de-dollarization of reserves are also intensifying selling pressure on the dollar. However, as noted above, If tariff escalation turns into a broader global trade war, the market may shift to the third regime of the dollar smile, and the dollar may regain buying interest (ex USDJPY).

The dollar may find support again, especially if global stagflation becomes the market’s dominant theme.

If this USD Smile’s 3rd regime plays out, it can be hedged with short positions in USDJPY and EURJPY, since the yen still has the highest beta to global growth risk, relatively speaking.

The yen typically performs well when a bull steepening of global yield curves (a global duration trade / yield-curve flattening) accompanies a stagflation shock, USDJPY is at a key technical level; a further break could open up more downside for the dollar.

But Meanwhile, the dollar smile curve could also shift to the left, so using shorts in EURJPY and USDJPY as a “tariff hedge” trade is relatively prudent.

Finally, another reason to be long the yen is that, given the direct reference in foreign-exchange policy to “addressing currency depreciation” (CCY weakness needing to be resolved), Japan could offer yen appreciation in exchange for the United States not imposing tariffs.Japan may offer yen appreciation in exchange for the United States not imposing tariffs.

2025.03.05

III. Market Pulse

Our latest Comments on the economic and market environment

Trump Tariffs at a Glance — Trump Tariffs So Far