March third, two thousand twenty-five to March sixth, two thousand twenty-five

I. Foundation

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

Indeed, China’s economy is showing a marginal recovery

Policy stimulus is one side of the story; the other is that the data are now showing a genuine turning point, with what was being said finally taking shape in real data.Effective additional stimulus must be introduced when there are signs of an economic turning point to be sufficient to support a long-term valuation expansion trade.

1/ Consumer trade-in programs have, since 8 have indeed substantially boosted sales of home appliances and mobile phones

2/ Consumption and tourism have indeed set a new record

3/ Most importantly, property prices have indeed stabilized, second-hand home prices rose month over month in January

4/ Most importantly, property sales have indeed rebounded, especially in the first-tier cities

For the market, micro-level earnings are indeed improving, forward earnings per share over 12 months have risen 4% over the past 6 months, reaching their highest level since 20, mainly driven by margin improvement:

2025.03.06

II. Insights

Our Viewpoints and ideas on market.

Why the reason for falling interest rates matters

Policy uncertainty, the lagged effects of high interest rates, and persistently elevated consumer prices are further weighing on U.S. market sentiment. Meanwhile, resistance at 6,100 remains strong, keeping markets choppy at the start of the year.

The latest consumer data and the 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 the 10-year Treasury yield has stabilized below 4.50%, the U.S. stock market has become less sensitive to interest rates. 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 did a few weeks ago.

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

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

2025.03.03

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

U.S. consumer expectations declined in surveys by the University of Michigan and the Conference Board, in fact, this consumer expectations data tend to be 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 in 2018-19, but it was a feature of the pandemic recovery in 2021-23.The rise in expectations in 21-23 played a role in the Fed’s rate-hiking cycle, driving an acceleration in the pace of rate hikes 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 not hesitate to cut rates while inflation remains elevated.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 the market has 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 community is increasingly becoming reality: European defense stocks have surged by double digits, driving a broader market rally, This is essentially a direct reflection of the expansion in fiscal space. One could say that the core logic behind the entire European market rally since 11 last year has been a reassessment of Europe’s ability and need to spend.

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

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

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

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

However, the case for European markets to outperform remains valid as long as the U.S. cannot offer attractive future return opportunities(Mag 7 is now becoming a capex machine rather than a buyback machine… one market is pricing in fiscal expansion, while another is pricing in fiscal contraction; the outcome is easy to imagine.

The valuation multiple of the former will inevitably expand, while that of the latter will inevitably contract.

We have discussed Europe extensively; we have been talking about it since the start of this rally. I will leave out the dates of the supplementary Notes here—you can find them by searching the keywords in Planet. 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 points mentioned—preventing developers’ debt defaults, curbing cutthroat competition, paying close attention to domestic demand, and supporting emerging industries—were all positive. After the work report was released, USDCNH rose, interest rates increased by 1 basis points, and stocks were 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 yuan)

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

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

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

7/ CGSB for consumer trade-in programs: 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, the CPI target for 2% is more realistic than the previous 3% target, aiming to balance supply and demand and keep prices within a reasonable range.

The fiscal deficit target was slightly below market expectations, the ultra-long special Treasury bond quota is 1.3 trillion yuan, an increase of 3000 hundred million yuan from last year, of which 8000 hundred million yuan is for key infrastructure and 5000 hundred million yuan for equipment upgrades and consumer goods trade-in programs, with an additional 5000 hundred million yuan in special Treasury bonds for recapitalizing large banks。

The local government special bond quota is 4.4 trillion yuan (3.9 trillion yuan last year), including 8000 hundred million yuan per year for local debt swaps.

The monetary policy wording is more dovish than the central bank’s previous phrasing, reiterates a “moderately accommodative” monetary policy and mentions “timely reserve requirement ratio and interest rate cuts,”which is more flexible than the central bank’s previous wording, “cut reserve requirements and interest rates at an appropriate time.”On liquidity management, it continues to emphasize “maintaining ample liquidity.”

However, the key signal is actually outside the numerical targets, with the agenda focusing more on domestic demand, the stock market and the property market, addressing supply-demand imbalances, and emphasizing curbing “involutionary competition”, considered an important source of deflation; the National Development and Reform Commission also mentioned promoting cuts in steel output.

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

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

On people’s livelihoods, it pledged to increase the medical subsidy by 30 yuan per person and the basic pension by 20 yuan; the National Development and Reform Commission also said that childcare subsidies would be provided, but specific details have not yet been disclosed.

Finally, this year’s report also added “promoting cross-strait cultural and economic exchanges”; 2025 year-on-year growth in defense spending remained at 7.2%, unchanged from the past two years.

2025.03.05

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

Market narratives have kept changing 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 scenarios:

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

2/ A weaker dollar based on “Mag7/OpenAI/EU defense spending/global data bottoming while U.S. growth slows” (partly due to tariff uncertainty).

However, as tariff implementation becomes more concrete, the market may begin pricing in a broader, globally synchronized growth shock rather than trading only a slowdown in U.S. growth…especially if tariff retaliation triggers the possible path toward a larger-scale global trade war.

The market remains focused on de-dollarization, especially given the poor performance of U.S. stocks. Discussion of a “Mar-a-Lago Accord” and global de-dollarization of reserves is also adding to selling pressure on the dollar. However, as noted above, If tariff escalation develops into a larger global trade war, the market may shift to the third regime of the dollar smile, and the dollar may attract buying again (ex USDJPY).

The dollar could be supported again, especially if global stagflation becomes the market’s dominant theme.

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

The yen tends to perform well during a global bull steepening of yield curves (a global duration trade/yield curve flattening) accompanied by a stagflation shock, USDJPY is at a key technical level; a further break could open up more downside for the dollar.

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

Finally, another reason to be long the yen is that, against the backdrop of foreign exchange policy explicitly mentioning “addressing currency depreciation” (CCY weakness needing to be resolved),Japan may be able to secure an exemption from U.S. tariffs in exchange for an appreciation of the yen.

2025.03.05

Whatever it takes: The era of U.S. subsidies for European defense is over

With Friedrich Merz raising his arms in triumph, Germany may be about to enter an era of unlimited defense spending (unlimited defense spending), and if the bill passes parliament next week, it will mean Germany will have the ability to increase military spending without budget constraints when necessary.

What’s the math?

2025 Germany’s GDP is estimated at about 4.5 trillion euros; each additional 1% GDP in defense spending is equivalent to 450 hundred million euros. Germany is currently pushing to rebuild its military capabilities, The catch-up effect after 30 years of long-term underinvestment may drive military spending toward 3% GDP, or 1350 hundred million euros. Keep in mind that Germany’s defense budget was only about 800 hundred million euros in 2024 and just 520 hundred million euros in 2022, a significant rate of growth.

Spillover effects in Europe?

What Germany is doing is setting a new benchmark and forcing other European countries to increase defense spending.But the issue is that Germany’s relatively low debt/GDP ratio gives it greater fiscal flexibility, while most European countries have higher debt ratios and less budgetary room.

However, overall European defense spending still faces upward pressure. The market previously expected collective defense spending by NATO European member states to rise gradually from about 2.1% GDP in 2024 to 2.5% by the end of this decade. But with Germany driving European defense spending higher, that forecast may still be conservative, and the eventual increase may be larger.

Key structural shift: No return to US defense subsidies

The era of U.S. subsidies for European defense is over, and markets may be underestimating this paradigm shift. Regardless of whether Republicans or Democrats control the White House in the future, they will no longer tell Europe, “It’s okay, you can cut defense spending now.”

From 1945 to 2024, especially 1990-2021, the U.S. bore the financial burden of European security. Over the past 30 years, US taxpayers essentially paid for Europe’s security! But that is history now, and it may not return.

This also means that, in this context, European defense sales, earnings, and FCF are certain to see significant growth over a long cycle, making higher valuation multiples reasonable. Compared with the past 20-25 years, the market may need to revalue European defense stocks more substantially.

2025.03.06

III. Market Pulse

Our latest Comments on the economic and market environment

An overview of Trump’s tariffs so far