June second to June fourth, two thousand twenty-five

I. Foundation 

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

Revisiting dollar weakness and NFP volatility trading proxies

Based on recent price action and options market data, The Swiss franc (CHF), Canadian dollar (CAD), and euro (EUR) are the best-performing counterparts for shorting the U.S. dollar.In other words, these three currencies are the most likely to rise further when the U.S. dollar weakens—in other words, they have higher beta to the dollar.

These three currency pairs can be prioritized for trades on a weaker dollar.

In addition, across the past 12 nonfarm payroll releases, the Mexican peso (MXN) and Brazilian real (BRL) had the most pronounced gamma (that is, sensitivity to volatility) among emerging markets, and their price reactions after the payroll data were strong... Correspondingly, Among G10 currencies, the Swedish krona (SEK) and the euro (EUR) have reacted most clearly..

(The corresponding attachments have also been posted on Planet.)

2025.06.02

II. Insights 

Our Viewpoints and ideas on market...

Income-driven asset prices & when the focus moves away from tariffs

The market’s expected ultimate effective tariff rate is currently in the range of 10-13%, whereas expectations at this level are unlikely to trigger a recession in the short term...which means the pain trade may continue....because nominal data will probably remain strong. As we have said before, 6-7 will be a key period for data releases, and we will keep watching through the end of July (two months from today).

1) credit spreads, 2) initial jobless claims, 3) earnings call content, 4) survey data, 5) artificial intelligence capital expenditures, 6) pessimistic expectations for tariffs, 7) liquidity conditions;

There are still no clear signs of actual weakening.. Last month, U.S. personal income rose 0.8% month over month,

The income-driven asset price cycle is not completely over yet.

The risk to the market is not earnings themselves, but that all participants need to adapt to a “new normal,” namely:1) higher discount rates, 2) the end of structural deflation, 3) the end of forward-looking Fed policy, 4) a fiscally dominated regime

Chart: The Fed has lost its ability to act preemptively

It is certain that the market will eventually force fiscal policy to return to responsibility and reestablish a new equilibrium at a new level; what is not certain is where the yield on 30-year U.S. Treasuries will ultimately settle. No one can answer that.

GDP is a function of labor * productivity * leverage,

As I said yesterday, this is a crucial week for labor data; the data that seemed safe are no longer safe,

Funds are going long on artificial intelligence again because productivity is now the only driver left.. The tariff narrative has peaked, and the market’s appetite for incremental information is incomprehensibly intense.

Chart: The tariff narrative has peaked; in the second half of the year, everyone will shift their focus back to what is right in front of them

Returning to the opening point, the income-driven asset price cycle is not completely over. As the final link after data and fiscal policy, Fed action will continue to be constrained; zero moves for the entire 25 year would not be surprising.

U.S. high-yield credit spreads currently price in a “0% recession probability,” while the median forecast among sell-side analysts is a recession probability of 40% (some buy-side investors even put the probability at 45%)... The “double put” from monetary and fiscal policy remains in place—credit spreads are being artificially compressed, while banks are raising their risk appetite amid higher nominal rates without taking on greater credit risk.

The day before yesterday, Waller said in a speech:

“...The divergence suggests that ordinary households are more pessimistic or sensitive about future prices, while markets and professionals believe inflation will be stable over the long term ordinary households are more pessimistic or sensitive about future prices, while markets and professionals believe inflation will be stable over the long term...I personally prefer to look at market-based inflation compensation measures and the expectations of professional forecasters, because they have real money on the line. If buyers of inflation-protected securities are wrong, they lose money; professional forecasters’ clients and companies make financial decisions based on their forecasts, and if those forecasts are wrong, they lose clients...As I used to tell my students, In a capitalist system, competition drives out companies that make the wrong decisions.For consumers, however, although getting a forecast wrong also has a cost, they are not in competition with one another, and a bad decision will not make them “go bankrupt.”。”

The problem here is that market yields have not been repriced to reflect higher inflation expectations. At this point, there are really two possibilities:

1) rate cuts will not materialize; 2) as Waller says, inflation expectations are overstated...

Let’s see together who is right and who is wrong.

2025.06.03

From tariffs on goods to tariffs on capital: the hidden Section 899

When discussion of the Big Beautiful Bill was just gaining traction, we had already posted an update on Planet. For details, see Notes 250516: The Big Beautiful Bill, fiscal upside surprises, and the bond market Today, we are mainly building on what we covered earlier to discuss the hidden Section 899.

The reason Section 899 matters is it is the first substantive provision to formally expand the scope of tariffs from goods to capital...

The fundamental difference between tariffs on capital and traditional tariffs on goods lies in this:—in today’s global trade settlement system, which is based on the U.S. dollar (meaning that, however loud the narrative, there is relatively limited scope for de-dollarization),regardless of how goods tariffs evolve, the United States can still earn tens of billions of dollars in revenue from capital tariffs of this kind—a monetary tariff—and all of this can be achieved without relying heavily on traditional tariffs, which often carry a clear risk of stagflation.

Under the current goods tariffs, the U.S. government could receive roughly 200–250 hundred million dollars in revenue each year. If the “monetary tariff” takes effect, even its moderate version could generate fiscal revenue of 100–150 hundred million dollars per year.

A closer look at Section 899 reveals that

the provisions behind it leave considerable room for further expansion of capital/monetary tariffs...

(This is closely related, so I’ll mention it briefly: another Notes piece will come out this week, and it will be our final discussion of tariffs, mainly to distinguish the two objectives behind them.. The two objectives are not in conflict, but the emphasis and direction will lead the market to different outcomes... Whether the end result is leverage or revenue makes a great deal of difference, and Section 899 clearly supports the latter..)

1) Section 899, also known as the “revenge bill,”its main provision is to tax passive income (such as dividends) generated by foreign investment in U.S. assets, applying to countries that impose “unfair foreign taxes” on the United States(for example, digital services taxes or minimum corporate taxes; Canada, Europe, and other countries and regions are primary targets);

2) Which countries will be taxed?As long as the U.S. Treasury designates a country on the “Discriminatory Foreign Countries” list (DFC, Discriminatory Foreign Countries)that is sufficient to trigger taxation, with no additional procedures;

3) Who is covered? Foreign governments, individuals, and companies—virtually all investors, including sovereign wealth funds and central banks worldwide;

4) What is the tax rate? Section 899 provides that, starting in the first year after the bill takes effect, the existing tax rate for covered entities is increased by 5%, with an additional 5% added each year thereafter, up to a maximum of 20% above the statutory rate. The key point is that Section 899 imposes an additional tax on top of the applicable existing rate (whether under a pre-tax or post-tax treaty);

5) When does it take effect? If the Big Beautiful Bill passes before 2025 10, Section 899 will take effect on 2026 1 1;

As mentioned earlier, if the “monetary tariff” is implemented, its moderate version could generate fiscal revenue of 100–150 hundred million dollars per year..

However, there is another consideration here—

For the monetary tariff to truly take effect(and work) (if it cannot work, there is no reason for this provision to exist...and things that serve no purpose are not written into the bill... )another provision will also need to be repealed...

This is also why Section 899 is probably just a precursor...

The United States needs to (and probably will),

repeal the “Portfolio Interest Exemption” (Portfolio Interest Exemption, PIE)...

At present, PIE materially exempts foreign investors from withholding tax when purchasing U.S. Treasuries, making their Treasury income completely tax-free. Section 899 merely imposes a surtax on the current tax rates for foreign investment—but under PIE, the tax rate on foreign holdings of U.S. Treasuries is zero.Therefore, If PIE is not repealed, Section 899 can apply only to dividends generated by U.S. stocks held by foreign entities, bringing the Trump administration only tens of billions of dollars in annual revenue.

This is also why the Big Beautiful Bill explicitly states(The bill’s authors have plainly told you they thought about this, and even explicitly pointed it out here):

“Because this provision merely adds a surtax on top of the otherwise applicable tax rate, it does not apply to income that is itself expressly excluded from the scope of that tax.

For example: the provision does not apply to portfolio interest, because portfolio interest is expressly excluded from taxation on FDAP (fixed or determinable annual or periodical) income (see Section 871(h)).

This contrasts with certain types of income for which the applicable tax rate is reduced or even zero, but which still receive relief from the statutory rate, such as income exempt under a tax treaty or subject to a preferential rate.”

If it is not repealed, under the current version, foreign investors currently hold around 18 trillion dollars in U.S. stocks; if PIE is not repealed, that is, Section 899 imposes only a limited surtax on dividends，Its impact is actually relatively limited... After all, most investors’ U.S. stock holdings and allocations are more focused on capital appreciation than on collecting dividends.

But If PIE is repealed, meaning that Treasury coupon payments would be brought under the 30% withholding-tax framework, even if a tax treaty applies, the surtax under Section 899 would also would have a significant impact。

Foreign investors currently hold nearly 9 trillion dollars in U.S. Treasuries; an effective tax rate of more than 20% on their coupon payments would be needed to truly cause a significant shock.. In a word:If capital tariffs are truly to become an important tool for the Trump administration to raise fiscal revenue，with revenue rather than leverage as the core objective, then PIE must absolutely be repealed; otherwise, this provision has little value or reason to exist.

(For more details on holdings of dollar assets, see Notes250515 Continuing the discussion of unhedged dollar exposure, with a detailed discussion of asset holders and ownership structures)

Finally, If Section 899 and the repeal of PIE are both actually implemented, then the result is self-evident:

Another item will be added to the weak-dollar checklist, and pressure on U.S. Treasuries will increase.

2025.06.04

III. Market Pulse 

Our latest Comments on the economic and market environment

Note: All content herein is for reference only, does not constitute investment advice, and is not a basis for any laws, regulations, or regulatory policies. Investors should not use or rely on this information as a basis for their decisions.