February second, two thousand twenty-five (250127-250202)
Diverging CB policy supports divergent rate market views
Over the past week, DM’s rate-sensitive assets extended their rally from mid-1, while in cross-market comparisons, The euro area was particularly strong, especially at the short end of the curve (upper chart, left).
Chart: Note the U.S.–Europe divergence, circled here
At the start of the week, DM rate markets themselves lacked other significant catalysts, This part of the move was driven mainly by the poor performance of stocks as U.S. and European technology shares fell, pushing monthly correlation trades within the relevant broader range to its edge.。
Chart: At the start of the week, DM rates were pushed higher amid stock market volatility triggered by the decline in technology shares, and the stock–bond correlation began to shift again
The broader range is determined by ten-year Treasuries and risk premiums; the narrower range reflects safe-haven trading, put another way, the broader range is unchanged; as safe-haven demand fades, this should rebound from the edge of the range.
Related reading: Notes 250109 The paradigm logic of the ten-year Treasury range and shifts in stock–bond relationships
Moving into In the second half of this week, DM rate markets’ focus returned to central bank meetings and euro area macroeconomic data. The various countries’Central bank meetings were broadly uneventful, the Fed kept rates unchanged, while the ECB and Riksbank each cut rates by 25 basis points as expected. By contrast, Euro area data remained weak, preliminary GDP data were weak, the ECB’s Bank Lending Survey showed that credit standards continued to tighten, and regional CPI data were generally below expectations, especially in Germany.
Chart: After this week, OIS the market is reflecting expectations of more aggressive easing by the DM central bank.
At the Fed meeting, the decision leaned hawkish, but Powell’s remarks leaned dovish, which explains the two-way trading(U.S. Treasury yields initially rose after the statement was released, but then fell after Powell explained the context behind the wording adjustment)
Our current expectation is that the Fed will cut rates by 25 basis points in each of 6 and 9 this year (core inflation and PCE will likely fall to a year-over-year level of 2.5%), for a cumulative 50 basis points in rate cuts for the year, 2s10s The curve will still steepen overall.
Now that the market has adjusted its easing expectations, it has actually returned to the range we've been trading all along, A few weeks ago, we wrote in Notes that the market's pricing of rate hikes was absolutely excessive; the reversal of this trade naturally creates many macro trading opportunities, such as gold.
Related reading: Notes250130Rate-hike expectations are completely out of the picture
Related reading: Notes250129The most overlooked FOMC in months?
At the press conference, Powell said that he is in no hurry to end balance sheet normalization; in light of Powell's remarks, the forecast for the end of QT will likely be delayed from the first quarter of 2025 to the end of the third quarter of 2025. Non-U.S. trades need to wait until the tightening of financial conditions ends will really improve, moving from the tariff narrative of Stagflation back to Inflationary Boom trading narrative.
Chart: Notes250128 The four quadrants of the macro cycle
On the European side, Lagarde’s press conference also provided little additional information, with discussion limited to the neutral rate. Lagarde said the Governing Council did not discuss this issue at this meeting, but ECB will publish the latest estimate of the neutral rate on 2 7.
This figure will be presented as a range, solely as a policy reference; based on Lagarde’s previous remarks, The neutral rate range may be between 1.75% and -2.25%, which means at least two more rate cuts will be needed for policy to cease being restrictive。
The baseline forecast remains ECB will cut 25 basis points at each of the next four meetings (100bp cumulatively), ultimately reaching a mildly accommodative terminal rate of 1.75%.Given that trade uncertainty could keep eurozone growth persistently below potential, while disinflation risks in the region remain, ECB may ultimately cut rates below the neutral rate; therefore, even with this week’s market rebound, terminal-rate pricing in European markets (around 1.9%) remains too high.
After laying it out this way, everyone should understand why Wall Street is buying Europe, and and this is despite LVMH’s poor results.
Remember, European banks are still breaking out.
Related reading: Notes250121 Wall Street’s next bet: Europe’s revival
Going forward, all we need to watch in Europe is BOE; MPC will most likely remain cautious in its policy guidance and will not abandon its “gradual” easing language;If BOE drops the word “gradual,” that will signal an acceleration in the overall pace of rate cuts in Europe.
The weekend is over. Wishing everyone who made it this far a happy life and all the best for the new week!
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Note: All content in this article is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.