The Macro Trading Floor transcript – 11 June 2025

Alf

Welcome back to The Macro Trading Floor. Alf speaking as always with my partner, Brent Donnelly. We have been absent for a few weeks, but it’s summertime. I’m in the south of Italy. Give us a break. But we’re back just for this week because CPI is very soft. And according to Mr. Powell, let me read verbatim… CPI just out, great numbers. Fed should lower one full point. Brent?

Brent

I think you might be quoting Trump, not Powell.

Alf

Yeah, I’m quoting Trump, definitely. So what do we think about this?

Brent

I think it’s the first time in a long time actually that the Fed’s been interesting. Because they’re now lagging, obviously they’re lagging the rest of the world, but now with this inflation print, it’s kind of showing, which I think has been very frustrating for the bears, that the tariffs and the economic policy uncertainty have really just not had that much impact on the real data.

So the sentiment data collapsed, and I think both you and I thought that was going to be a harbinger of hard data collapsing or coming off. And it just hasn’t reacted at all. I mean, I know we’re only looking at May data released in June, but I mean, May data could have had some hiring freezes and inflationary impact from tariffs if Walmart’s going to raise prices and whatever.

And like, honestly, if you didn’t know that these tariffs and this economic policy uncertainty happened, Nasdaq’s unchanged from April 1st, disinflation is still happening, job growth is still soft landing. So like the bear case is just so frustrating because the real world just doesn’t give two shits about any of this.

Alf

Wow, you sound quite cynical the way you describe…

Brent

Well, I’m more bemused or amazed because I just, I’m shocked that, you know, the data… and again, obviously this could just be a lags issue because we’re barely past liberation day in terms of the data, but I’m just surprised. I’m just surprised that nothing really seems to be showing up. And then now because equities have ripped and there’s sort of this reflexivity where the data’s okay and then eventually people go, I guess everything’s okay! And the sentiment data might just end up coming back up.

So I wouldn’t say I’m really frustrated because like I gave up on the bearish view at when 5500 broke in S&Ps, but I’m just more surprised that you really just barely see any evidence of tariffs or, more importantly, of the uncertainty in any of the hard data so far.

Alf

Yep. So when we talk about the CPI, there are a couple of important things to say. The first one is that the cutoff date for the CPI only allowed half of the effective tariff rate to be included. So you know, the next spring is actually going to reflect the full thing, but even accounting for that Brent, I mean, the pass through of goods inflation was very limited, very limited. There wasn’t much going on.

Which really makes me think there are two hypotheses. The first one is where companies are a bit, you know, hesitant to pass through the full tariffs to consumers. Maybe they’re passing through the bit step by step. And the whole idea would be there, let’s wait for demand, right? Let’s not just go ballistic to pass through, let’s try to do it more gradually.

And the second hypothesis could be that we just have to wait another month for the whole goods inflation impact although frankly I don’t see why extrapolating on the full impact rather than 50% should deliver much, much more different results than it is now. So it’s mostly about the companies, I think here. I mean, if they’re passing through very gradually, then it’s not gonna be very scary. And also as a reminder, goods represent about 23% of the core CPI basket. It’s not the whole story, not even close to be the whole story.

Brent

Right. And if you look at a chart of services inflation since 2021, I mean, it’s basically a perfect 45 degree angle straight down. Like there’s some blips up and down, but generally services inflation has come down from the peak in 2021 in almost a straight line. So yeah, if goods inflation ticks up and service inflation ticks down, then that’s still disinflationary based on that, whatever, 77-23 ratio.

Alf

Yeah, that’s correct. I mean, the weights in this basket is quite interesting, right? Because the shelter inflation, for example, depends whether you look at CPI or PCE, but you’re looking at 35% roughly of the basket of core inflation. That’s quite important, right? And the shelter data have been coming down pretty aggressively. I was looking at the print and I was comparing it with a random pre-pandemic print. I was gonna put it in an article tomorrow.

It’s quite funny to look at this, frankly, Brent, because the print we’ve been getting over the last three months. If I don’t tell you whether it’s June 2025 or June 2019, you wouldn’t see the difference. I mean, seriously, it’s quite impressive.

Brent

And honestly, that’s an interesting point because really a lot of things have just reverted to the pre-COVID baseline of not quite secular stagnation because inflation is bit stickier, but kind of similar data to like ‘17, ‘18, ‘19. And I just realized you asked me about the Fed and then I just started talking about inflation and CPI and stuff.

But with regard to the Fed, like Waller was quite dovish for quite a while. And a lot of the rest of the committee has kind of held off because of the uncertainty. But I wonder if there’s a point where they just go, you know what, screw it. We’re like 150 basis points above neutral. Let’s just get a little bit closer. So I’m kind of on high alert now for all the Fed speeches because there’s been a period where I was barely paying attention to them just because it got boring and they seemed to be on hold for a while. But I could see them actually now signaling something like, okay, we’re ready to go.

And then when they’re ready to go, it probably means like three 25s in a row kind of thing. So I guess the takeaway for listeners would basically be to pay attention to the Fed speeches going forward because they might actually matter now, even though they haven’t mattered recently.

Alf

I think of course the heavyweights like Williams, they’ve been very conservative, right? They just tell you, yeah, we’re going to look at the data, we’re going to wait. And now the data is out. And we’re talking about CPI basically printing almost in line with pre-pandemic prints. But we haven’t talked about the labor market Brent, which I think is also interesting. Because there is a labor demand and the labor supply story to the labor market.

And after the very likely downward revisions that we’re going to get for these prints, the US labor market is having around 100,000 jobs a month, 110,000 more or less. That’s not a lot frankly.

Brent

What was it in ’17-‘18, like 180 or something?

Alf

Yes, yes, yes. But you need to compare it with labor supply, right? That’s important. People always forget that there is another angle to the labor market. And labor supply in 2017, 2018 was stronger than it is today. And effectively today, you can say, look, the break even for unemployment rate not to go up is that the labor market needs to add about 130,000 jobs. Now you are at about 110, 120, but you’re borderline, Brent. I mean, if you’re the Federal Reserve, you have two mandates, it’s a normal you act. given the relative distance from each mandate.

Now you can say, sorry, but what is the distance from inflation? You have three or four prints that are basically in line with 2% inflation. And then you can ask yourself, what is the balance of risks on the labor market? Yeah, well, you are pretty fragile, aren’t you? You have an employment rate slightly creeping up every month. I would say that it doesn’t take a lot for them to turn dovish. I also don’t expect them to turn uber dovish.

But as you say, the balance of risks versus how conservative they’ve been, I think you need to look at the speeches and for people like Williams to start telling you that, you know, they’re starting to lean dovish. I think it might happen sooner rather than later.

Brent

Especially when you’ve got like 250, 300 basis points of cuts from other central banks and they all tend to kind of move in somewhat auto-correlated fashion. So, I mean, it’s something to watch anyways. And yeah, the thing with the labor market is that yes, non-farm payrolls surprised to the top side, but you know, the Kansas City thing that you look at, or even if you look at ADP claims, continuing claims, a lot of those things are making cycle highs – or cycle lows, depending – like cycle bad, whatever direction that is. Continuing claims is making cycle highs. And the revisions have been pretty negative.

So overall, the jobs market isn’t that strong. There’s definitely not inflationary pressure coming from the jobs market. So kind of like you said, they’re not going to start going 50s, but they can signal like, okay, we’re ready to go. And then the market will always get ahead of it. And then you also have the May 2026 thing, which is difficult to handicap. So that’s when the new Fed governor will come in and they were talking about maybe there was some rumors Bessent might be that person. Whoever that person is, obviously they’re going to be super dovish.

And so I think there actually could be some interesting stuff in options out there. Because the market at some point will start to price a sort of a kink in the curve at May 2026 where they just cut for financial repression reasons in order to help the US refinance the debt. I mean, they’ll never actually say that, but they could actually do that starting in May 2026, whoever the person is.

Alf

Yeah. And so we have been voiced to have Mr. Bessent be the Fed governor. I find that quite interesting. In general, when you hear that Trump or people around Trump are suggesting somebody that is, well, very much under the influence of Trump, let me put it mildly this way, to be the next Fed president, then you know the direction we’re taking, right? It’s probably going to be somebody very likely to be a yes man. Which as you say increases the odds that we’re gonna see lower rates in the second half of 2026.

Which, by the way I find the timeline interesting because May 2026 is six months before the midterms in the US and the midterms are extremely important for Trump because the majority in the House and in the Senate that he has actually a pretty small – I mean just take a look at how tough it is to pass the Big Beautiful Bill – and what if at the midterms you actually don’t deliver and then it’s going to get even harder.

And yes, with tariffs, you can wave your hands and sign some royal decrees of sorts to impose your policies, but for budgets, no, you can’t do that. You need Congress and you need the House. And so, interesting timeline. I wouldn’t expect a hawkish Fed chair, let me put it like this, to actually disrupt these policies in the second half of 2026.

Brent

Yeah. And actually just an interesting point, speaking of tariffs, it’s amazing how the beta to tariff headlines has just collapsed to zero. Like the market just doesn’t even care. If you ask people what the tariff rates are now, I mean, half of financial professionals couldn’t even tell you what the blended tariff rate is or what the actual tariff rates are on China. It’s like, it was this end of the world situation and now there’s so much complacency or just almost like boredom or disinterest around the tariff story.

Like we had, I guess a China deal or some kind of implementation of a contours of a deal or something today. And honestly, like NASDAQ moved 20, maybe 30 handles on the announcement. It’s interesting how the market has just kind of said, okay, well, we’re going to get some kind of tariffs, but we don’t know what. And if they become detrimental to equity prices, they’ll probably be reduced or delayed. So it’s almost like equities can’t pay attention to tariffs anymore because there’s no credibility to any of the policy and it’s just going to change if equity sell off. It’s kind of like the put theory anyways.

Alf

Yeah, absolutely. Look, the other thing that we should ever chat about, I think, is I would say places outside the US. Because now this disinflation is showing up in the US. But there are a few countries that are that have inflation rates that are at or even below what they used to have during the pandemic. I repeat, at or below what they used to have below before the pandemic. And I have a theory for which these countries are quite likely to go back to pretty much what they saw during the pandemic, which has implications for rates and FX.

Okay, the poster child is Switzerland, but I can expand this to Europe as well, which is more interesting for people. So if you’re Europe Brent, right now you have inflation at 2%. The trend of inflation is lower. So it’s annualizing even lower than 2%. Wage growth as estimated by the ECB at the end of this year is going to be 1.7%. Now you understand if wages are growing 1.7, the underlying inflation pressures, even with productivity at like 0.5, because in Europe we’re not very productive, but that means underlying inflation pressures at like 1 to 1.2%. That’s really low.

Then you have low oil prices and you’re an oil importer. That helps. You have a strong currency. That’s disinflationary. And on top of it, you have China which is rerouting goods. We have the first evidence… and I suggest people to take a look at the great work of Brad, my god the surname is so hard, Setzer Set-zer I hope. So Brad does a lot of work on trade flows and is a very data driven guy. And he shows that China has been rerouting goods around. And Europe is an obvious market for that, it’s very large, there’s a lot of domestic demand going on here, we like cheap stuff in Europe anyway so we buy… all the Chinese Temu stuff has been rerouted over here.

Now, the point that I have here is that if you import Chinese goods with a strong currency, so Euro CNY has basically been going up lately, you have a strong currency, you import cheap goods, and China has negative PPI. So that means China is producing these goods even cheaper than they were in the past, and they’re now exporting them to Europe, which has a stronger currency because Euro CNY is up. So the importer gets very low prices. And then you might import further deflation basically out of China.

And you sum all of this together, low wage growth, a strong currency, Chinese goods getting dumped, oil prices being low… and I can frankly imagine a situation where disinflation in Europe gets even worse. And at the end of the year, you’re like at 1 to 1.25% trending. And then you need to start asking yourself, where should rates be in Europe if inflation is 1 to 1.25?

My rant is over.

Brent

Well, and it’s interesting because the ECB has essentially said we’re done, or we’re at least done for this part of the cycle. So if there was another move lower in inflation to match what’s going on in Switzerland, let’s say, I think that would actually be a surprise now. It would be a surprise to the ECB and it would be a surprise to the market. And then the question becomes, so we haven’t really talked about FX…

So just to give people a like three sentence update on what’s going on in FX, the structural dollar theme is still alive, although it hasn’t been working in G10. And really the flows that we’ve been seeing have been into carry. So people are buying Brazil, Mexico, anything with carry. It’s a good way to be structurally short dollars without paying a tax because if you’re short dollar yen, you’re paying, it’s negative carry. So people are doing Dollar Brazil, Dollar Max, et cetera.

But Euro actually has been going up despite really nothing new on the news flow side in terms of German deficits and all that stuff. Euro has traded decently. But if your scenario comes true, does that mean Euro collapses or can you get disinflationary Europe and a stronger currency at the same time?

Alf

Yeah, I would say the latter Brent, I would expect. So first of all, you have some initial correlation evidence of that. So rates, differentials between the euro and the dollar have been trending in favor of the dollar, right? You have like terminal rate in Europe is 1.65% I think right now? And in the US has been around 3.5 or higher. So this differential is widened in favor of the dollar, but the euro is going up, not the dollar. So that’s quite interesting already.

And we have to attribute all of this, I think, to capital flows. Basically, the way I see this is the following. If you are a, I’m going to quote a friend of mine, okay, and I can’t say the name because he made me promise not to say, but it’s very close friend of mine who runs quite some money for a hedge fund, went to speak to a German pension fund a week ago. And he asked them, so you guys have been basically buying a bunch of dollar assets between equities and bonds, et cetera. And you have been making money on the dollar position and on the equities over the last few years. But now you see this Euro turning very, very rapidly. How much have you hedged of your dollar position? And the guy in charge of German Pension Fund told him, null comma null, which is 0.0.

We both laughed and he said, what do you mean? Like you haven’t hedged anything? And he said, yeah well, we use these three month and six month rolling correlation things. And, know, so far the sign hasn’t fully flipped between the S&P 500 and the euro. And my friend said, yeah, but I mean, do you, do you need six months for that? Yeah. The process says so. So, you know, it’s, they have to follow whatever the guideline is. And he was saying, okay, but we’re preparing already asking banks and this and that.

And this really makes me think. If you have to hedge, Brent, one of the reasons that makes you be, you know, stay away from edging is interest rate differentials. How much is it going to cost you in the forwards to hedge the euro versus the dollar? Now, if the ECB is priced to cut further because there is disinflation, this means that it’s going to cost you even more. The longer you wait, the more interest rate differentials are going to be priced in the forwards. The more it’s actually going to cost you to hedge.

And so, if I’m making any sense, there might be a situation where despite disinflation because of capital flows, because of hedging flows, and because of people wanting to get in earlier before the ECB starts cutting rates to even lower than they are and therefore increasing the hedging cost against the dollar, you might have a situation where rates come down and the currency get stronger, which is not unprecedented. It’s been going on in Switzerland for like 10 years, effectively.

Brent

And I mean, that’s can be one of the frustrating things about a structural trend in the dollar is like in 2002, ‘03, ‘04, ‘06, ‘07, the dollar was just going down and it really didn’t matter what was going on in, you know… non-farm payrolls strong, Euro still went up. You know, it just didn’t really matter that much because the capital flows can be so big that they just dwarf the speculative flows. So I mean, I could see that scenario.

The weird thing about it though, is that if this was supposed to be Sell America on policy uncertainty, I mean, equities essentially are at the all time highs, US bonds are stable. So then the entire story just becomes a hedging story, either Asian central banks changing their dollar reserves, which is happening, or pension funds in Canada and Netherlands and wherever increasing their dollar hedges, which is also happening.

But it’s harder for it to be like a turbo Sell Dollar regime when US assets are at the all time highs. So that makes me feel a little bit more cautious about the trend lower in the dollar against G10. And you’re seeing it in dollar yen, for example. I mean, dollar yen is not even going down. I think selectively doing things like… long euro is fine, although it’s negative carry, also just owning things, owning a basket that’s not going to make you mega short carry because just being short dollars against G10 just ends up being very expensive and annoying.

Alf

Yes, indeed. You can see today when you get these dovish surprises on US inflation, risk adjusted, one of the best performing currencies is Brazil. If you think about it, Brent, in an environment where growth isn’t dying, you have a potentially dovish shift at the Fed, you have fiscal deficits in the US… you can imagine commodities doing okay in this environment. And we are seeing a couple of commodities actually doing more than okay. I think you wrote a piece about, what was it, platinum or palladium?

Brent

Yeah, platinum has been going kind of ape shit lately, which is interesting because, I mean, it’s done nothing for ages. And the narrative around it actually makes sense. It’s essentially Chinese buyers hit a wall at a certain point where gold was so expensive that they started switching to platinum jewelry. And then also even as it doesn’t really work as well for reserves because it’s too small of a market, but essentially at the margin, the ratio of gold to platinum price got so extreme that real people in the real world started switching from gold to platinum. So yeah, it’s an interesting narrative.

Alf

Seen the same for silver, by the way, which doesn’t have an end usage narrative as big as platinum, but still, right? I mean, all these high beta metals, if you wish, they’ve been doing pretty well. So if you’re a commodity exporter with interest rates at, was it 14.75% in Brazil? Yeah, then I think you actually get some flows coming in, right? It’s also a way to be slightly long risk, if you wish.

Because the problem with the other FX pairs is that if you’re long the euro, well, the euro is like an old weather thing. But if you’re long the yen, okay, the yen is a great example, versus the dollar, well, it’s negative carry and it tends to still have that negative beta to equities, right? I mean, if there is a strong risk-on momentum, it’s a bit hard to get the yen to rally. It’s much easier to get the Brazilian real to rally in that environment.

Brent

Yeah, I would say dollar yen has probably been the most disappointing trade this year in terms of FX because you had the BOJ hiking, you had like US recession risk, policy risk, equities collapsing. And I mean, dollar yen went to 140 and now it’s at 145? So, you had a kind of a perfect storm in April for dollar yen to go down and it just doesn’t go down. And it’s really annoying to hold because of the carry.

So that I think has been one of the most disappointing. I guess short equities has been the most disappointing, but short dollar yen has been also rather disappointing because you got a lot of the things you wanted and you still didn’t make money.

Alf

Yes. So Brent, I’ve been thinking about this situation where, and this is funny, but where ECB cuts more than forwards. So let’s say this disinflation story in Europe, which pushes the ECB to go to, say 1.5, 1.25, 1% might actually spur these hedging flows from people trying to avoid more prohibitively expensive hedging costs, effectively trying to front load ECB cuts, right? You come in now, you hedge your dollars now before the interest rate differential becomes even bigger.

And I was thinking, you know, this differential could actually lead to a demand for the euro. It’s a very convoluted thing where you would normally expect the opposite, right? The hawkish ECB is good for the euro, but I can also see a situation where the opposite is true. I mean, man, I’m maybe talking myself into being long euro regardless of what happens, which is never good. You never talk yourself into being long something.

Brent

But you know what, maybe actually that’s an interesting trade if you can vol-weight it correctly, is to receive something like December 2026 ECB and be long euros against it. And maybe if your scenario plays out, you make money on both. Or one of them pays off and the other one doesn’t move or something. I think that’s an interesting combination that’s worth thinking about.

Alf

Yeah, absolutely. What else is top of your head? We talked about the Fed, the labor market. We’re trying to make a case to be bullish or bearish equities. We have covered Europe. Is there anything else you want to talk about?

Brent

Yeah, I think that’s about it. I mean, the only other thing that I find a little bit interesting is that crypto is definitely waking up. Even Ethereum, which I feel like Bitcoin has a lot of unique properties as like the corporates are buying and all that. And people perceive it more as like a legitimate, like the OG first mover advantage and all that. So I would consider Ethereum to be more of like a speculative barometer and I think it’s interesting that Ethereum is trading so well and things like Palantir.

We’re getting back into like a meme mode here where it just feels like money’s flooding the market and retail’s buying. And then when we make new all time highs, all the CTAs and institutions are going to get sucked back in because they’ve been super underweight. I think the sort of animal spirits going around right now is interesting, which is usually like, not the ninth inning, but it’s like when the meme stocks and everything start going crazy, you’re in like the seventh inning, but you need a huge explosion in all this stuff before, you know, eventually you try to pick a top.

Alf

Can we for a second talk about CTAs because, I mean in your business at Spectra you must be able to see some of these guys trading with you. I don’t know whether you have any insights in how they move and how they think about trends in general and FX trending here like the dollar for example because you know they do trade liquid stuff so FX should be in their realm as well… and a lot of people look at them and they say look they’re down seven to ten percent year to date. They’ve been chopped around beautifully this year, awfully actually I should say. Because well they were long stocks and then they got you know Smashed and then they went short stock at the lows because the trend was unfolding and then they got stopped out from that as well.

So now people are saying okay these guys must be looking for a trend right now. And there has been a couple of trends one of it is in the dollar. So do you see them coming Brent? I mean, what can you tell us about CTAs?

Brent

Yeah, I mean, they’re generally pretty slow moving. So they’re actually still long yen. I mean, they’re short dollars across the board. And like you said, they’ve been chopped up in equities and fixed income. The one strange thing though, is that generally the CTAs tend to tweak for trend and carry. And so because the signals are opposite right now, like long dollars is still long carry against most of G10. So the positions haven’t been as big as they would normally be because there’s a contradiction between the trend and the carry.

Like when the dollar was going up, they’re all in because then they’re long trend and long carry, but now it’s not as much of an all-in sort of situation. And then same thing with the carry trades like EM, people are saying, oh, EM is getting popular. Well, like carry and low vol regimes can last for like six months, 12 months, 18 months.

I feel like people tend to get way too worried about positioning way too early in that stuff. And it’s not like it’s just like a spec, you know, a spec chasing situation. It’s more of like a regime where if the regime is low VIX and low vol, then carry could work for months and months and months and months. Although we do have to worry about the July 9th tariff deadline a little bit, but then like we said at the top of the show, no one cares about tariffs anymore. He’ll probably just delay it another month anyways.

Alf

And I tracked this thing that I shared with clients, so you should have seen it as well. It’s the Sharpe ratio of a basket of carry trades cross asset. I just want to have an idea how much fun have people had recently being long carry. And this works very well as a contra indicator Brent. So if people have had like a one or one and a half Sharpe ratio, delivered Sharpe ratio, simply by being long carry across rates, FX, equity, vol, whatever you want, then generally speaking, it’s time to get scared.

But that Sharpe ratio today is only 0.5. I mean, 0.5 means that you’re basically extracting the historical long run risk premium from carry. I mean, carry tends to deliver 0.5 Sharpe over time. So you’re getting, yeah, you’re just getting back basically what you deserve from a carry factor and nothing more. And this is to compound your view that it’s not very popular. I mean, it’s getting popular, but it’s not crowded at all.

So if you’re a carry junkie or a bread and butter guy as the… when you, when you ask hedge funds, they would ask you, what’s your bread and butter trade, which you can also basically turn into what’s your carry trade. It’s the same question. And so, I mean, the carry is not very, very crowded, but well, July 9 is still there. If I have to guess on July 9, there is a theory and I want to check your reverse psychology skills on Trump.

I mean, the S&P is 6060, yields have not exploded at all, bond market vol has been quite contained recently. Do you think he might want to squeeze some pressure out of someone, namely Europe, because that’s the easiest one to pressure on. I mean, you’re never going to get the deal with Europe, whatever that means, in the next few weeks unless it’s an understanding of whatever. But do you think he might feel empowered to come back and push or not really?

Brent

I mean, I get that argument, my feeling is more that he’s just getting bored of this whole trade theme and he’s moving on and immigration is now what he’s more interested in and trying to get the Big Beautiful Bill through. I don’t know, maybe he’s just done with trade and this is what he’s going to do. And now he just wants to kind of let the boys sign the deals and move on. That’s kind of more my impression, but I mean, obviously I have no idea.

Alf

Yeah, fair enough. I mean, nobody knows just asking around. Okay, I would say for our comeback episode, that was it. As always, we promise not to disappear for another month, but it’s summer. So forgive us if we go to the seaside from time to time talking about for me, I don’t think Brent can go to the seaside where he is.

Brent

Yeah, there’s not much of a seaside here.

Alf

All right, guys. Thanks for listening as always and talk soon.

Brent

Thanks, Alf, thanks everybody. Ciao.