Transitory Deja Vu

Transitory Deja Vu

The highlight of this week was the FOMC meeting on Wednesday, where the FED chair Jerome Powell referred to a potential tariff lead inflation as “transitory”, once more! I believe it was during the fall of 2021 where the same term was used by the FED committee and obviously, we all saw where inflation numbers ended up in the next few years. One thing for sure, the moment he mentioned that word a lot of memories came back across market participants.

But let’s first focus with Europe, and Germany to be precise, where a parliamentary vote went through late last week and approved the 500bn infrastructure spending plan, a vital moment for the country and in my view a significant step towards a recalibration of their fiscal spending and by default growth perspective. Once more, in an expected outcome the market sold the “rumor and bought the fact”, with European rates trading 17bps tighter from last week’s wide level. As of now, the 10yr German government bond is currently trading at 2.75% versus a 2.92% level of last week. On the equity side, European indices traded around 0.5-1% higher in the week with some profit taking in the defense names which negatively impacted the DAX index, closing unchanged to slightly lower in the week. Bear in mind that on average European equity indices are trading between 10-15% higher year to date.

Across the pond, the FED kept rates on hold as expected at 4.5% with updated projections seeing higher inflation and soft growth, along with slightly higher unemployment for 2025. Chair Powell was consistent with his recent rhetoric of “wait and see” mode with regards to forward guidance in rate cuts and downplayed the significance of recent soft data which pointed out to lower growth. He also mentioned that there is a possibility that tariff driven inflation may be transitory and that the economy still stands strong. All in all, the meeting was interpreted as a dovish stand by the market causing a higher move in US equities and tighter yield in US government bonds. 10-year US Treasuries are currently trading at 4.21% and S&P equity index is at 5665, still circa 8% lower than the recent new highs on the 19th of February 2025. On the political side, President Trump is reminding the market on a single day basis that the 2nd of April (and I quote) is “the Liberation Day in America”. This concerns upcoming reciprocal global tariffs which are supposed to be imposed on nation-by-nation basis. The market is still trying to figure out if this is going to take place or it is a negotiation tactic, nevertheless the market narrative is more cautious as a lot more cash has been put on the sidelines (according to a BOFA survey, cash balances have moved from 3.5% to 4.1% in the last month.)

In terms of issuance, we saw France and Spain tapping the market on Thursday with very well received auctions and high bid to cover ratios. Data was mixed with Retail sales and University of Michigan consumer expectations hitting the lows for the last 2 years, a couple of soft data points which reenforce the narrative of a growth scare in the US. In Europe, German PPI came a bit lower than expected and European CPI was revised a touch lower from 2.4% to 2.3% for the month of February. As we stand, here are the market rate expectations for year-end 2025:         US = 71bps, EU = 51bps, UK = 48bps. (see below graph for US rate cut expectations)

Looking ahead…

Next week, we have a lot of core data to go through across both continents with US Core PCE data on Friday being very important to the inflation narrative. We also have another very important market technical which is called: quarter end rebalancing from passive/active funds. Funds will be engaging different rebalancing actions for tax or window dressing reasons and seasonality usually but not always implies a risk on tone across assets. Now, this year is everything but not normal given the moves so I wouldn’t bet all my money for the seasonal effect taking place, nevertheless one thing I have learnt as a sell side market maker is always to respect the technical of the market. At Athlos, we still have the same view of being highly diversified across asset classes given the expected volatility in the market and we wait for new dislocations to present themselves. A particular one which we have started nibbling on is new issues with higher coupons across the Financial space given the recent rerack higher in risk free rates. If you want to know more about what we are doing feel free to contact any member of the Athlos team.

Written by: Michael Konstantinou, Senior Portfolio Manager