Inflation

We discuss the implications of this morning’s CPI report and the relative attractiveness of 2/5 Treasury curve steepeners.

We upgrade European small caps to maximum overweight and double down on our existing recommendation to go long European small caps relative to US ones.

The perfectly synchronised moves in US, Japanese, German, and UK 30-year bond yields through the past two months are odd… and irrational. These irrational moves present compelling investment opportunities.

While we anticipate higher inflation in June, it looks increasingly likely that the price impact from tariffs will be less aggressive and long-lasting than many feared.

This year’s plunge in tech stocks followed by the recent strong countertrend rally is eerily reminiscent of 2000. But the market and economic parallels between 2025 and in 2000 run much deeper. This report lists 10 striking parallels between 2025 and 2020, then highlights some important differences, and ends by describing how the rest of 2025 might unfold based on a playbook that is: 2025 = ‘2000 with some tweaks.’

A weakening economy will apply downward pressure to Treasury yields, but the Trump term premium will keep long-dated yields higher than they would otherwise be. This makes Treasury curve steepeners the most attractive trade in US fixed income.

The Fed held rates steady this afternoon, and the timing of its next move will be dictated by whether the tariff shock to inflation is transitory or more long lasting.

Countertrend buy triggers have been activated for the S&P 500, Nasdaq and Nasdaq versus 30-year T-bond.

The stimulus measures driving the post-COVID expansion were beginning to wane after five years and pointing the economy in the direction of an organically occurring recession. Now that DOGE and the multi-front trade war have sped up the timetable, we reiterate our risk-off recommendations.

Tariffs will make a difficult job almost impossible. Hitting and sustaining a precise 2 percent inflation target is more about luck than judgement. It requires both the starting point for inflation expectations and any inflation/deflation shock to combine perfectly to 2 percent. While structural inflation expectations in the euro area and Japan could be close to 2 percent, those in the US and the UK will be stuck uncomfortably above 2 percent. We discuss the investment implications for rates and FX. Plus: gold is vulnerable to a tactical reversal.