From February tenth, twenty twenty-five to February fourteenth, twenty twenty-five

I. Foundation 

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

How is the European market pricing Trump’s tariffs?

This section is mainly intended to help you trade the second phase in European markets, alongside Notes 250211: European trading, phase two: from cyclical to defensive, banks at the top Read them together.In Europe, the greatest exposure to tariff risks is concentrated mainly in industrials and consumer sectors. Here are several of the most exposed representatives to use as proxies for future monitoring.

(Note: When reading the notes, think one step further: high exposure to tariffs now also means repricing when tariff risks recede. We do not know when, but this trade will definitely emerge in the future.)

MBG；MAERSKB；BMW；ADS；IFX；ASSAB；P911；LR；KNIN；DGE；SKFB；VOLCARB；RI；STMMI；EVK；PUM；ELUXB；LXS；CPR；LIGHT；RCO；SVITZR

2025.02.11

“The simultaneous decline in U.S. stocks and the dollar” in history

Over the past 25 years, there were 33 months in which the S&P 500 Index and the trade-weighted U.S. dollar index both closed lower. This is relatively rare, partly because A sudden downgrade to U.S. growth expectations often triggers more severe financial stress, which ultimately tends to drive the dollar higher regardless of what caused the event.

However, three factors could contribute to this market configuration:

i) Relative interest-rate moves are unfavorable to the dollar; ii) U.S. growth expectations are downgraded relative to those for other economies; iii) U.S. credit risk rises.

Looking at the longer-lasting episodes, there were four periods when the dollar and U.S. stocks fell together for at least two consecutive months:

From 2002 4 to 6, from 2002 12 to 2003 2, from 2007 6 to 7, and from 2007 12 to 2008 3.

Most of them were associated with Interest-rate differentials shifting against the dollar were involved, mainly because Markets expected the Federal Reserve’s policy to be relatively accommodative

The only exception was in 2003 1, when market attention shifted to growing concerns about the possibility of a U.S. war with Iraq, a factor that generally weighed on U.S. assets. There was also another similar consecutive decline from 2011 6 to 7, but unlike the earlier episodes, this time The decline was not driven solely by relative interest rates, but by a combination of factors, including the hawkish stance of the European Central Bank (ECB), weaker U.S. growth expectations relative to other economies, the U.S. debt-ceiling crisis, and broader fiscal concerns in Europe.

The remaining cases were associated with weaker growth expectations for the United States relative to other major economies In 8 2001, the United States was still struggling to emerge from recession, while growth broadly recovered outside the country. In 3 2011, a positive oil-price shock (which, before the structural growth of U.S. shale oil production, typically weighed on U.S. growth expectations) weakened the dollar; the subsequent appreciation of the yen after the Japanese earthquake and tsunami further intensified downward pressure on the dollar. Then, in 2 2016, Concerns about a U.S. recession intensified, as reflected in the underperformance of U.S. cyclical stocks relative to defensive stocks compared with the performance of European cyclical stocks relative to defensive stocks.

When the dollar weakens broadly and stocks fall, the yen (JPY), Swiss franc (CHF), and euro (EUR) tend to post the largest gains Given the current risk factors — including inflationary pressure and the outlook for the European economy — we prefer going long the Swiss franc against the U.S. dollar (CHF/USD) over going long the yen against the U.S. dollar (JPY/USD). But If markets begin to downgrade U.S. growth expectations, the yen should offer the best safe-haven protection.

This dynamic was especially evident on 1 27, although the market quickly eased its initial concerns afterward. On that day, a commonly used proxy for U.S. growth expectations fell about 2.5% from the pre-market open to the intraday low (left chart below). Meanwhile, The yen significantly outperformed other currencies This trend is also confirmed by historical cases: when growth expectations were downgraded by at least 2.5%, the yen had the highest average spot return, followed by the Swiss franc(right chart below)

2025.02.14

II. Insights 

Our Viewpoints and ideas on market.

Lagarde and von der Leyen

“We can no longer waste our strengths through self-imposed constraints.”— Lagarde and Ursula von der Leyen wrote in a Financial Times opinion piece, “Europe has heard the message of change), they wrote in “Europe has got the message on change.”

The article concludes:“The stakes are too high for us to fail. We are ready to do whatever it takes to get Europe back on track.” The wording directly echoes Draghi’s famous speech to save the euro in 2012—“whatever it takes.”

The two people—one the president of the European Central Bank, the other the president of the European Commission—further validate our next bet on 250121 Wall Street:The thesis on Europe’s resurgence: for the first time, Europe is advancing a growth narrative from the top down as its top priority. It is the clearest trend, with a trading horizon ranging from several quarters to several years.

“As the global artificial intelligence (AI) revolution accelerates, the EU risks being sidelined. Our traditional manufacturing giants are losing global market share. Geopolitical shifts have turned dependencies into vulnerabilities, while high energy costs are weighing on European businesses.”

Remember: when policymakers and politicians panic, markets rally.

【Further reading】

250121 Wall Street’s next bet: Europe’s resurgence

250130 The Europe trade is still on

European bond selloff at the start of 250106 & market pricing of ECB rate cuts

250107 Divergence in European markets: The Gravitational Effect

241204 A potential bullish trade on Germany is taking shape

250120 Rate pricing, safe assets, and behavioral mechanisms

Von der Leyen and Lagarde believe that Europe has the necessary conditions to catch up in the technology race. At the same time, “We have an opportunity to bring down energy prices in a lasting way.”The ultimate point is also to bring energy prices down, the same end goal as the Trump administration.

“Firms still face long permitting procedures, onerous reporting requirements and diverging enforcement of digital rules.” Easing complex regulation would free up companies’ costs and dynamism; this is one of the most achievable ways to lift overall European market valuations, The valuations moving higher now are reflecting this, and the results can be seen in the different performance across market sectors.

In 250120 Rate pricing, safe assets, and behavioral mechanisms we noted that when facing existential threats (the governing side), leaders around the world will inevitably compete to advance output, productivity, prosperity, employment, safety, and security to meet the demands of increasingly anxious populations, Those who cannot meet them ultimately end up leaving office and being replaced.

Ultimately, all these goals require funding, and the most effective means are often stimulus, deregulation, and animal spirits in the market. Fiscal austerity does not help achieve these goals.

Therefore, regardless of what people say or what documents state, what is certain is that any government anywhere in the world today will ultimately choose higher fiscal spending and lower taxes out of panic; there will be no exceptions.

Combined with the actual deployment of technology, this ultimately creates a macro regime of Inflation Boom.

2025.02.10

Negative spreads and delayed rate-cut expectations

Liquidity easing in China has paused, government bond issuance has risen significantly since the Spring Festival Net financing is currently about 3500 hundred million yuan per week, which means Monthly net supply could reach 1.4 trillion yuan, the highest level since 11 of last year.This will cause liquidity in the banking system to tighten.

2 20 is the tax payment date, so liquidity will likely remain tight or tighten further over the next week or so, until the tax payment deadline.

Market expectations for the timing of the PBOC’s next rate cut have been pushed back, particularly because foreign-exchange pressures persist and the PBOC is now continuously signaling a strong renminbi midpoint to keep foreign exchange stable.

The next window for a rate cut could open as early as 4; by then, either the path of failed trade negotiations, with China deciding to let the renminbi exchange rate float; or a path in which trade tensions ease significantly and USD/CNY remains below 7.2, with the former more likely.

Now the entire mainland repo curve is now in negative-spread territory 1-10-year government bond curve is also below interbank funding costs:

Chart: The entire CNY repo curve is below the 7-day repo benchmark rate

Chart: 1-year and 10-year government bonds are both currently below DR001 and DR007 (banks’ funding costs)

At the end of last year, investors could overlook negative carry, mainly because ongoing mark-to-market gains from long bonds and interest rate swaps were generating returns. This was supported by the shift in monetary policy toward “moderately accommodative” and the PBOC’s continued purchases of short-term government bonds through open market operations.

However, since January, the PBOC has stopped buying short-term bonds to curb the pace of the rally. Expectations for the timing of rate cuts have now also been pushed back, and negative returns make it harder for the market to hold long-term interest rate positions.Beyond foreign-exchange pressures, the authorities may also want to limit leverage in the bond market and direct funds toward the real economy.

On the other hand, the stock market’s current positive risk sentiment could persist through the national congress on 3 5, while the market expects policy to favor demand, adding further pressure:

Chart: China rates are under pressure to follow equities higher

However, this year’s Government Work Report (to be released on 3 5) itself is still unlikely to exceed market expectations for fiscal policy(most expect a growth target of around 5%, a GDP growth target, a deficit of 4%/GDP, 3 trillion yuan in ultra-long-term special government bonds, and local special-purpose bonds slightly above last year’s 3.9 trillion yuan), and trade tensions are unlikely to disappear, limiting bond selling driven by equity-market risk appetite The bond selloff triggered by equity-market risk appetite is limited。

2025.02.11

The second phase of the Europe trade: from cyclicals to defensives, banks at the top

Continuing from the earlier pieces (250130 The Europe trade is still on + 250202 Weekly Wrap+250121 Wall Street’s next bet: Europe’s resurgence),Since we began following them, European bank stocks have risen sharply, mainly as relatively optimistic earnings growth has lifted valuations across the trade.At this stage, however, the bank trade will face more and more challenges.

1/ Capital flows between cyclical and defensive sectors

Europe’s first wave of trading was concentrated in cyclical stocks, with very clear outperformance, as we had been emphasizing for some time, but by In February, more and more money flowed into defensive sectors to protect existing portfolios, reducing risk.

Chart: European defensive sectors are also moving higher; the second-phase trade is here

2/ Tariffs

Tariffs remain a significant issue, and uncertainty around trade policy is increasing, Cyclical sectors are much more vulnerable to tariff risks; after the valuation expansion, the second-phase trade is unlikely to see another large-scale move higher.

3/ Rates

European rates are being repriced now. Although the impact on European banks is limited so far, The more aggressive ECB rate-cutting cycle that can be expected ahead may put pressure on banks And Notes250210 Lagarde and von der Leyen Read them together.

Given the forecasts for weak economic growth and continued disinflation, as well as Lagarde’s indication that ECB staff had lowered their estimate of the neutral rate, A rate cut on 4 17 is highly likely. The baseline forecast is a series of rate cuts totaling 25 basis points, reaching 1.75% by 7.

2025.02.11

Delayed tapering of quantitative tightening and liquidity issues

Fed officials have remained relatively quiet over the past few months on balance-sheet runoff, and a reduction in the pace in March now looks unlikely.At this point, the Fed will most likely stop reducing its Treasury holdings at the end of the second quarter to slow quantitative tightening, then stop completely at the end of the third quarter (after which mortgage-backed security proceeds will be reinvested in Treasuries),one quarter later than previously forecast.

Powell’s comments at last week’s press conference clearly indicated that the Fed still considers liquidity ample; however, there are some issues in this regard.

The Fed may rely too heavily on EFFR’s performance to assess liquidity, but EFFR may not accurately reflect whether reserves are gradually becoming tighter.Liquidity in the banking system is more complex, and early signs of tightening may appear before EFFR moves noticeably. Reserve abundance is not a static concept but a gradual process. If the Fed relies only on EFFR, it may underestimate how quickly market liquidity is tightening, causing policy adjustments to lag.

Chart: The relationship between reserve normalization and money-market spread volatility is more stable than EFFR

Based on the baseline forecast for the debt ceiling, the new quantitative-tightening forecast shows that by around 10, reserves will fall closer to—but not below—the lower bound of the Fed’s estimated ample-reserves range.

The further quantitative tightening progresses, the greater the risk of funding volatility.Once reserves fall to a certain threshold, changes in market rates will not be linear or gradual; they could intensify suddenly. Even if reserves dip only slightly below the “safety threshold,” the market reaction could be more severe than expected.That is how market disruptions emerge.

Chart: Estimated TGCR–IOR spread: As reserves fall below the Fed’s estimated lower bound for ample reserves 12%, the risk of funding spreads rises nonlinearly 

Chart: Impact of actions taken at different times on reserve levels

If tapering starts in 3 and ends in 6 (the baseline scenario), the final reserve level (assuming bank assets remain stable) will be near the midpoint of the Fed’s estimated ample-reserves range;In the scenario where tapering starts in 6 and ends in 9, reserves would fall to the bottom of the estimated range; while a scenario starting in 9 and ending in 12 could push reserves outside the estimated range.

The Fed’s current signal is that starting the taper in 6 and ending quantitative tightening in 9 is a reasonable baseline scenario; the main reasons are: 1) it would ensure reserve levels do not fall below the estimated ample range; 2) it is consistent with the view expressed when quantitative tightening was first slowed in 2024 5: slowing the pace can reduce the risk of an unexpected overshoot and help redistribute reserves among banks; 3) the adjustment comes after the 5 refinancing announcement, helping clarify the Treasury’s cash-management strategy once the debt-ceiling issue is resolved; 4) the Treasury may revisit its cash-management strategy at some point, and a lower steady-state TGA level would give quantitative tightening more room to operate.

Assuming that, after the debt-ceiling issue is resolved, TGA returns to 8500 hundred billion dollars, a further extension of the quantitative-tightening timeline would push reserves down to a level that could intensify money-market volatility. This could lead the Fed to start purchasing assets sooner, ultimately resulting in a larger balance sheet.

Chart: Changes over time in the liability-side structure of the Fed’s balance sheet and the expected path of quantitative tightening

2025.02.13

III. Market Pulse 

Our latest Comments on the economic and market environment

Japan and the yen trade

Some people sometimes read only the trading-day notes and skip the weekend material, but be sure to read yesterday’s weekend document, especially the sections on Japan and the yen.The yen has strengthened in line with the broader trend of currency appreciation, but this trend has received little attention so far. More capital will certainly line up to enter later.

A few additions here:

Chart: The EURJPY trade mentioned in the weekend document Pair

Chart: Going long the Japanese short end remains a robust, persistent trade

Chart:Japan’s domestic wage growth

2025.02.10

The first CPI data release during Trump’s term

1/ First, let’s look at the market narrative before the CPI data

Chart: Estimate distribution on Bloomberg before the release (Core CPI MoM)

Dom Wilson：

The official CPI forecast is somewhat complex—the headline CPI is expected at 0.4%, slightly above the market consensus, while core CPI is expected at 34bp (higher, but consistent with 0.3%’s market consensus after rounding).Given that the 1-month effect may still have an impact, along with new seasonal factors, volatility could be higher than usual.

If the data meet market expectations, the decline in year-over-year growth could bring some relief, but the market may need to see the data for 2 and 3 to confirm whether the overall first-quarter trend is clearly better than last year’s volatile period.As with many macroeconomic data points, the broader policy backdrop remains a more important driver than inflation itself or any single response from the Federal Reserve (Fed).

Excluding tariffs, underlying inflationary pressures may be milder than the market expects. In the near term, however, the impact of tariffs could offset this trend, so we recently raised our inflation forecast.The market has already priced in part of this risk—the short-end inflation outlook recently reached a new local high, current market pricing implies fewer than 1.5 rate cuts in 2025, and there is little further easing priced in.

Over the medium term, the balance of inflation risks is more favorable, which means the market may be underestimating the room for rate cuts over the coming quarters.However, given that trade policy is the key variable, unless the CPI data bring a major surprise, this release will not significantly change the market’s view.We still think it makes sense to stay long in line with the base case, but recommend diversification, including non-U.S. markets, alongside long-dollar positions.

Joe Clyne：

Ahead of the CPI data release, the market is broadly long gamma, so it prefers holding forward volatility rather than short-term volatility.

Current straddle pricing is around 80bp, broadly in line with recent realized volatility. Even accounting for the CPI event, this level still indicates that the market is broadly positioned long gamma.

On the other hand, we think 3-month 25-delta calls (especially SPX) around 11v are a good allocation. Overall, on the volatility curve, longer-dated upside is more attractive than gamma.

Volatility pricing on the Nasdaq 100 (NDX) and Russell 2000 (RUT) looks reasonable, but if adding gamma, we prefer RUT, even though it has recently faced some pressure from carry costs. Overall, we still bullish on forward volatility, especially on the upside.

Chart: In terms of the market’s reaction function …

because this is the first first CPI report of Trump’s term, and market attention to tariffs and the Fed’s path is at a peak, market expectations for this report are still very high, and major banks have all made forecasts; roughly, they are looking for a modest increase, within expectations.

2/ Data above expectations

Inflation in 1 CPI rose to 3.0%, above the market expectation of 2.9%.

Core CPI inflation rose to 3.3%, above the market expectation of 3.1%.

Overall CPI has risen for four consecutive months, and core CPI has also officially returned to an upward trend.

Chart: this chart is relatively more intuit-ive.

Chart: let’s break it down

Inflation data remain relatively hot. Although some residual seasonal factors may affect the data, The Fed is clearly less tolerant of this situation this year, and its policy response may be more sensitive.

In one simple sentence: Inflation in the US is HOT..

3/ Shelter CPI is core

Chart: CPI is majority Shelter

However, looking at it now, in fact this time’s housing CPI in the data remained the main driver, accounting for 30% of the increase in overall CPI data;

It is important to note that This part of the data has a lag effect of 12 months, which means actual inflation is much milder. The market’s initial reaction may lead to excessive trading, and a rebound is highly likely after the first wave of selling.

Chart: another presentation; core CPI component data show that housing and transportation services were the largest contributors to this month’s increase

4/ The Treasury market’s reaction

The data were above expectations, but the market’s reaction to the CPI data exceeding expectations is more interesting: yields on 10-year Treasuries continued to rise, while yields at other maturities tended to remain stable.

This implies an important conclusion: the policy rate may not currently be restrictive, but instead be at a neutral level that is considered to be neutral.

5/ How should we interpret the January data?

Since COVID, In fact, U.S. 1 inflation data have consistently been “high,” and today’s core CPI follows the same pattern as the previous releases. 

Chart: the “January data” remain persistently high

Robin Brooks believes that the best measure of underlying inflation should be “core services” (the blue line), which has been relatively stable in the data. So this “high” reading is mainly due to noise and residual seasonal factors, as in 2023 and 2024. As we have said on the Planet, the downward trend in inflation will not be reversed so easily.

Further reading: Notes 250130 The rate-hike narrative is completely out

6/ Finally, here are the major investment banks’ expectations for the Fed’s rate-cut path this year

2025.02.12

Record retail buying in U.S. markets is unsustainable

Over the past 22 days, U.S. retail investor flows have persistently been skewed toward net buying, producing three of the largest single-day net buying volumes in history records, but this “YOLO” dip-buying trend may be running out of steam.

Retail investors (retirement allocation inflows of 401k / 529 / PWM VWAP) are the alpha behind buying the dip; this group is happy to buy during 2-3% pullbacks.

Traditionally, January and February are the biggest months for inflows into 401k and 529 allocations.

Chart: massive fund flows underscore the impact of the January Effect

But this trend is now starting to weaken:

2025.02.13

Note: All content in this article is for reference only and does not constitute investment advice or serve as a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for making decisions.