January thirteenth, two thousand twenty-five to January fourteenth, two thousand twenty-five

I. Foundation 

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

II. Insights 

Our Viewpoints and ideas on market.

America First & how people view the news behind data and expectations 

The America First policy pursued by Trump clearly signals less interest in “endless wars,”This is another reason why we say the inflation trade may not be much fun.

On Russia and Ukraine, Trump appointed retired U.S. Army general Keith Kellogg as special envoy, and engaged with Zelenskyy and Putin. Ukraine is seeking international security guarantees through a ceasefire agreement, while also suggesting that Neutrality could serve as a basis for negotiations, which would mean giving up the possibility of joining NATO.

Russia, meanwhile, insists that the 2022 Istanbul Agreement must serve as the basis for negotiations, including Ukraine’s recognition of Crimea as Russian territory and the independent status of Luhansk and Donetsk. The establishment of humanitarian corridors and a mechanism to monitor negotiations have also become key discussion points. Russia’s resilience to sanctions and whether Europe can maintain its defense commitments to NATO amid current economic pressures will directly affect the course of future negotiations.

Polls show that the American public is optimistic about the economic outlook, but pessimism about foreign affairs continues to rise. The latest Gallup poll indicates that more than 2/3 of respondents expect the stock market to rise over the next year, and more than 50% are optimistic about improvements in employment and inflation. However, 66% are pessimistic about whether international disputes can be resolved peacefully.Partisan divisions remain pronounced: among Republican voters, 76% believe that U.S. global influence will grow, while Democratic voters take a more cautious view.

This partisan divide in views naturally leads to a divide in views about the market:

Source: University of Michigan's monthly consumer survey

Republicans have no inflation expectations because the person who “can solve every problem” was elected, while Democrats are the opposite, Behind the data and expectations is how people view the news.

2025.01.13

A shift in the balance of risks: what could stop the decline in U.S. Treasuries

If the 12-month FOMC meeting marked an important shift in which the Fed again tilted its risk assessment toward inflation, then the 12-month employment report delivered the key next step in that narrative, Moderate average hourly earnings data avoided a more alarming signal of a resurgence in inflation, but the case for rate cuts to ease labor-market risks has now faded from view.

Regarding what could stop U.S. Treasury prices from falling, External news is a potential catalyst, but the data so far continue to reinforce the assessment that the U.S. economy is resilient at high interest-rate levels;Another mechanism that could drive a reversal in yields is that the selloff in rates itself begins to create enough of a headwind for growth expectations(or a more significant negative feedback from rising yields to risk assets).

In fact, the significant widening of front-end spreads early last week stemmed from news that Michael Barr, the Fed's Vice Chair for Supervision, planned to step down from his supervisory role (news that Michael Barr) planned to step down from his supervisory role.I wonder if you still remember this name, which we mentioned in Notes 241112..

 This too is the point of reading Notes,“News” in the market is merely the expected outcome of probabilistic events for us.

As for Michael, the market expects bank regulation to ease, which could ultimately support banks’ demand for U.S. Treasuries. However, broadly speaking, term funding conditions have already eased significantly over the past two weeks.

Although the post-election knee-jerk shift in the inflation curve seems attributable to an increase in the tail risk of higher tariffs, the subsequent steepening of the curve is more consistent with the market assigning greater weight to the prospect of growth driven by larger-scale fiscal stimulus.Current market positioning has left inflation pricing somewhat vulnerable to a renewed emergence of tariff concerns. If the growth issues behind tariffs once again come into focus, the inflation curve could face renewed flattening pressure.

2025.01.14

III. Market Pulse 

Our latest Comments on the economic and market environment

From monetarism to fiscal dominance

The real yield on 30-year U.S. Treasuries has reached its highest level since 2008, The recent rise in benchmark interest rates is somewhat independent of long-term inflation expectations and reflects more the market’s concerns about increased debt supply and larger fiscal deficits.

Debt worth 14.6 trillion dollars will mature over the next two years, while the Fed is still in QT. When the market’s biggest bond-market maker (the Fed) is absent, yields naturally rise. The Fed’s balance sheet has shrunk from 9 trillion dollars to 6.85 trillion dollars, Rarely have the supply and demand curves been as clear as they are now.

In this term premium cycle, Fidelity’s Jurrien Timmer is truly an impressive figure:

“With the Fed and other central banks no longer the buyer of first and last resort, it seems plausible that the term premium might rise in the months and years ahead.”

Over the past decade and a half, the Fed and other major central banks played the role of “the last resort” through large-scale asset purchases (such as quantitative easing, QE), providing sustained demand for the bond market. This demand effectively lowered long-term bond yields while suppressing the term premium.

As central banks shrink their balance sheets (QT) or stop buying bonds, the market loses this “backstop demand,”More bond supply must be absorbed by the market, which in itself raises the required return on long-term bonds. And a rising term premium offsets the positive effect on bonds of the Fed’s expected rate-cut path.

A rising term premium means higher real yields; when stocks and bonds are positively correlated, rising rates also lead to stock-market volatility, Rate jitters do not necessarily mean the end of a stock-market bull market, but they will certainly weaken bullish momentum.Rate cuts dominated the movement of bond yields in the previous cycle, but going forward, the term premium may outweigh the Fed’s rate-hiking/cutting cycle.

So, how far will the trade go?

In 24 12, Yellen wrote in a letter to congressional leaders: "Treasury currently expects to reach the new limit between January 14 and January 23, at which time it will be necessary for Treasury to start taking extraordinary measures,” and the Treasury currently expects between 25 1 14 and 1 23 reach the new debt limit, at which time the Treasury Department will will need to begin taking extraordinary measures.

These “extraordinary measures” will directly affect subsequent market movements and are a key development we are watching now.

2025.01.14

Extreme market pricing and Inauguration Day behavior

Bond markets are currently pricing in only one Fed rate cut in 2025, of about 28 basis points, while some investors in the U.S. stock market are currently pricing in 0 cuts, that is, no rate cuts at all, and the market also expects interest rates to rise gradually in 2026, until 2026 12.

Chart: Market consensus pricing

Chart: Market implied probability of rate hike (next 12 m)

Trump has previously said emphatically that he favors a weaker dollar, It can be expected that the recent “front-running” in the dollar and U.S. Treasury yields ahead of Inauguration Day will certainly reduce the likelihood that he immediately takes dramatic inflationary action (such as across-the-board 10% tariffs).

In fact, the extent to which tariffs on China are priced in is now worth questioning, because China has shown a relatively strong willingness to cooperate overall, and relations between China and the U.S. are currently very delicate. Given current pricing, Even if tariffs on China/Mexico/Canada are imposed as expected, they will most likely become a “sell the news” event.

If broad 10% tariffs are not imposed all at once, the inflation outlook is quite acceptable—or, one could say, it has already been fully absorbed and priced in by the market as of now:

If, during the 2 -3 weeks after Trump takes office, he does not mention unexpectedly high tariffs, war, or territorial annexation measures, U.S. Treasury yields and the dollar will most likely lose momentum, which would benefit emerging-market equities that have remained under pressure.

2025.01.15

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 their decisions.