Weekly Investment View: Growth Dynamism or Slowdown Inbound?

This Week

• US Macro – Dominique expects PCE to confirm disinflation remains stalled, with personal income and spending to show growth dynamism is intact.
• US Rates – Antonio still expects a slowdown in Q2 (but not a recession). He still looks to buy rates, but at a cheaper price.
• EM Macro – Caroline argues ongoing FX weakness reduces the space for continued BoK rate cuts.
• China – Liang expects a gradual decline in the 10-year CGB yield over the next 2-3 months
• EZ and UK Macro – Henry takes profit on Gilt steepener and previews the UK Spring Budget.
• G10 FX – Ben took profit on long GBP/JPY ahead of the Spring Budget.

Link to Appendix: Trade Table

Dominique Dwor-Frecaut – US Macro

The most important data of the week are PCE and personal income and spending. Based on CPI and PPI, we already know that PCE will confirm that disinflation remains stalled, with rising goods prices, uncertain housing disinflation, and sticky and noisy supercore inflation.

There is more scope for surprises with personal income and spending (Chart 1). The unexpected contraction in January spending was caused by a steep increase in the savings rate. By contrast, income growth was well above trend. In February, consensus expects spending to recover to 0.5% MoM from -0.2% and income growth to moderate to 0.4% MoM from 0.9% in January. This forecast implies growth dynamism is intact and that households are getting used to the uncertainty created by President Trump’s policy announcements. This would be consistent with my view that the US economy will prove more resilient to tariffs than market consensus assumes.

Antonio Del Favero – US Rates

Tighter financial conditions (FCs) will lead to a slowdown in Q2 (but not a recession). Also, tariff risks and uncertainty will continue after 2 April. Trump’s announced policies remain negative for growth. Finally, the Fed is clearly on hold. However, if the unemployment rate (UR) increases quickly to 4.5%+, then the Fed could cut – provided inflation does not accelerate.

We took profit on long SOFR Dec25 at 96.41 and on long SOFR Jun25 at 96.50 following the STIR rally. Now SOFR Dec25 is at 96.23 and SOFR Jun26 is at 96.40. Unless the data collapse immediately (not our base case), US rates seem reasonably priced, and both STIRs and the long end are not attractive enough. I still look to buy rates but want a cheaper price.

Caroline Grady – Emerging Markets

South Korea’s Constitutional Court has yet to rule on the impeachment of President Yoon Suk-Yeol, extending the timeframe past that of earlier hearings. The court overturned the impeachment of Han Duck-soo earlier this week, reinstating him as acting leader. But given the different allegations, this is no guide to the decision on Yoon.

Consumer confidence declined again in February on the continued political uncertainty, and KRW has underperformed despite the USD weakness. BoK recently downgraded its growth expectation for this year, while inflation is expected to remain contained. But ongoing FX weakness reduces the space for continued rate cuts.

Whether a final verdict – due any day with a few days’ notice from the court – improves domestic stability or ignites further social unrest is currently unclear given opposing views. But a decision would help to draw a line under months of political upheaval and declining sentiment. We were stopped out of our earlier short INR/KRW and now stay on the sidelines.

Liang Ding – China

The PBoC’s withdrawal of liquidity from the banking sector since the beginning of this year has triggered a bond market correction and returned yields to a ‘reasonable’ level. After a 55bp rise in the 2-year CGB yield and a 30bp rise in the 10-year CGB yield since the end of last year, the Q1 Monetary Policy Committee minutes indicated that the PBoC will improve liquidity supply to lower funding costs and stabilize the bond market.

PBoC’s easing bias and weak fundamentals support lower CGB yields. Chart 5 shows the close relationship between the 10-year CGB yield and YoY bank loan growth rate. We expect a gradual decline in the 10-year CGB yield over the next 2-3 months.

Regarding the exchange rate, the PBoC has kept its forward guidance largely unchanged. The PBoC still prefer to see a stable USDCNY and keep it capped below last year’s high at around 7.30 in the near term.

Henry Occleston – Eurozone & UK Macro

The UK deficit over-shoot widened in February (Chart 5). We have been bearish the UK long end but expected the BoE to cut more than the market is pricing since the start of the year.

At the Spring Statement, a more bearish economic outlook will likely set the tone, and we expect the OBR to decently revise its unemployment assumptions higher at the end of the forecast horizon.

This will force the Chancellor to cut spending and likely keep the door open to future tax hikes. Both would weigh on UK growth and strengthen our conviction that the BoE will need to cut more than currently priced, this year.

We see a risk that the bearish outlook, spending cuts, and potential future tax rises trigger risk-off in UK gilts. As a result, we tactically close our 2s10s gilt steepener, securing a 45.2bp gain. However, we remain long SFIZ5, targeting 96.4.

There is a risk that the OBR will continue to issue unrealistically optimistic forecasts and that the Chancellor underdelivers on spending cuts on these projections. With no strong conviction on the likelihood of this scenario, we prefer to remain on the sidelines for now.

Ben Ford – G10 FX

We took profit on long GBP/JPY (first communicated to client Bloomberg chats on 24 March) ahead of the Spring Budget for three reasons:

1. Budget uncertainty. The Spring Budget is due midday Wednesday. Following a bleak update of public sector finances for February, we believe Chancellor Reeves must cut spending and leave the door open to future tax hikes. Given little market certainty, and the need for significantly dovish OBR forecast updates, there is a real risk of GBP downside.
2. Risk of a second leg to the US stagflation trade. While consensus is for a rebound in real spending through February (data on Friday), there is a negative relationship between YoY real spending and US uncertainty, especially services (Chart 6). It suggests a far sharper slowdown in spending that would force the market into risk aversion and JPY to rally.
3. We could run out of room on BoE (and BoJ) pricing. We expect the BoE to cut another 100bps this year, yet markets are pricing less than half of that with the next not for another three meetings (August). Meanwhile, the JPY 1Y1Y forward swap is failing to show signs of slowing. It leaves room for front-end GBP-JPY tightening.

Appendix: Trade Table

Table 1: Current Trades
*Total returns using daily close price. Positions are sized such that impact of any one trade on portfolio is no larger than 50 bps.
Asset Class	Date entered	Trade	Rationale	Entry	Stop Loss	Target	Current Price	P&L*
FX	15-Mar-25	Short EUR/NZD	Click here	1.879	1.920	1.800	1.887	-0.4%
	15-Mar-25	Long NOK/SEK (50% position)	Click here	0.953	0.925	1.000	0.957	0.2%
	21-Feb-25	Short DXY (50% position)	Click here	105.080	107.900	100.500	104.305	0.4%
	12-Feb-25	Long BRL/MXN	Click here	3.560	3.400	3.900	3.472	-2.1%
	17-Jan-25	Long USD/CNH 4m 7.5×7.6 call spread	Click here	25 bps		120 bps	4 bps	-21 bps
	25-Oct-24	Short AUD/NZD	Click here	1.109	1.130	1.060	1.100	0.7%
Rates	24-Mar-25	Long 10-year China Government Bond	Click here	0.019	0.020	0.017	0.018	4 bps
	05-Mar-25	2s10s Bund Steepener	Click here	0.005	0.003	0.010	0.007	16 bps
	03-Mar-25	Short Euribor Z5	Click here	97.968	98.100	97.600	97.940	3 bps
	07-Jan-25	Pay 10y EUR Swap	Click here	2.430%	2.050%	3.000%	2.723%	29 bps
	13-Nov-24	Long SONIA Z5	Click here	95.900	95.700	96.400	95.965	6 bps
Equity	10-Mar-25	Long CO K5 (50% position)	Click here	69.80	68.00	75.00	73.43	2.6%
Source: Macro Hive

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