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

I. Foundation 

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

1948: The Fed, foreign exchange markets, commodities, and Treasuries

The main issue in 1948 was combating postwar inflation; the economy was in a period of high inflation in absolute terms (CPI reached 10%) but rapid decline.On 1948 1 9, the Federal Reserve announced its first rate hike in ten years, raising the discount rate; it also tightened monetary policy by increasing commercial banks’ reserve requirement ratio on 1 23.

Before the Federal Reserve became independent in 1951, it was responsible for keeping Treasury interest rates low to facilitate government financing, which kept U.S. Treasury yields tightly controlled at very low levels. Commodity prices fell sharply that year, which could neither cause a further sharp decline in interest rates nor avoid affecting corporate earnings., so during this period, equities and commodities were positively correlated. Falling commodity prices hit the U.S. stock market, and the Dow Jones Industrial Average continued to decline, reaching the market low of 48.

After the market bottomed in 2, on 3 5 of that year, the Federal Reserve amended Regulation T and Regulation U, allowing investors to conduct securities-market Margin trading (75%), while the tax-cut billThe Revenue Act of 1948 was forced through (Truman vetoed it; the House passed it). The market rebounded from its bottom, and on 4 3 Truman signed the Marshall Plan to rebuild Europe; the rally continued through 6 of that year.

On 6 1, the Federal Reserve tightened monetary policy further, raising the reserve requirement ratio from 22% to 24%; in the middle to latter part of 6, the First Berlin Crisis broke out, The threat of war halted the market’s advance.In 8 of the same year With commodity prices falling, CPI remained volatile at elevated levels, and the Federal Reserve tightened monetary policy further, it raised rates again on 8 12, lifting the discount rate from 1.25% to 1.5%; the market moved unevenly lower from 6 through 9.

From 9 to 11, the international situation improved and U.S. domestic industrial production rebounded year over year, until 11, when Truman was reelected on a platform of government intervention and social welfare, dashing hopes for tax cuts, the market fell and recovered in 12, but declined 2.1% for the full year.

On 1 16 of the same year, the French government contacted the British Parliament to discuss considering adjusting the franc exchange rate, hoping to reach a new workable arrangement for the franc-dollar exchange rate. The French government’s main goal was to stabilize the French economy, and its fiscal and budgetary measures were the first step in this plan. The next step was to adjust the exchange rate to account for rising prices in France. In their view, establishing a new fixed exchange rate was not feasible at this stage of the economic plan. They therefore considered it necessary, during a transitional period, to allow some of the convertible currencies entering France to find their appropriate exchange-rate level through the operation of the free market.

Washington believed that freedom in the foreign-exchange market should not apply to exchange rates for commercial transactions, but should be limited to financial transactions, such as repatriating French capital from abroad. France found that, given its own economic circumstances, it could not depart from its existing approach.

The Bretton Woods Agreement stipulated that members had to obtain IMF approval to change the par value of their currency, and they also undertook not to adopt multiple-currency practices without IMF authorization. There is no doubt that these were the reasons France to seek the IMF’s approval.

France repeatedly made clear that these proposals were intended as transitional measures to address current urgent needs, and that their aim was to stabilize the franc at a single fixed exchange rate.British policy chose a two-pronged approach: do everything possible to help the French government achieve its goal of a fixed, unified exchange rate as soon as possible, while taking the necessary measures along the way to limit the impact on its own currency and the many other currencies it was closely watching.

Paris’s new free market differed from the free foreign-exchange market that existed before the war. It would operate through authorized banks in Paris and be open only to residents of French territory wishing to buy dollars or escudos for approved purposes. It was not intended to facilitate capital flight, currency speculation, or arbitrage between different currencies.

The IMF tried to persuade France to treat it as a transitional measure rather than a permanent arrangement.France’s actions effectively demonstrated that if the government could not prevent inflation and rising production costs, no system of foreign-exchange controls could keep the currency at a fixed level, calling into question to some extent the ineffectiveness of the entire Bretton Woods system, raising the question of whether the system was based on the availability of various currencies rather than on people’s willingness and ability to exchange services, raw materials, and goods.

The franc crisis occurred in January of that year, and the franc depreciated against the dollar by 44.45%.

【Further reading】

n 1948-01-26 FRENCH FRANC (DEVALUATION)

2025.02.03

II. Insights 

Our Viewpoints and ideas on market.

Revisiting political noise and the ultimate performance of assets

Last year, we published an article in the Foundation section of our community titled “In the U.S. stock market, micro-level performance matters more than macro politics,” which said:“In the U.S. stock market, political developments may have less influence on stocks than people imagine. Even clearly targeted policies (such as tax rates and fossil-fuel regulation) sometimes produce outcomes contrary to expectations. Experience shows that corporate earnings matter far more than who occupies the president’s office.”

See Notes241031 Micro-level performance matters more than macro politics in the U.S. stock market, today we’ll add a little more on this issue.

Many people who started investing in the A-share market feel uncomfortable when they turn to U.S. markets. Many mainland Chinese researchers also naturally tend to view overseas markets through the lens of a policy-driven market and start with policy when taking a top-down approach.

This does not mean that the interaction between policy changes and local market fluctuations is unimportant, in fact, this interaction is clearly evident, especially when the government is large and highly visible (the deficit issue); the effect is even more pronounced then.The key is that a basic principle of trading overseas markets is to first distinguish everyday political noise from the ultimate performance of assets.

Chart: Performance of S&P sectors during Trump’s previous term and Obama’s terms

Contrary to many people’s intuition, the chart above compares sector returns during Trump’s first term and Obama’s two terms. Although their policies and ideologies were completely different, the sectors near the top of the rankings were broadly similar the top of the rankings was actually quite similar: technology and consumer discretionary were the best-performing sectors in both periods. This was driven by the micro-level performance of industry cycles, business characteristics, and corporate results and growth.

Policy only raises volatility in certain parts of the market for a period of time. Over the long term, one of the most important macro perspectives has always been: the long-term primacy of the economy and earnings over domestic politics (and international geopolitics).

2025.02.05

Global PMIs: growth territory, Treasuries, commodities, and reflation

Global PMI jumped to 50 in 1, reaching this key level for the first time since 2022 9. This was a relatively healthy rebound because it was driven jointly by the activity and price components, which is very positive.

https://mp.weixin.qq.com/s/A_QhGmdoD9IONOyjkUu9qA   Read together with the article at this link

The recovery in manufacturing confidence is mainly due to looser global monetary policy., and manufacturing, as a highly interest-rate-sensitive industry, responds particularly strongly to this. The net share of central banks cutting rates has now risen to 55%, while PMI typically leads monetary policy by about 9 months, and financial-condition constraints are gradually easing. This is the same trade as the long-term Treasury trade Bessent wants, so the upward trend will certainly continue, and this is an area to position for.

At the country level, the activity component shows that 50% countries are already PMI in expansionary territory (>50), with 35% of them showing acceleration. India continues to have the highest activity index globally, while the United States is the country where acceleration is most pronounced (is it all coming together?)In Europe, France and Germany are also moving into recovery mode;

Chart: Bloomberg report

Chart: Bowman recommends adjusting the leverage ratio and global systemically important bank surcharge so banks can hold more Treasuries

Note: Bowman is currently a leading candidate for the Federal Reserve’s Vice Chair of Supervision position.

A manufacturing recovery led by commodities will provide downside support for commodity prices，This refers to base metals, base metals have greater certainty of recovery in this cycle than energy, base metals will continue to rise along with the recovery in the new-orders-to-inventories ratio.On the other hand, the price component of DM did edge up slightly, reaching its highest level since the end of 2022 and providing near-term inflation support, However, this indicator remains far below its long-term average, indicating Inflation is still returning toward its target level.

Take the copper reflation trade as an example:

Chart: The recovery trade: prices rise along with the recovery in the new-orders-to-inventories ratio, while inflation returns toward its target, making the reflation level a key resistance line

Chart: Some January discussions on reflation from the commodities community

To recap, a recovery in the new-orders-to-inventories ratio provides downside support;inflation is still returning toward its target level, which sets the upper limit for the trade.

【Further reading】

n Notes250128 The four quadrants of the macro cycle

2025.02.06

III. Market Pulse 

Our latest Comments on the economic and market environment

Trump imposes tariffs on imports from Mexico, Canada, and China

Trump signed an executive order imposing tariffs on imports from Mexico, Canada, and China, effective from 2 4. The White House has tied the conditions for lifting these tariffs to improvements on immigration and fentanyl, but has not provided specific targets. Although the outlook remains uncertain, Wall Street broadly believes that the tariffs on Canada and Mexico may be short term.

The order that was implemented is actually identical to the proposal he made last year, so it has effectively already been priced in.(See Notes241130 Trump Tariffs Impact on Greater China Tech Hardware & Server ODMs)

1) The executive order signed by Trump imposes a 25% tariff on imports from Mexico and a 25% tariff on imports from Canada (excluding energy products),energy products are subject to a 10% tariff, while imports from China are subject to a 10% tariff.

These tariffs will be added on top of the existing tariffs. Specific details about the products eligible for the lower energy tariff have not been announced, but they are expected to include oil, natural gas, and electricity. Subsequent Federal Register notices may provide implementation details, including the specific product codes that qualify for the lower rate.

2) The White House emphasized in the executive order a“retaliation clause”, meaning that if a country responds to U.S. tariffs by imposing import duties on U.S. exports or taking similar measures, the president can increase or expand the tariffs imposed under this order to ensure the measure’s effectiveness.Although this is clearly a warning about possible retaliation, it does not in fact take effect automatically.

3) The tariff plan is scheduled to take effect on 2 4. The White House fact sheet on tariffs and the executive order emphasizes that fentanyl and immigration issues are the reasons for imposing the tariffs, but it provides no clear conditions for lifting them beyond cooperation and improvement on immigration and fentanyl issues. Given their potential economic effects and the broad conditions the White House has set for removing the tariffs, these tariffs are more likely to be temporary.

4) According to estimates made before GS, tariffs lasting 25% on imports from Canada and Mexico would raise the U.S. effective tariff rate by 7 percentage points, pushing up core PCE prices by 0.7% and causing a negative impact of 0.4% on GDP. A 10% tariff on energy products would reduce this impact to some extent.

【Further reading】

n Notes250122 How much of Trump’s tariffs has the market priced in?

n Notes241127 Renminbi: no rush to act

n Notes250129 How did the Fed view tariffs during the previous trade war?

n Notes241226 U.S. consumer exposure to imports from China

n Notes250115 Extreme market pricing and inauguration-day actions

n Notes241120 Commodities: three trading pairs for tariffs and tail risks

2025.02.03

Policy whiplash and dollar trading

The dollar plunged throughout the day, quickly erasing the outperformance it had previously gained on tariff news.

Tariffs on Canada and Mexico were delayed by 30 days following talks with Sheinbaum and Trudeau, sending the Canadian dollar soaring by 80 basis points; after Trump spoke with Trudeau, Canada agreed to a 13-billion-dollar border plan to curb fentanyl inflows, while the Mexican peso rebounded sharply, with USDMXN falling 160 basis points to return to Friday’s level.

The euro came under pressure and fell 30 basis points, becoming the weakest currency in G10, as Trump is still considering tariffs on Europe of 10%. Although tariffs on China have not disappeared, USDCNH fell 20 basis points over the day, declining steadily since news broke of the delay in tariffs on Mexico. It is also supported by the People’s Bank of China’s midpoint mechanism, keeping volatility within a 2%-day trading range of around 7.34;The first fixing after the Chinese holiday ends on Wednesday is the most important signal for the market’s subsequent direction. Keep a close eye on it.

Long USD in the short term (This is a short-term trend, so short-term traders should continue to trade with the trend. Pullbacks are entry points; there may be a symmetrical downward move.)It mainly rests on three factors: 1)Flexible exchange rates The mechanism offsets changes in costs; 2) tariff implementation and potential supply disruptions spur the dollar Safe-haven demand, driving the dollar’s outperformance against the currencies of small open economies and emerging markets; 3)Tariffs taking effect Frees up room to rise, as the market prices in subsequent Chinese policy adjustments.

Overall, if policy does not change much, USD/CNY should still remain in the 7.40-7.50 range, and EUR/USD is probably still the clearest pair to trade on the downside, but In the short term, only part of this will materialize; the market is familiar with Trump’s erratic, ever-changing style.. FX trading is choppy, so you can use this trend to position in equities.

2025.02.04

Noisy nonfarm payrolls?

Now that we’ve looked at the data, let’s add a few thoughts on things outside the usual focus,

1/ Labor-force participation rose, unemployment fell, and average hourly earnings increased; residential construction employment climbed to a new high for this cycle.However, excluding government, health care, and education, the overall economy added only 14,000 jobs.This means that, overall, the data still point to a soft landing, so, NFP strong&the Fed is still cutting rates.

The market action is interesting too: bonds sold off slightly, and yields bear-steepened.

2/ the most less NFP overnight volume in months. Smart money is waiting.

3/ The benchmark revisions lowered monthly job growth for 2023 and 2024, respectively—by an average of about 40,000 jobs per month in 2023 and about 20,000 jobs per month in 2024. Among these, Industries with higher concentrations of undocumented immigrant workers Employment data were revised down less (such as construction, agriculture, food service, and others);

Quoting Lawrence: *It is like a trader taking over a bad position for another trader, exiting the firm... The VERY first thing they do is bring the markdown.

What does that mean? When one trader takes over the bad positions of another trader who is about to leave, The first thing is usually to mark down the assets, directly lowering their valuation so that the new trader’s subsequent performance looks better.

“Trump BLS (Bureau of Labor Stats) control now.”

Revise the previously possibly “overly optimistic” employment data downward so that future figures look more “realistic” or better match the new leadership’s perspective.After the new team takes over, they will surely need to clean up the data first to fit a new political or economic narrative.

4/ Remember what we said yesterday?

“The rebound in the new orders-to-inventories ratio supports the downside;Inflation is still returning toward its target level, which sets a ceiling on the trade.” This time After the data, capital began pushing higher toward the key reflation level we identified.

“A manufacturing recovery led by commodities will provide downside support for commodity prices，This refers to base metals, base metals are more certain to recover in this cycle than energy”

Look at today’s commodity moves: which group is leading? Base metals.

Every sentence in Notes is worth taking a careful look at.

See Notes250106 Global PMIs: Growth Range, U.S. Treasuries, Commodities, and Reflation

Did you understand it this time?

2025.02.07

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.