Good morning … I KNEW it. (No, NOT an I told ya so, note).
TLINEs always work! (no they don’t…we all know the trend is your friend … until it bends).
No sooner do I admit all was lost and suggest you turn your eyes, delete any future post and move on if / when I attempt to lead with any visual context AND THEN, only to be justified in my process of thought (?) moments after all was lost…
30yy broke back up ABOVE TLINE noted…and is in / around 4.48% today…
… momentum clearly continues to suggest rates are to be moving HIGHER but then again, this all very much relying on developments outta DC … to be continued …
… I KNEW it :)
Meanwhile, the Trump Put (discussed further by John Authers below) was (not?) on full display last night in the speech, at least not in the form we THOUGHT it should / would / MIGHT take. Trying to ‘game’ at what level S&Ps would need to hit and ‘trigger’ is NOT one I play BUT there WAS reference to yields … which have been lower for most of the year. Interesting.
Backing up and looking specifically at the Trump Put a bit further …
ZH: Gold Gains, Bitcoin Bid As Tariff-Tantrum Wreaks Havoc Across Risk-Assets
… Helping matters along, the bounce started around the European close and at key technical support levels for the S&P and Nasdaq - and the market's negative gamma worked both ways (as it does), accelerating flows to the upside as the bounce started....
Who could have seen that ridiculous bounce coming?
For those who already forgot the first Trump trade war, we are nearing the time when everyone turns apocalyptically bearish and the White House leaks a bullish "trade war deal" trial balloon.
Also, both the S&P 500 and Nasdaq bounced at their respective 200DMAs today...
… More below but I’d put / keep ALL this in context of RATES first and while there may be something of a bearish lean out the curve at the moment, let us NOT forget the power of The Oval?? And on THAT note, what some heard last night …
I’ll move on and show myself out but later on today will be watching Lutnick to see what next As The (tariff)World Turns — markets are currently liking / HOPING for something good on that front. AND … here is a snapshot OF USTs as of 657a:
… for somewhat MORE of the news you might be able to use … a few more curated links for your dining and dancing pleasure …
NEWSQUAWKUS Market Open: Global Sentiment lifted on tariff optimism, European stocks at highs & Bunds hammered on German spending plans … USTs are under modest pressure, following the lead from Bunds, but to a much lesser degree. Due to the German measures not having any direct fiscal implications for the US and as the region remains more focused on growth concerns; ISM Services & Factory Orders are the next points to watch on this alongside ADP ahead of Friday’s Payrolls. USTs have been down to a 110-27 base but have spent much of the European morning and APAC session holding at the 111-00 mark.
DOGE has gained more traction in laying off federal workers than expected. We assess the implications for the labor market and funds rate. Even with hundreds of thousands of possible federal layoffs, we think aggressive rate cuts would require evidence of much broader fallout on private demand.
…In our view, the bar is high for DOGE-related job losses, in isolation, to alter the FOMC's policy course in the next few meetings. In particular, the FOMC is highly unlikely to infer persistent deterioration in labor demand from DOGE layoffs, with these mixed within the 5mn+ gross job separations and hires that have typically occurred in a given month over the past year. To trigger a move, we think the FOMC would need to see evidence that this is part of a persistent weakening of aggregate labor demand…
The OPEC+ announcement that it would start unwinding its voluntary cuts looks to us like a risky decision amid bearish sentiment around tariffs, talk of lower sanctions on Russia, and without evidence yet of significant sanctions-driven supply disruptions.
The pathway towards bringing barrels back without lengthening the market too much is a narrow one that assumes strong compliance (while laggards are planning to increase supplies) and/or significant reductions in Iranian flows.
We continue to believe that tariffs on Canada and Mexico may change differentials but won’t impede flows, and although there is talk of a softening of US sanctions on Russia, in our view this wouldn’t change balances much
Here’s an update from Germany on tariffs which may very well be outta synch by time ink dries …
Yesterday, President Trump announced that the delayed 25% tariffs on Canada and Mexico would go into effect on March 4th. In response to Trump’s original announcement a month ago, we determined that these tariffs would subtract roughly 0.4-0.7 percentage points from growth this year and add a roughly similar amount to inflation (see “Groundhog day for trade wars”).
We have not yet adjusted our forecast to reflect these new tariffs, as we await clarity on how long they may be implemented. Nevertheless, considerable downside risks to the growth outlook are mounting: trade policy uncertainty has hit historical levels, financial conditions are tightening, sentiment indicators signal weaker growth momentum, and more trade actions are likely to come. While the Fed may not be able to ease preemptively given still elevated inflation and inflation expectations, rate cuts would become likely if evidence emerges that the labor market is weakening or financial conditions tighten more aggressively.
Six weeks past the inauguration, today’s COTD takes selective stock of the market moves under the new administration.
Nominal yields are down across the curve, with essentially all the declines in reals; equities are lower; credit spreads are wider; the dollar is weaker and oil is down sharply. This is not the Trump trade as advertised.
To us the drivers are clear. Recent weeks have been dominated by growth-negative headlines from repeated tariff threats and chaotic DOGE cuts, contributing to historically elevated policy uncertainty and weighing on sentiment. We’ve argued repeatedly that fiscal policy is central to the rates outlook, but negotiations on a bill are going to be drawn out, vulnerable to the Republicans’ slim House majority, and could bring a shutdown and debt limit fight in the interim. Increased OPEC production should provide an offset to risk assets but raise the downside to rates (as would deregulatory efforts to boost demand for Treasuries).
There could be method to all this: take any growth hit early, create an environment favorable to Fed rate cuts, and then follow with a big fiscal package that boosts animal spirits heading into 2026.
Nevertheless, with prolonged uncertainty and policy sequencing presenting headwinds to confidence over the near term, we respect the revised stop on our short 10y SOFR and close the trade (entered three months ago) at a small profit.
A blog post from German operation …
DB: The trade war dent to CEO confidence may be short term
The worrying thing about the trade war that is unfurling across North America and China is that it is becoming a far more multi-faceted conflict than it was during President Trump’s first term. Canada, Mexico, and China have all unveiled responses to the US tariffs that involve non-tariff measures including, mineral supply cuts, court challenges over guns, and restrictions for US firms including biotechs.
In this piece, we discuss how capital markets are highly levered to CEO confidence. And that confidence is heavily driven by economic uncertainty and market movements. We argue that the effects of uncertainty may be short term in nature while equity malaise can have a more lasting impact. As such, we expect capital markets (including M&A) to be more conservative in Q2 as corporates in the US, Europe, and China adjust their businesses for the new trade environment. CEOs will also be focussed on deciding how much of the tariffs can be passed onto customers without political blowback.
However, in the absence of a significant (and sustained) equity and credit market sell-off, we expect M&A, expansion & investment plans, and IPOs to pick up in H2 of 2025. In the same way that corporates adjusted their supply chains in quick time during Covid in 2020 and as the Ukraine conflict commenced in 2022, we expect them to adjust relatively quickly today. Indeed, most of the usual markers of CEO confidence remain intact: namely strong equity markets, low credit spreads, low unemployment and others.
If economic uncertainty subsides by the summer (even if tariffs remain in place), CEOs are likely to push ahead with M&A and expansion plans to reinvigorate returns on equity which, in the US, have now fallen below their pre-Covid level.
… when I see, ‘we adjust price f’cast accordingly’, I slowdown to investigate … in this case, it’s consistent with current and prevailing narrative of lower rates …
With tariffs and counter-tariffs creating uncertainty over oil demand, we had expected OPEC+ to extend production cuts once again. However, following yesterday's announcement, that appears not to be the case. Our updated S/D now looks looser than before. We adjust price forecast accordingly.
Key takeaways
US imports tariffs on Canada, Mexico and China have gone into effect, which are likely a headwind for the oil-intensive part of the economy, and hence demand
However, OPEC+ announced yesterday that the unwind of voluntary cuts will start in April, as per the existing production agreement
Still, seasonally, demand growth tends to be concentrated in April-to-August; it appears that OPEC wants to use this period to test the market for higher supply
OPEC+ has indicated it will remain sensitive to market conditions; it is possible that production will only see a few monthly increases, not the full unwind
Still, our updated balance are looser than before; total oil liquids are likely in surplus from here; we lower our Brent forecast $5/bbl for 2Q-4Q.
… a UK shop on US bank regulations …
NatWEST: Bank Regulation Update: Too much of a good thing
Fed Governor Michelle Bowman’s February 5th speech entitled “Bank Regulation in 2025 and Beyond” reignited a long-standing debate over the appropriate regulatory response to deteriorating liquidity in the market for US Treasuries. Governor Bowman’s speech highlighted the potential for changes in bank leverage ratios and G-SIB surcharge regulations as a means of supporting Treasury market liquidity.
While swap spreads widened sharply following the announcement, this widening has moderated somewhat, and currently market pricing is consistent with a high probability of an incrementalist “recalibration” of capital ratios, rather than more aggressive policy measures such as exclusions of Treasuries or Treasury repo from the SLR or eSLR denominator, or a more material re-consideration of Basel III Endgame provisions.
At these valuations we favor paying long-end spreads, as incremental measures are at best temporary and likely only necessitate revisiting the issue again as the Treasury market grows and/or as the Fed continues to reduce the size of its balance sheet. Moreover, the political environment might be more conducive to policy measures which result in a moderate outright reduction of capital in the banking sector in the interest of a stronger credit mechanism and more rapid growth.
Any time you use ‘the force’, most ALL products of the ‘80s will slow down to investigate whatever narrative you are putting forth and this one is no different …
US President Trump’s address to Congress echoed speeches at campaign rallies. Markets have limited interest in much of the content. Trump did suggest trade tariffs would create “a little disturbance”, which seems to suggest a commitment to keep taxing US consumers. However, there was a faint sound of retreat from US Commerce Secretary Lutnick, who suggested that some of the tax burden may be lifted for consumers of Canadian and Mexican products as soon as today.
Uncertainty is a management style, but there are consequences. Corporate investments and household savings are in part determined by certainty around expectations for the future. More visible taxes (e.g. an avocado tax or a propane tax) have the power to affect consumer behavior more quickly than less visible taxes (e.g. aluminum taxes).
US January factory orders data is not a major market focus. Over time, it offers more important indications for investors. US companies can respond to import taxes by increasing profits (inflationary) or market share. Data around US production will hint at the route taken.
Bank of England Governor Bailey and other officials testify to parliament today, offering informed policy makers’ views in an uncertain economic climate. Assorted business sentiment survey data are due—hard to read in a polarized world.
… Same shop with an economic perspective …
UBS: US Economic Perspectives More tariffs: growth risks mount | 4 March 2025
When the administration added 10% tariffs to imports from China last month we pulled forward a thin tenth of core inflation and roughly the same in reduced growth into 2025 from 2026. Our baseline projection already contained large tariffs on imports from China being spread over 2025 and 2026. However, last month we explained that the 25% tariffs on imports from Mexico, 25% tariffs on non-energy imports from Canada, and 10% imports on energy imports from Canada would likely lower GDP growth in 2025 by 0.8 pp. While the FOMC might be hamstrung waiting to assess the inflation impact in the short run, with the unemployment rate expected to rise close to 5%, even after the inflation shock subsided, we estimated that maybe not in 2025 or 2026, but by 2027 the fed funds rate would be lower, and in that scenario we would expect outright accommodation and below 3%.
We estimated the economy would already be slowing from less fiscal support across local, state and federal governments. We estimated the slowdown in real disposable income growth, which has nearly halved over the last year, would lead to slower real consumer spending in 2025. We do not know how long these tariffs will be in place, in case this is part of a negotiation. However, in an already slowing economy, an expansion that already not really firing on all cylinders, sizeable tariffs appear to be meaningfully increasing the downside risks.
… and same shop with a note missed from the other day …
UBS: Global Strategy 7 Key Macro Themes for Spring | 3 March 2025
1 - Europe has been outperforming the US. When does the music stop?
2 - Can the ECB still surprise markets? We think so, but only in tails scenario
3 - Will US tariffs outweigh the positive impact from Ukraine ceasefire?
4 - Markets have barely moved post German elections - we see 3 main scenarios from here
5 - What have investors been saying/doing lately? Duration and Hybrids are the key debates... Recent client discussions suggest duration extension trades are still in play, even more so when the 10y Bund is at 2.5%. We actually see a split among investors: on one hand, the lack of volatility pushed some investors, especially in IG, to increasingly add exposure to 1) what has been underperforming; 2) what trades wide vs. all time tights (ex: REITs). On the other hand, some clients structurally or tactically more defensive, especially in HY, struggled with high beta outperforming (ex: CCCs - exposure in EU funds at decade lows). At a sector level, the key debate is still around Hybrids and given their current level in EUR, some clients are trying to benefit from a growing US Hybrids market to add extra yield to their portfolios (the pick-up relative to senior looks appealing vs. the EUR index with ~1-2% in USD vs. 0.75-1.25% in EUR).
6 - How to position in the current macro backdrop? Favour RV and cheap hedges, not beta trades..
7 - Technicals: when does the music stop? We are getting there but carry is still too high to go all in...
… finally, odds that this last narrative changes at precisely the wrong time ??
Yardeni: Are Odds Of A Bear Market Rising? Will Earnings Save The Day?
We've been betting on the resilience of the US economy and earnings to keep the bull market going. Our thesis has been challenged by a rash of weak economic indicators for January recently. We think that they will be stronger in February and March, as we've discussed in recent days.
However, Trump's tariffs imposed today on Canada, China, and Mexico could have stagflationary consequences for all concerned if they are not soon lowered or removed. As a result, we are raising our subjective odds of a what-could-go-wrong outcome for the economy and the stock market from 20% to 35%. We are reducing the likelihood of a meltup/meltdown scenario from 25% to 10%. We are keeping our Roaring 2020s scenario at 55%, and maintaining our year-end targets for the S&P 500 of 7000 this year, 8000 in 2026, and 10,000 in 2029.
Of course, we reserve the right to change our minds as often as the President of the United States does. Indeed, after the market close, Commerce Secretary Howard Lutnick said on Fox Business that compromises with Canada and Mexico will likely be revealed as soon as Wednesday! Go figure.
If the economic data up ahead confirm our upbeat assessment of the economy, then earnings should increasingly drive the stock market higher. Our colleague Joe Abbott reports that complete Q4-2024 data are now available for S&P 500 companies’ aggregate revenues per share (RPS), earnings per share (EPS), and profit margin.
(1) RPS and EPS rose to record highs, and the profit margin edged up to 12.8% (chart).
… And from the Global Wall Street inbox TO the intertubes, a few curated links …
From one of THE very best at The Terminal on positions and BETS …
Bloomberg: Treasury Options Traders Target Bigger Bond Rally Ahead March 4, 2025 at 9:55 PM UTC
…Big bets Traders have been putting money to work on the back of lower Treasury yields, as recent activity in the 10-year options market has soared. The bulk of the action however has been focused in the April and May 10-year call options, on strikes specifically targeting yields at 4.15% and then as low as 3.85%.Theactivity has also bled into 5-year Treasuries, where one trade Tuesday looked to aim for a 3.35% yield level.
Open interest, or the amount of risk held by traders in Treasury options, has surged across a number of call strikes on 10-year notes. The trades have been making money. One example is a position bought on Monday in May calls for a premium of roughly $27 million. Following Tuesday’s extension of the bond market rally, the same position was worth approximately $40 million, at one point. Over the past week, approximately $150 million has been spent on a handful of stand out trades.
… Before moving on I’d like to insert a visual of 5yy with 3.35 (ish) noted, for reference and context …
… making the ‘dipORtunity’ up at TLINE (just north of 4.10%) … watching AND an OpED worth a look …
Bloomberg: We’re About to See If the ‘Trump Put’ Is Real Tariffs test belief that markets can act as a veto on economic policy. March 5, 2025 at 5:00 AM UTC
Just Another Tariffs Tuesday Tariffs Tuesday is in the books, which is just as well. The US has now imposed 25% tariffs on Canada and Mexico, and brought tariffs up by 20% on China, while Commerce Secretary Howard Lutnick has just given an interview suggesting that they will be retracted or in some way reduced on America’s neighbors within the next 24 hours. In such an environment of uncertainty, let’s stick to what we can say with confidence, which isn’t all that much.
First, this is how the US stock market traded Tuesday. There’s no point trying to fit a narrative to it. Volatility like this is unhealthy:
However, volatility — at least as measured by the popular CBOE VIX index derived from options prices — is not as extended as you might think. It’s risen sharply, but remains below the spikes caused by Silicon Valley Bank two years ago, last year’s carry trade unwind, and the surprisingly hawkish December meeting of the Federal Reserve:
The really startling tell came in the currency market…
…The broader decline for the dollar suggests something strange is afoot. Logically, it implies that investors expect tariffs to be seriously bad for the economy. That led to a sharp shift in expectations from the Fed:
As the tariffs are directly inflationary in the short term, and therefore make it harder to cut rates, this move shows severe (possibly overdone) pessimism about US growth.
Beyond that, two concepts are in question. The first is the “Trump Put.” Until now, it has been taken as axiomatic that the president cares too much about the stock market to persist in a policy that causes a selloff. Any climbdown, as Lutnick appears to be signaling, will be taken to show that the Put remains in place, and the stock market does retain its veto over economic policy. The fact that these tariffs have actually been imposed, however, has radically challenged that belief.
Second is the notion of the US as a safe haven. The well-established principle is that in times of trouble, the dollar goes up. This is true even if the source of the trouble is the US itself; in 2011, money poured into the dollar as a haven even after Standard & Poor’s downgraded US sovereign credit. A big dollar fall therefore suggests that traders are at least cautiously considering whether the US can serve that function any longer. Policymaking this erratic doesn’t make for the safest of havens.
The biggest question for the next 24 hours is whether the tariffs stay in force. If they do, then the Trump Put is no longer operative. That would spell the end of another cozy assumption and leave markets on their own…
An(other) OpED from The Terminal …
Bloomberg: US Recession Odds Are Becoming Unsettlingly High It’s only a matter of time before economists start slashing growth forecasts for the American economy. March 4, 2025 at 6:02 PM UTC
…While still relatively low, my probability of a recession has increased from 10% at the beginning of the year to 25% to 30% today. This is a consequential and quite unsettling development for an economy with high potential and aspirations, elevated asset prices, and a pivotal role in driving global growth.
Here’s an interesting trek thru the data …
DATATREK: Market Thoughts, Inflation/Stagflation History
…Topic #2: A brief history of inflation’s relationship to US economic growth and how stagflation develops in the American economy. The following chart shows annual headline US Consumer Price Index inflation on a monthly basis from 1960 to the present. The vertical gray bars show the 9 recessions over this period.
Three points on this data:
1: Inflation always declines during and after a recession. The arrows in the chart highlight this relationship. The declines may be small (1.1 percentage points in 1960) or large (12.2 points across the 1980 and 1981 – 1982 recessions), but they are a consistent feature of economic downturns.
2: The declines in inflation over the last few years (from 9.0 to 3.0 percent) are unique in that no recession was required to achieve them. That speaks to just how much momentum the US economy was carrying into the Fed’s aggressive rate hikes in 2022.
3: The stagflation (high inflation, low economic growth) of the 1970s came against a very different macroeconomic backdrop versus today. Inflation ran noticeably higher in the decade, only bottoming at 5.0 percent in December 1976, and rose as economic growth continued. Now, inflation is 3.0 percent, still too high for comfort, but nowhere close to the stagflationary 1970s.
Takeaway: This history goes a long way towards explaining why markets are starting to price in more Fed rate cuts this year as economic uncertainty grows. As of today, Fed Funds Futures put the highest odds (32 percent) of 3 cuts in 2025 and declining 2-year Treasury yields confirm that view. Tariffs are a one-time price shock, but a weaker US economy always pushes inflation lower. The FOMC will therefore have the latitude to reduce rates should the US economy start to weaken materially. Also, current conditions are nothing like the 1970s stagflation era, further supporting the argument for rate cuts this year should they be needed.
AND from ZH in case you hadn’t heard …
ZH: Consumer Health "Remains Cautious" As Bidenomics Hangover Begins Tuesday, Mar 04, 2025 - 11:55 AM
