February tenth, two thousand twenty-five to February thirteenth, two thousand 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 with the second phase of European-market trades, alongside Notes250211 Europe Trade Phase Two: From Cyclicals to Defensives, Banks at the Top Read them together.In Europe, the greatest exposure to tariff risk is concentrated mainly in industrials and consumer sectors. Here are a few of the most exposed representatives to use as proxies for monitoring going forward.

(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 certainly 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

II. Insights 

Our Viewpoints and ideas on market.

Lagarde and von der Leyen

“We can no longer waste our strengths by limiting ourselves.”—Lagarde and von der Leyen (Ursula von der Leyen), in an opinion article published in the Financial Times, “Europe has got the message on change”(Europe has got the message on change), they wrote.

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

The fact that one is the ECB president and the other the European Commission president further validates our next Wall Street bet for250121:The view on Europe’s revival is that, for the first time, a growth narrative has been set as the top priority from the top down in Europe. It is the clearest trend, and the trading cycle could last as little as several quarters or as long as several years.

“As the global artificial intelligence (AI) revolution accelerates, the EU risks being marginalized. Our traditional manufacturing champions 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 revival

250130 European trading continues

250106 Start-of-year selloff in European bonds & market pricing of ECB rate cuts

250107 Divergent views in European markets: The Gravitational Effect

241204 A potential long position in Germany is taking shape

250120 Interest-rate pricing, safe assets, and behavioral mechanisms

Von der Leyen and Lagarde believe that Europe has the necessary conditions to catch up in technological competition. At the same time, “We have an opportunity to bring down energy prices in a lasting way.”The final point also directly calls for bringing energy prices down, which is the same objective as the Trump administration’s.

“Firms still face long permitting procedures, onerous reporting requirements and diverging enforcement of digital rules.” Easing complex regulation will free up companies’ costs and vitality; this is one of the clearest ways to lift valuations across European markets, The valuations rising now are reflecting this, and the results can be seen in the differing performance of the market’s various sectors.

in 250120 Interest-rate pricing, safe assets, and behavioral mechanisms we noted that, when facing existential threats (for those in power), leaders around the world will compete to promote output, productivity, prosperity, employment, security, and protection in order to meet the demands of increasingly anxious populations, Those who cannot meet these demands will ultimately be removed from office and replaced by the next person.

Ultimately, all these goals require funding, and the most effective approach is often stimulus, deregulation, and the market’s “animal spirits.” Fiscal austerity does not help achieve these goals.

Therefore, Regardless of what people say or how the documents are written, what is certain is that It can be expected that any one of the current governments around the world will ultimately choose higher fiscal spending plus lower taxes out of panic; there will be no exceptions.

Combined with the real-world deployment of technological applications, this ultimately forms the macroeconomic regime of an Inflation Boom.

2025.02.10

Negative spreads and delayed rate-cut expectations

Liquidity easing in China has paused, Government bond issuance increased significantly after 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, its highest level since 11 last year.This will cause liquidity in the banking system to become tight.

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

Expectations for the timing of the PBOC’s next rate cut have been pushed back, This is especially because foreign exchange pressures persist and the PBOC is now continuously maintaining foreign exchange stability through signals of a strong renminbi midpoint fixing.

The next rate-cut window could open as early as 4, at which point it will either the path in which trade negotiations fail and China decides to let the renminbi exchange rate go; or a path in which trade tensions ease significantly and the USD/CNY exchange rate remains below 7.2, with the former being more likely.

Now The entire mainland repo curve is now in negative-spread territory, the 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 now below DR001 and DR007 (bank funding costs)

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

However, since January, the PBOC has stopped buying short-term bonds to curb the pace of the rise. 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 be seeking to limit leverage in the bond market and direct funds toward the real economy.

On the other hand, the stock market’s positive risk sentiment could persist through the national assembly on 3 5. The market expects policy to tilt toward demand, adding further pressure:

Chart: China rates are under pressure to follow equities higher

However, This year’s Government Work Report (published on 3 5) itself is still unlikely to exceed market expectations for fiscal policy(most expect a growth target of around 5% for GDP, a deficit of 4%/GDP, 3 trillion yuan in ultra-long-term special treasury bonds, and local government special-purpose bonds slightly above last year's 3.9 trillion yuan), and trade tensions are unlikely to disappear, limiting equity-market risk appetite will trigger only limited selling in the bond market.。

2025.02.11

The European trade, phase two: from cyclicals to defensives, banks at the top

Following on from (250130 Europe’s trade is still going + 250202 Weekly Wrap+250121 Wall Street’s next bet: Europe’s revival),Since we began following them, European bank share prices have risen sharply, mainly because relatively optimistic earnings growth has driven up overall trade valuations.But at this stage, the bank trade will face more and more problems.

1 / Flows between cyclical and defensive sectors

The first wave of European trading was concentrated mainly in cyclical stocks; outperformance was very pronounced, as we had been highlighting for some time, but by February, more and more capital flowed into defensive sectors to protect existing portfolios and reduce risk.

Chart: Europe’s defensive sectors are moving higher too; the second phase of the trade is here

2 / Tariffs

Tariffs remain a significant issue, and trade policy uncertainty is increasing, Cyclical industries are much more vulnerable to tariff risks, and after the valuation rerating, the second phase of the trade is unlikely to have much further upside.

3 / Interest rates

European interest rates are being repriced now. Although the impact on European banks is limited so far, The more aggressive ECB rate-cutting cycle now expected in the future could put pressure on banks And Notes250210Lagarde and von der Leyen Read them together.

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

2025.02.11

Delayed slowdown in quantitative tightening and liquidity issues

Fed officials have been relatively quiet over the past few months about balance-sheet runoff, and a reduction in its pace in March now seems unlikely.At this point, the Fed is likely to stop reducing its Treasury holdings at the end of the second quarter to slow the pace of quantitative tightening, and to stop entirely at the end of the third quarter (after which mortgage-backed security proceeds will be rolled into U.S. Treasuries),one quarter later than previously forecast.

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

The Fed may be relying 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 a more complex structure: early signs of tightening may appear before EFFR shows significant volatility. Reserve abundance is not a static concept but a process that changes gradually. If the Fed relies only on EFFR, it may underestimate how quickly market liquidity is tightening, leading to delayed policy adjustments.

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 critical point, movements in market rates will not be linear or gradual; they may intensify suddenly. Even if reserves dip only slightly below the “safety threshold,” the market reaction could be more dramatic than expected.This is how market disruptions occur.

Chart: TGCR-IOR spread estimates: as reserves fall below the Fed’s estimated lower bound for ample reserves by 12%, the risk of funding spreads rises nonlinearly 

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

If the reduction begins in 3 and ends in 6 (the baseline scenario), the final reserve level will approach the midpoint of the Fed’s estimated ample-reserves range (assuming bank assets remain stable);In the scenario where the reduction begins in 6 and ends in 9, reserves fall to the bottom of the estimated range; whereas a scenario in which it begins in 9 and ends in 12 could cause reserves to exceed the range.

The Fed’s current signal is that starting the reduction in 6 and ending quantitative tightening in 9 is a reasonable baseline scenario The main reasons include: 1) ensuring reserve levels do not fall below the estimated ample range 2) 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 meeting, 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; a lower steady-state TGA level would give quantitative tightening more room to operate.

Assuming that TGA returns to 8500 hundred million dollars after the debt-ceiling issue is resolved, a further extension of the quantitative-tightening timeline would push reserves down to levels that could intensify money-market volatility. Such an outcome could lead the Fed to start buying assets earlier, ultimately resulting in a larger balance sheet.

Chart: Changes over time in the composition of the liability side 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

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

A few additional points here:

Chart: The currency pair mentioned in the weekend file: EURJPY

Chart: Going long the short end of the yen curve remains a robust and durable trade strategy

 Chart: Wage growth in Japan

2025.02.10

The first CPI data point of 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 complicated—the headline CPI is expected to be 0.4%, slightly above the market consensus, while core CPI is expected to be 34bp (although higher, it rounds to the market consensus of 0.3%).Given that the 1-month effect may still have an impact, along with new seasonal factors, volatility could be somewhat higher than usual.

If the data meet market expectations, the slowdown in year-over-year growth could provide 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 larger driver remains the policy backdrop, rather than inflation itself or the Fed’s response in isolation.

Excluding tariffs, underlying inflation pressures may be milder than the market expects, but in the near term the impact of tariffs could offset this trend, so we recently raised our inflation forecast.The market has already partly priced in this risk—the near-term inflation breakeven recently climbed to a new local high, while the market is pricing in fewer than 1.5 rate cuts for 2025, with almost no further easing priced in.

Over the medium term, the balance of inflation risks is more favorable, which means the market may be underestimating the scope for rate cuts over the coming quarters.However, given that trade policy is the key variable, Unless the CPI data contain 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 baseline scenario, 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 favors holding forward volatility rather than short-dated volatility.

The current straddle pricing is around 80bp, broadly in line with recent realized volatility. Even accounting for the impact of the CPI event, this level still indicates that the market broadly holds gamma positions.

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

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

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

Because it is the first CPI report of Trump’s term + market attention on tariffs and the Fed’s path is at a high point, the market has high expectations for this report, and banks have all made forecasts; essentially, it is about a modest increase within the expected range.

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%.

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

Chart: This chart is relatively more intuitive

Chart: Let’s break it down

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

Put simply: Inflation in the US is HOT..

3 / Housing CPI is the core

Chart: CPI is majority Shelter

But looking at it now, in this release, housing CPI remains the main driver in the data, accounting for 30% of the rise in overall CPI data;

It is worth noting 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 could lead to overtrading, and a rebound will most likely follow the first sharp sell-off.

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

4 / U.S. Treasury reaction

The data came in above expectations, but the market’s reaction to the stronger-than-expected CPI data is more interesting: yields on 10-year Treasuries continued to rise, while yields at other maturities tended to remain steady.

This points to an important conclusion: the policy rate may not currently be restrictive, but instead may be at a level regarded as neutral.

5 / How to interpret the January data

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

Chart: The persistently high “January data”

Robin Brooks believes 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 that easily.

Further reading: Notes250130 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 the U.S. session is unsustainable

Over the past 22 days, U.S. retail investors have persistently shown an imbalance toward net buying, with three of the largest single-day net purchases by trading volume in history records, but this “YOLO” buy-the-dip trend may run out of steam.

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

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

Chart: Massive capital flows highlight 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 informational purposes 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 their decisions.