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

I. Foundation

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

China's economy is indeed recovering at the margin

Policy stimulus is one thing; the genuine turning point now emerging in the data is another. What has been said is finally materializing in real data.effective additional stimulus must be introduced when there are signs of an economic turning point to be sufficient to support a lasting valuation expansion trade.

1/ The consumer trade-in program has been in place since 8 has indeed significantly boosted sales of home appliances and mobile phones

2/ Consumption and tourism indeed set a new record

3/ Most importantly, real estate prices have indeed stabilized，January resale home prices rose month over month

4/ Most importantly, real estate sales have indeed rebounded，especially in first-tier cities

5/ For markets, Corporate earnings are indeed improving，12-month forward earnings per share rose 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.

The reason rates are falling 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, making markets choppy at the start of the year.

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

These multiple factors have also changed the correlation structure between rates and stocks—as Treasury yields on the 10-year note have stabilized below 4.50%, the U.S. equity market has become less sensitive to interest rates. In other words, because the main reason yields are falling now is weaker growth expectations, lower rates are providing less support for equity returns 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.

Further reading: Notes 250109 Stocks and interest rates: Treasury yield ranges and the changing paradigm in stock-bond relationships

2025.03.03

The Fed will take a cautious, dovish approach & features of this round of expected data

U.S. consumer expectations declined in both the University of Michigan and Conference Board surveys, In fact, this consumer expectations data is usually quite volatile and tends to 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, prompting 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, though 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 even while inflation remains high.The U.S. 2-year real yield has fallen 45 basis points this month, reaching its lowest level since 2022 8, even as consumer inflation expectations have risen, 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 on Planet is increasingly becoming reality: European defense stocks have surged by double digits, lifting the broader market, essentially a direct reflection of the expansion of fiscal space. One could say that the entire European market rally since 11 of last year has been driven by a reassessment of Europe's capacity and need to spend.

The U.S. decision last night to cut funding support for Ukraine will only accelerate this discussion，the defense sector will most likely open higher again today, and in this context some very large funding figures will surely be floated.

Europe’s major powers are taking further steps to try 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 news from the 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 would require unanimous agreement from all EU member states, a very high bar, especially given Hungary and Slovakia.

However, the case for European markets outperforming still holds as long as the U.S. continues to offer no attractive future return opportunities(Mag 7 is now a capex machine rather than a buyback machine… one market is pricing in fiscal expansion while another is pricing in fiscal contraction, and the outcome is predictable.

The valuation multiples of the former will inevitably expand, while those of the latter will inevitably contract.

We have discussed Europe extensively, starting at the beginning of this rally. I won't include dates for further-reading notes here; you can search the keywords on Planet to find them, and you should read this entire section.

2025.03.04

A brief discussion of the “meeting”

Overall, it was in line with market expectations, The points mentioned—preventing developer default risks, curbing cutthroat competition, placing strong emphasis on domestic demand, and supporting emerging industries—are all positive factors; after the work report was released, USDCNH rose, interest rates increased by 1 basis points, and the stock market was broadly flat (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 renewal programs: 5000 hundred million yuan (slightly below expectations)

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

On 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. The 2% CPI target here 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-term special treasury bond issuance totaled 1.3 trillion yuan, up 3000 hundred million yuan from last year, of which 8000 hundred million yuan is for critical infrastructure, 5000 hundred million yuan for equipment upgrades and consumer goods trade-in programs, and an additional 5000 hundred million yuan in special treasury bonds for recapitalizing 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 language on monetary policy was more dovish than the central bank's previous wording，reiterating a “moderately loose” monetary policy and mentioning “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 the appropriate time.”On liquidity management, it continued to emphasize “maintaining ample liquidity.”

However, the key signals are actually beyond the numerical targets，with the agenda focusing more on domestic demand, the stock market, and real estate, addressing supply-demand imbalances, and emphasizing curbing “involutionary competition”，considered a major source of deflation; the National Development and Reform Commission also mentioned promoting cuts to steel output.

On real estate, For the first time, it explicitly called for “preventing the risk of debt defaults by property developers,” which may relate to recent work involving Vanke。It pledged to “support the healthy development of real estate and stock markets” and to continue promoting the stabilization of 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.” The emerging industries singled out for support include new energy vehicles, AI mobile phones and computers, and intelligent robots.

For people's livelihoods, it pledged to increase the medical subsidy by 30 yuan per person and the basic pension by 20 yuan, and the National Development and Reform Commission also said it would provide childcare subsidies，but no specific details have yet been disclosed.

Finally, this year's report also added “promoting cross-strait cultural and economic exchanges,” while defense spending growth for 2025 remained at 7.2%, unchanged from the previous two years.

2025.03.05

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

Market narratives have shifted 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 regimes:

1/ Dollar strength 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/ Dollar weakness based on “Mag7/OpenAI/EU defense spending/data from the rest of the world bottoming out while US growth slows” (partly due to tariff uncertainty).

However, as tariff implementation becomes more concrete, the market may begin trading a broader, synchronized global growth shock rather than just a U.S.-specific growth slowdown…especially in the possible scenario where tariff retaliation sparks a larger global trade war.

The market is still focused on de-dollarization, especially as U.S. stocks underperform. Discussion of the “Mar-a-Lago Accord” and global de-dollarization of reserves is also intensifying selling pressure on the dollar. However, as noted above, If tariff escalation turns into a larger 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 be supported again, especially if global stagflation becomes the dominant market 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 relatively the highest beta to global growth risks.

The yen typically performs well during a stagflationary shock accompanied by a bull steepening of global yield curves (a global duration trade/flattening yield curves)，USDJPY is at a key technical level, and a further break could open the door to more downside in the dollar.

But at the same time, the dollar smile curve could also shift to the left，so taking short positions in EURJPY and USDJPY as a “tariff hedge” trade 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 a stronger yen.

2025.03.05

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

With Friedrich Merz raising his fist in triumph, Germany may be about to enter an era of unlimited defense spending，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?

Germany's 2025 in GDP is expected to be around 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 from years of long-term underinvestment may drive military spending toward 3% GDP over the past 30 years.—that is, 1350 billion euros. Keep in mind that Germany’s defense budget was only about 800 billion euros in 2024, and just 520 billion euros in 2022, representing significant growth.

Spillover effects in Europe?

Germany is setting a new benchmark, compelling other European countries to increase military 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 more limited budgetary room.

Nevertheless, overall European military spending remains under upward pressure. The market had 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 military spending higher, that forecast may still be too conservative, and the eventual increase could be larger.

Key structural shift: No return to US defense subsidies

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

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

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

2025.03.06

Nonfarm payrolls commentary & a rare macro trading combination

Yields up, Equities down, Dollar down—this is an extremely rare trading combination, highly discordant, but the logic behind it is gradually becoming clear—U.S. equities are now driving the narrative, whereas Rates had consistently served as the barometer before.

Over the past few weeks, the S&P has fallen by more than 6%, and market consensus centers on trade tensions, weak data, the lack of a US growth plan, and excessive foreign positioning. The relative weakness of U.S. equities, combined with the relative strength of Chinese and European markets, has begun to weigh on the dollar. More importantly, UST’s safe-haven rationale is being challenged. The market no longer views it as a “safe haven,” reflecting a change in the risk premium.

The core issue is that the current U.S. policy path is creating cost-side pressure without a corresponding growth narrative to support it.The commitment to reduce the fiscal deficit from 6% to 3% was interpreted by the market instead as deficit risk expanding to 7%. For now, the Trump administration still has an opportunity to reset expectations through measures such as deregulation and pro-growth policies, but the window is narrowing.If the S&P breaks below 5700 points, it will be a key signal, meaning the market has officially shifted from “Growth” to “Contraction” mode and triggering a further rise in the UST risk premium; 10Y UST yields may therefore shock 5%.

The Bloomberg US Growth Surprise Index has fallen to its lowest level since 9 of last year. Uncertainty over trade policy is weighing on consumer sentiment and Capex. Since 2 12, 2Y UST yields have fallen 43bp, and trend-following funds are adding to their long positions.

Regarding today’s NFP, rates traders may still use a bond sell-off as an opportunity to receive rates, because This Establishment Survey was conducted during the week of 2 12. The market may view it as having failed to fully capture the impact of government-related layoffs, and therefore as insufficient to dispel concerns about weakening consumer sentiment and Capex trends.

Fed Policy Outlook: Rate Cut Not on the Table Yet

Fed Governor Waller stated clearly that a rate cut would not be considered at the 3 meeting, and that it is still necessary to see whether soft data persist. He believes The market’s expectation of two 25bp rate cuts remains reasonable, but the tariff episode of 2018/19 should not be used as a benchmark for the current environment.Meanwhile, Atlanta Fed President Bostic warned that Trump’s policies are plunging the U.S. economy into “incredible flux,” making it difficult for the market to obtain sufficient policy clarity in the near term.

Bostic noted that the economy currently faces several variables: tariffs, trade policy shifts, inflation volatility, and deteriorating consumer sentiment. This has sharply reduced the likelihood that the Fed will adjust policy before spring or summer.“I would be very surprised if the market had sufficient policy clarity before the end of spring… We have to be patient.”

2025.03.07

III. Market Pulse

Our latest Comments on the economic and market environment

Trump Tariffs So Far

2025.03.04

Key drivers of euro area spreads

A brief comment: The ECB meeting brought nothing genuinely new, aside from once again emphasizing the market’s high level of uncertainty.This means short-end rates will either fall or remain unchanged. At the very least, we need to wait until the fiscal stimulus from defense spending actually translates into inflation before discussing the next step.

The European Central Bank will most likely try to accommodate this large-scale financing plan, but financial conditions in the market will tighten far faster than the central bank’s pace. This tightening will show up in rising long-end interest rates.

Looking at sovereign spreads, capital flows remain relatively balanced for now, mainly because the scale and timing of future issuance by national treasuries remain highly uncertain.In the short term, global risk appetite and geopolitics will continue to be the key drivers of sovereign spreads in the euro area.