January twenty-seventh, twenty twenty-five to January thirty-first, twenty twenty-five

I. Foundation 

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

The four quadrants of the macro cycle

There are four types of macro cycles: Disinflationary Boom, Inflationary Boom, Stagflation, and Deflationary Bust.

1）Disinflationary Boom

Rising growth alongside falling inflation constitutes a Disinflationary Boom, A Disinflationary Boom is typical of the early cycle, that is, the early-cycle stage; during this stage, financial conditions tighten and credit availability declines, reducing spending and, in turn, curbing profit growth, prompting central banks to ease policy and the yield curve to bull-steepen.

2）Inflationary Boom

Rising growth alongside rising inflation constitutes an Inflationary Boom, an Inflationary Boom usually occurs in the middle of the cycle, that is, the mid-cycle stage; during this stage, central banks are still implementing accommodative policies, and the influx of liquidity drives interest rates lower and risk premiums tighter.This self-reinforcing expansion drives cash flow growth, but later in this stage central-bank policy gradually turns restrictive and the economic output gap narrows.

The market characteristics of an Inflationary Boom are relatively clear, the underlying market The trading narrative is a recovery in cyclical sectors, including industrials (XLI), materials (XLB), energy (XLE), financials (XLF), technology (XLK), and small caps (IWM),The relative performance of these sectors versus the S&P 500 index can be one of the criteria for assessment.

3）Stagflation

Slowing growth alongside rising inflation constitutes Stagflation, Stagflation usually occurs late in the cycle, or in the post-cycle/late-cycle phase, that is, the late-cycle stage; during this stage, economic growth remains above potential but has peaked, central banks begin turning hawkish, and risk assets are usually in their final melt-up phase.Later in this stage, monetary tightening pushes yields higher, and the market’s reaction to adverse news and events is amplified.

The stagflation phase of the cycle is a macroeconomic phase in which growth momentum weakens while inflation momentum accelerates, This is one of the most difficult stages to navigate. The challenge is not which assets to hold, but how much beta risk the portfolio should carry.

The reason is that, during this stage, growth slows while inflation rises. This causes sales to fall over the business cycle while input or labor costs rise, dealing a double blow to margins.In this environment, corporate earnings come under pressure, weighing on the stock market and company profits.

This stage is also relatively difficult to distinguish, because Stagflation may also arise as temporary noise caused by tightening financial conditions, and as financial conditions ease, the market may return to an Inflationary Boom at any time.

4）Deflationary Bust

Slowing growth alongside falling inflation constitutes a Deflationary Bust, A Deflationary Bust is a typical economic slowdown/recession phase. During this stage, monetary tightening causes risk premiums to widen and gradually feeds through to the real economy, with corporate earnings affected with a lag. The economic output gap is large at this point.

2025.01.28

How did the Fed view the tariff issue during the last trade war?

Reviewing the Federal Reserve’s meeting minutes and staff analyses during the first trade war in 2018 and 2019 yields three conclusions:

1）Federal Reserve staff and FOMC members took a relatively dovish view of the impact of tariffs on inflation

2) Staff estimates of the impact of broader tariff plans Estimates of the impact on GDP were far more severe than the market had predicted

3) Although FOMC ultimately chose to cut rates, some members were skeptical about whether the effects of tariffs were sufficient to warrant a monetary policy adjustment.

That is also why the Notes 250129 was the least watched FOMC in months? It said that “tariffs would not constrain FOMC’s policy adjustments over the long term.”

2025.01.29

II. Insights 

Our Viewpoints and ideas on market.

The United States can no longer sustain the narrative of its technological hegemony on its own

The Stargate project, a 5000-billion-dollar gamble aimed at dominating the competition over AI infrastructure, presents a paradox:It is both inevitable and seemingly impractical. Its success depends not on technological breakthroughs, but on whether it can navigate the maze of sovereignty disputes, financial dependence, and geopolitical red lines.

The United States cannot, and will not, fund the Stargate project alone.Even with 1000 billion dollars in federal loans and 1250 billion dollars in investment from Microsoft/NVIDIA, the project’s first phase still faces a 2750-billion-dollar funding gap. To close that gap, the United States will have to strike a “Faustian bargain” with foreign sovereign wealth funds.These funds will trade infrastructure for equity, and capital injections for ownership of Stargate data centers. For example, the 750-billion-dollar investment proposed by MGX would give Abu Dhabi an 15% stake and control over server operations in the Middle East.

 Chart: Stargate’s ownership structure

Meanwhile, SoftBank may restructure its debt through the Stargate project, with 400 billion dollars of related Vision Fund debt secured by Stargate project assets.In exchange, SoftBank may give U.S. regulators access to ARM chip designs in return for looser antitrust oversight.

Stargate’s “American” branding is inherently contradictory.It depends heavily on foreign capital, whose participation inherently undermines the U.S. sovereign interests it claims to promote.By 2030, non-U.S. entities may hold 55% to 60% of Stargate equity, giving them veto power over the Pentagon’s AI contracts and chip export policy.

On the other hand, Stargate’s dependence on AI chips made by TSMC and Samsung is as high as 80%, while these companies themselves rely on Chinese rare-earth imports, leaving their supply chains highly vulnerable to Chinese leverage. China accounts for 92% of the global rare-earth processing market, enabling it to disrupt chip production through export controls.This strategy already proved effective during the trade war in 2020. If China retaliates against U.S. technology sanctions by restricting magnesium or gallium exports, Stargate’s supply chain could grind to a halt.

Another potential threat is data sovereignty. G42 data centers in Abu Dhabi are an important part of the Stargate network, but these facilities are governed by UAE law. This legal gray area means that U.S. privacy laws and export controls are difficult to enforce.

Therefore, the Stargate project reveals a harsh reality: the United States can no longer sustain the narrative of its technological hegemony on its own.By bringing in MGX and SoftBank, the United States has gained short-term capital but also faces long-term risks that could run counter to its goal of winning the AI competition. Yet this also points to a reality in transition: global AI leadership no longer rests on unilateral advantage, but requires collaboration. Stargate’s ultimate legacy is that even as the AI competition rages, capital has no borders, and power, as the new Trump administration demonstrates, always flows to those who control the money.

2025.01.27

The least watched FOMC in months?

At this point, this may truly be the least watched one, The 1 FOMC meeting is not expected to offer much new information. The statement may mention a stabilizing labor market, but is unlikely to provide clear guidance on a rate cut in 3.

A few key points to watch at the press conference:

1) Whether the Federal Reserve believes Further declines in inflation (expected over the coming months) could open the door to rate cuts

2) Whether the Federal Reserve remains confident that the current level of interest rates“substantially restrictive”, is not suitable as an endpoint

3) How FOMC assesses potential tariff increases and their impact on future prices

The current baseline expectation is for 25bp rate cut each in 6 and 12 this year, followed by another rate cut in 2026.Inflation will most likely continue to decline, and tariffs will not constrain FOMC’s policy adjustments over the long term.

The main source of uncertainty is the precise timing of the Fed’s rate cuts, for two reasons: first, economic forecasts (inflation and the labor market) cannot yet provide clear policy guidance; second, it is not yet clear how FOMC plans to address this round of tariff issues.

However, One point we can be fairly confident about is that market pricing is now too hawkish in reflecting the possible path of FOMC ahead, particularly because the market-implied probability of rate hikes is too high.

We are skeptical that the new administration’s policies will create enough inflationary pressure, and FOMC is unlikely to readily consider further rate hikes from the current level, already viewed as “restrictive.” In addition, The market may also be overlooking the lessons of 2019—when tariff uncertainty hit equities and prompted FOMC to implement insurance cuts.

2025.01.29

III. Market Pulse 

Our latest Comments on the economic and market environment

Rate-hike expectations are completely off the table

The latest Fed meeting conveyed several main points: 1) keep rates unchanged 2) no rush to cut rates 3) future decisions will be guided by data 4) rate-hike expectations are completely off the table

FOMC is in no hurry to cut rates and is proceeding cautiously until the direction of future policy is clearer, This means that, at least for now, a rate cut in 3 has essentially been ruled out.After strong market data in 12, the unemployment rate stabilized, making the Federal Reserve more comfortable with the current level of interest rates.

The statement removed the phrase “inflation moving toward the 2% target.” Although Powell highlighted the two recent favorable inflation readings at the press conference, he remained somewhat reserved about the outlook for declining inflation.

Powell’s remarks at the press conference was somewhat dovish, describing the current level of interest rates as “substantially restrictive”, suggesting more room for rate cuts ahead while ruling out hikes. He said, “If inflation is not moving toward the target, the most reasonable thing to do is to hold steady.”

See our post from yesterday Notes 250129: The least watched FOMC in months?

Chart: yesterday’s Notes

In fact, the meeting’s overall outcome was broadly consistent with the views we shared yesterday: the macro backdrop remains bullish, the Federal Reserve has easing tools at its disposal, Powell’s policy is steady, and the fiscal deficit can withstand higher interest rates.

Powell’s performance this time was excellent, with 2-year Treasury yields moving almost in lockstep with the Federal Reserve (federal funds rate 4.25% vs. 2-year Treasury 4.1%). He ignored Trump’s calls for rate cuts, successfully curbed inflation expectations and market risk, and eliminated rate-hike expectations, allowing U.S. equity valuations to catch their breath.

Private-sector debt is in good shape. The private sector deleveraged after the 08 financial crisis, companies locked in low-cost, long-term debt during the pandemic, and household liabilities are concentrated in fixed-rate mortgages with terms of 30 years. The fiscal deficit is driving economic growth and can withstand the current “higher for longer” policy. Compared with 08, when the main problem was private-sector debt, the current Fiscal pressures remain manageable.

The macro backdrop remains bullish: the Federal Reserve is ready to ease policy, economic growth is slowing but remains resilient, and inflation is trending favorably (mainly because housing costs are falling). Powell is currently paying closer attention to year-over-year CPI data to filter out the effects of seasonal adjustments.

At this point, core inflation and PCE probably need to fall to 2.5% year-over-year levels before rate cuts can genuinely return to the agenda; the 2% target is not a hard requirement.

After the meeting, risk assets strengthened in the market reaction, and attention turned to corporate earnings. The Federal Reserve also has ample ammunition for rate cuts, while rate hikes are completely off the table. The yield curve bull-flattened, with short-end yields falling and the Federal Reserve keeping the front end restrictive; market expectations for long-term economic growth and inflation declined. Risk appetite recovered, credit spreads narrowed, volatility fell, gold and copper prices rose, and the dollar weakened as Treasury yields declined.

The Treasury market is currently pricing in two rate cuts this year, and that expectation is broadly reasonable.

Although 2s10s are bull-flattening, the overall expectation is still for steepening this year, because the effects of deflation and the rate-cut cycle are structural. At the same time, the fiscal position has not improved under Trump (despite the DOGE phenomenon), refinancing pressures are rising, short-end yields will continue to fall, while the long end may face rising fiscal pressures.

Long-dated bonds remain attractive. The 4.5% yield on the ten-year Treasury is still relatively high, and 2-year Treasuries are also a good hedge, performing well during rate-cut cycles. The U.S. economy’s relative advantage remains intact. Considering Trump’s return and stronger rate-cut expectations, cyclical and value stocks still have the stronger case going forward.

Gold’s macro backdrop is following a perfect path, it performs well during rate-cut cycles, economic growth slows, central banks continue buying, and fiscal concerns in particular are driving demand for hard assets.

Chart: the end of the rate-hike narrative is a major positive for gold

Chart: with Powell still holding steady, expectations for growth and inflation are declining at the long end; the 2s10s bull market is moderating, but steepening will continue

Chart: credit spreads narrow: corporate balance sheets are healthy and can withstand a higher-rate environment

Chart: infla tion expectations decline: after the Federal Reserve held rates steady, the market’s pricing of future inflation fell further

2025.01.30

The European trade is still going

Although LVMH’s earnings fell short of expectations, European markets continue to attract strong interest, European bank stocks are breaking through key resistance levels one after another, and several important earnings releases are also due today.

The market is looking for opportunities to diversify investment exposure away from the highly concentrated U.S. market.If the macro backdrop continues to feature solid U.S. growth, high interest rates, and a low equity risk premium, cyclical and value stocks still have room to rise.European markets remain underweight, and Europe may continue to outperform as concerns about mega-cap technology stocks increase.

2025.01.30

The most extreme dispersion environment in 25 years

Over the past five trading days, realized volatility in the U.S. S&P 500 index (SPX) was about 15 (equivalent to an average daily move of 0.9%), while the average realized volatility of S&P 500 constituents was about 45 (equivalent to an average daily move of 2.8%).

This 30-volatility-point (vol spread)spread reached its highest level since 2020 11 (the U.S. election plus the release of vaccine efficacy data), and ranked among the top ten over the past 25 years, a period that includes the financial crisis, COVID, and other events.

In other words, individual stocks are far more volatile than the index, and market dispersion is extreme. This is one of the most pronounced periods of single-stock dispersion in the past 25 years, an ideal environment for stock pickers and alpha hunters.

Chart: greater single-stock volatility dispersion behind index volatility

Chart: the current volatility spread ranks among the top ten historically

2025.01.31

Note: All content herein 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.