May twenty-six, twenty twenty-five to May twenty-nine, twenty twenty-five

I. Foundation 

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

The real problem in the Japanese government bond market: supply and demand, not Bond Vigilantes

Long-dated bond market selloffs generally have two causes. One is the so-called Bond Vigilantes, I looked it up specifically: in China it is translated as “bond vigilantes,” but actually The idea is simple: some institutions that influence market pricing begin demanding higher yields as a warning about the lack of fiscal discipline..

This applies more strongly to U.S. Treasuries; applying it to Japanese government bonds is somewhat of a stretch, and at least for now, that is not how they are being traded.

A large share of outstanding Japanese government bonds is held by the Bank of Japan, and the process of restoring the functioning of the domestic bond market is still under way, which means that, at least in the short term, the Japanese government bond market will not see trading based on Bond Vigilantes logic.

Another perspective is more fundamental and better fits the current workings of the Japanese government bond market: the underlying issue is supply and demand...

The surge in current Japanese ultra-long-term yields is mainly caused by an extreme supply-demand imbalance in the corresponding maturity segment, and the Bank of Japan’s latest survey of bond market participants supports this view (the “Bond Market Survey” released by BOJ in 5 explicitly states that the functioning of the Japanese bond market is impaired).

Liquidity in Japan’s ultra-long-term bond market has fallen sharply, making it difficult for prices to form steadily between buyers and sellers in a sufficiently deep market...

More specifically, at the “Bond Market Group Meeting” held by BOJ from 5 20 to 21, several participants expressed the view that the Bank of Japan should help restore trading activity in ultra-long-term JGB.

Participants noted:“Given the severe decline in liquidity in the ultra-long-term market, the BOJ should consider various flexible responses, including halting reductions in bond purchases, directly increasing purchase volumes, and even merging maturity buckets for 10-year-and-longer bonds into a single bucket (merging of the 10y+ maturity buckets into a single bucket).”

However, BOJ’s room to act on issues in the ultra-long-term market is clearly limited, because its overall plan to reduce JGB purchases cannot easily be changed, The deterioration in supply and demand in the ultra-long-term market stems from structurally weak investment demand, which is fundamentally not a problem the central bank can solve.

The macroeconomic issue of fiscal discipline should be addressed by the government; the supply-demand issue for ultra-long-term JGB, meanwhile, should be addressed by the Ministry of Finance through adjustments to the issuance structure in its government bond management policy.

However, it can be expected that at the monetary policy meeting in 6, the Bank of Japan will need to issue an updated bond purchase plan in the form of a “mid-term assessment.” The plan should neither surprise market participants nor obstruct the Ministry of Finance’s debt management policy, and it should not needlessly further undermine market sentiment.

Everyone can follow this closely when the time comes.

The main point is that U.S. Treasuries and Japanese government bonds are now trading on different logic. They are of course linked, but we still need to view them from different perspectives.

2025.05.26

II. Insights 

Our Viewpoints and ideas on market...

The case for low oil prices (continued): A new paradigm, a new era, a new alliance... moving before oil and gas assets become stranded

1973's export embargo ushered in the great era of energy security, With the world highly dependent on external oil supplies, OPEC monopolized oil prices and could easily impose a “geopolitical risk premium” on the market whenever gunfire broke out in the Middle East. No one could stop it.

But times have changed... by 2025, the global energy supply landscape had shifted, so that oil prices(adjusted for inflation)even fell below their 1973 10 level (11.65 dollars per barrel then, versus 11 dollars now)Thanks to exploration technology, abundant capital, and mature infrastructure, oil development and marketing are now highly efficient...

And “peak global oil demand” has become a new, unshakeable certainty.

The United States is now the world's largest energy producer. The logic is no longer that of an importer, but of a dominant force.OPEC has long been marginalized; Venezuela and Angola have exited; Algeria's fiscal breakeven is now 125 dollars per barrel, while Russia continues to ramp up production. In fact, Iran's profile now has more to do with nuclear weapons and terrorism; at 400 barrels per day, it has no pricing power..Any disruption to oil supplies can be quickly made up by other producers.

Meanwhile, at the beginning of 5, Trump's visits to Saudi Arabia and the UAE, marked the beginning of a new alliance:

The key is not where the money is, but where it is going...

Saudi Arabia (1200 barrels) + the United States (2110 barrels) + Russia (1100 barrels) together account for nearly 50% of global production... Trump's high-profile reception in the Middle East essentially reflects the formation of a new axis of energy-producing nations...

The common task facing major oil-producing countries today is to monetize their assets early and in an orderly way before oil and gas assets become “stranded assets,”

No one wants to follow Venezuela's path.

On his first day in office, Trump declared a national energy emergency, established an 28-day approval process, repealed emissions standards for gas-fired power plants and the gas cap, lifted the ban on ANWR, and pushed full steam ahead with crude oil and natural gas production and exports. As LNG export terminals are built and pipelines continue delivering natural gas to power plants and AI data centers, the dual drivers of Electrification + gas will become an irreversible trend for decades to come.

The history of energy paradigm shifts is repeating itself.

2025.05.27

The focus may be fiscal rather than monetary: the paradox of high deficits and high interest rates (the Fed has been pulled to the very end of the decision-making chain)

The United States is currently operating with an epic fiscal deficit; we have already discussed in a series of posts on the Planet the budget-cutting discussions in 2 and early 3...All these figures are almost negligible relative to the overall fiscal scale—

More importantly, from the perspective of macroeconomic accounting identities, public-sector deficits = private-sector surpluses.

The government's massive injection of liquidity sends real liquidity into the real economy, which will substantially delay the downside shock the economy may face. In fact, if tariffs really end here, this recession could even be avoided, and that is quite likely...

We live in a nominal economy, which means Even if real growth slows, as long as fiscal stimulus sustains nominal growth, consumption and employment will not collapse, and the economy will not enter a typical recessionary trajectory.

This is a very unusual macroeconomic environment:

1）The Fed staying put is intended to curb an overheated economy; 2) meanwhile, the bulk of the fiscal deficit is actually interest expense; 3) and that interest expense ultimately flows back to the private sector (bondholders), thereby boosting consumption and investment in turn..

The Fed is trying to “suppress” the economy with high interest rates, but those high rates are “paid back” to the market through the fiscal deficit, effectively creating a second round of stimulus...This substantially raises the bar for a recession, as long as the deficit is maintained or continues to rise, barring an extremely severe exogenous shock, the U.S. economy will continue to sustain nominal growth, and asset markets will continue pricing in the possibility of reacceleration.

Chart: Earlier discussion

The key to fiscal dominance once again comes back to the bond market...In fact, We discussed this long-end issue a month ago. At the time, the market's central focus was still on tariffs, while the risk from Bond Vigilantes was already on our radar...(What we were watching a month ago is now a topic the market is discussing feverishly.) We will stay ahead of the market. 

Chart: Notes250428 Another, counterintuitive but more likely, combination of macro-level paths

Against a backdrop of persistent debt and deficits, the Fed has effectively been pulled to the very end of the decision-making chain—it no longer has the forward-looking ability to “turn off the music before the party starts”... The Fed's actions are constrained by the bond market and data, while the bond market is controlled by deficits, and the data will lag policy or be distorted by noise...

The only timely sentiment data still cannot serve as a basis for action..

Focusing on nominal values will be especially important this year.

2025.05.28

Data: falsehoods, misjudgments, and echoes

There are lag effects across different sectors of the economy, and market data also lag,

The data we see today are really echoes of past behavior; they do not equal the current state of reality.

At the beginning of the month, the story of U.S. GDP negative growth made front-page headlines across major media outlets. There was a lot of market discussion at the time; we didn't discuss it then, but it is more certain now, so we can talk about it...

From today's perspective, This negative growth looks more like a spurious figure; many data points are like this. Looking only at the result itself cannot provide genuinely meaningful insight.The negative figure was mainly caused by net exports: the surge in imports in the first quarter effectively lowered the net exports component. This is entirely explicable from a trade perspective...

The factors behind GDP are not that directly linked to the real economy.. This was also mentioned in the Notes a few days ago...

Chart: Notes250514 The awakening of the silent majority and the polarization of centrist voters

Ultimately, data results are the result of behavioral choices. If you look directly at the data and draw charts without identifying the underlying behavioral choices, it is no different from inferring causes from effects, and searching for C based on the wrong B will only produce the wrong result (in fact, the result “you want to get”).

Returning to GDP, following the negative figure in the first quarter, today's Atlanta Fed GDP Now model shows second-quarter GDP annualized growth back around 2.2%... In fact, it is obvious: reality is nowhere near that dramatic.

Only by seeing through the noise can we become immune to all kinds of “shocking headlines.”

2025.05.28

Data (II): Is it really safe? The labor data as an example

Yesterday, Xingzhi's U.S. market notes reviewed the latest labor-market data:

U.S. market notes:https://www.meridianresearch.app/home?product=us-strategies

It is worth noting that the share of respondents who said the share saying it is hard to find a job rose to 18.6%... (diverging from the unemployment rate)

Let's use this data to continue discussing data noise; see the earlier discussion at Notes250528 Data: falsehoods, misjudgments, and echoes, Read the one from 28 first, then come back to this one.

The market has kept its attention on initial jobless claims, and the latest reading came out today. Overall, there was little movement, and it was not far from market expectations,

However, behind the reassuring data lies a false sense of security...

The data have not reversed, which does indicate that employment appears fine on the surface,

But In fact, a “recessionary labor market” can exist without large-scale layoffs, and this has indeed happened before..This kind of recessionary labor market is actually not inconsistent with the “low unemployment rate” we discussed before, because there really is no unemployment.. but the labor market really has not “improved” either..

Around 00, Companies did not carry out large-scale layoffs; instead, they chose to slow hiring significantly,

Ultimately, nominal spending slowed, while the effects of weak CapEx also began to compound...but The overall labor market did not experience a “traditional collapse” at the time...

This also led to what later came to be called a “jobless recovery”

——Because there were no major layoffs, when the economy began to recover, there was no “labor gap” to fill quickly, and naturally there was no large-scale hiring.

Back to today: initial claims are relatively stable, but continuing jobless claims are steadily rising...

Chart: Notes250513 Unemployment-rate logic and credit assets

The labor market remains in a state where companies are indeed “not laying people off,” but also “not hiring”—and if this situation lasts too long(and it is quite likely to last too long), it will naturally create delayed recessionary pressure on the overall economy.

Everyone already knows what happened after the 00 data.

Chart: Looking back after the fact (03)

Behind data interpretation, you need to maintain a framework without being locked into it.

Market narratives always swing between extremes, and real trading opportunities are precisely hidden among lags, echoes, and market misjudgments.

2025.05.29

After the court: The tariff drama is only just beginning

An injunction by the U.S. Court of International Trade pushed the tariff issue into a new phase..

But will Trump's tariff policy really end here..?

In our view, the court event actually marks the starting point of a new round of shorting the United States...

Chart: Yesterday's Deep Planet comment (https://www.meridianresearch.app/home?product=vega-trading）

On 2025 5 28 local U.S. time, the U.S. Court of International Trade posted its ruling against Trump on its website, finding that “the Trump administration's additional tariffs are unlawful, and the executive orders imposing them are revoked and the corresponding tariff measures are to cease...”

In fact,

Tariffs are actually the only “tax” a president can impose directly without congressional approval.The reciprocal tariffs pursued by the Trump administration rely primarily on the authority granted to the president by the International Emergency Economic Powers Act (IEEPA), and that law is also the point of criticism in this trade court case.

The law's advantages are speed and broad applicability, but its disadvantage is a weak legal basis that makes it vulnerable to challenge...

Specifically, Trump invoked IEEPA on the grounds that “the trade deficit constitutes a national emergency,” but the U.S. Court of International Trade (CIT) ruled that he had abused the authority under IEEPA, meaning the basis for a “national emergency” was not established.

This also means there is considerable room to challenge the reasoning behind the ruling, because everyone has a different answer to the question of what actually constitutes a “state of emergency”...

Trump's tariff authority currently comes mainly from the following three types of laws:

1) International Emergency Economic Powers Act (IEEPA): allows the president to declare a national emergency and impose tariffs; used for reciprocal tariffs targeting China and drug-related issues (such as sanctions on Mexico and Canada related to fentanyl);

2) 232 provision (Section 232): empowers the U.S. Secretary of Commerce to conduct a comprehensive investigation into whether an industry or imported goods threaten national security, and then recommend tariffs; for example, the steel and aluminum tariffs in 2018 fell into this category;

3) 301 provision (Section 301): authorizes the Office of the U.S. Trade Representative (USTR) to take tariff measures against specific countries, mainly to address countries such as China that engage in “unfair trade practices.”

Generally speaking, the Supreme Court will not intervene in political issues of this kind; resolving them requires legislation by Congress.

But given the current political climate, such legislative constraints are extremely unlikely to occur..

To quote Mark Twain: “Everyone knows how efficient the U.S. Congress is.”

So the reality is,

We may continue to coexist with tariffs for a long time, unless the tariffs themselves trigger a systemic crisis.

So, taking this a step further, what might happen next?

CIT ruled that all tariffs imposed by the Trump administration under the International Emergency Economic Powers Act (IEEPA) were unlawful, including tariffs on Canada, Mexico, and China, as well as the so-called “Liberation Day Tariffs.”

However, that ruling does not apply to “product-specific tariffs” imposed under Section 232 of the Trade Expansion Act of 1962 (such as steel, aluminum, automobiles, and semiconductors currently under consideration).

The government has 10 days to implement the ruling and has appealed to the U.S. Court of Appeals for the Federal Circuit. The appeals court may pause implementation of CIT's ruling while it hears the case. But The entire appeals process is expected to move quite quickly—on the order of “weeks,” not months.

If the final ruling upholds the original decision, the importers concerned will theoretically be entitled to demand refunds of tariffs paid previously. But the government is expected to delay refunds as much as possible until the appeals process is fully over.

CIT's ruling is logically rigorous, with sophisticated legal reasoning.

The court held that the “Liberation Day Tariffs” were unlawful because, if Trump wanted to address the “trade deficit” through tariffs, he should have used other statutory provisions, such as Section 122 of the Trade Act of 1975 (Section 122).

Although the provision authorizes the president to impose tariffs on the grounds of a “balance-of-payments disequilibrium,” it caps the rate at 15% and the duration at 150 days.

In other words, IEEPA itself does not authorize the president to impose tariffs because of a trade deficit.

Regarding the “fentanyl tariffs,” CIT noted that their scope was overly broad and did not precisely correspond to the stated threat—drug trafficking. The court emphasized that the wording “dealing with” threats in IEEPA must refer to specific measures that directly address specific threats, rather than serving merely as bargaining chips in diplomatic negotiations. If this interpretation is adopted by a higher court, it could have broad implications for sanctions mechanisms based on IEEPA.

What responses might Trump take next?

1) The option with the strongest legal footing:Invoke 301 provision (Section 301) to build a new legal basis for tariffs on the grounds of “unfair foreign trade practices.” This This may allow tariffs to be imposed on multiple major trading partners, but it also requires more formal procedures and may impose a cap on tariff rates.

While 301 investigations are conducted under USTR, Trump may consider switching to 122 provision in the short term to maintain transitional tariffs on 10 -15%。

2) Revive the 338 provision (Section 338) from the 1930s:This is a provision similar to 301 but with fewer procedural requirements. However, it has hardly been used since the 40s.

After just losing the IEEPA case, Using 338 clearly carries very high legal risk, but the Trump administration has always had a high tolerance for litigation.

3) further expands reliance on the 232 provision, extending it to more categories of goods. Although Trump has initiated nearly 50% of all investigations under 232 since 1962, there is still room to push further.

...

So, what are the implications for the market..?

The market had initially come to believe that Trump's tariffs were more or less at their peak, would not escalate further, and might even be canceled in the future, It is precisely this expectation that has supported some investors' optimism, such as hopes for easing inflation, expectations of a supply-chain recovery, or higher valuations in certain sectors (such as manufacturing and consumer goods).

But yesterday's ruling by CIT found that the tariffs Trump imposed under IEEPA were unlawful; essentially, it does not completely reject tariffs; rather, it pushes the Trump team to use other legal means (such as 301 and 232 provisions) to continue imposing them.

In other words—not that tariffs will decrease, but that they will most likely “continue in another form.”

So, “the only thing that has really changed” is this illusion that “tariff policy is about to end or shift direction”...

Back to the beginning: why do we say this is the most bearish news since 04/02 Liberation Day..

On the other hand, the ruling actually makes the “legislative codification” of tariffs more likely...

Tariffs are unlikely to be suspended; they will simply shift to other legal instruments and continue to be imposed, Uncertainty will bring greater inflationary pressure than before. We have said many times on the platform that decision-makers allocating resources focus on the game of 0 and 1; certainty and uncertainty matter far more than “what it is.”

After the China–U.S. talks were finalized, a new, lengthy period of uncertainty began once again..

2025.05.30

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content herein 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.