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Macro Regime — 2025-W05

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Standing macro backdropBORROWED

Borrowed from its month (2025-02); the weekly reads the standing object, it does not recompute the aggregate.

United States: overheating / late-cycle
China: disinflationary stall
Euro area: disinflationary stall
Japan: overheating / late-cycle

month aggregated actuals

United States

Indicator	Basis	2025-02	2025-01	Change
Core CPI	% MoM	0.25 2025-02-01	0.43 2025-01-01	▼ -0.18
Core PCE	% YoY	2.97 2025-02-01	2.78 2025-01-01	▲ 0.19
CPI (YoY)	% YoY	2.8 2025-02-01	2.99 2025-01-01	▼ -0.19
FX vs USD	px	107.61 2025-02-28	108.37 2025-01-31	▼ -0.76
GDP	% QoQ ann.	not recorded
PMI (mfg)	index	50.9 2025-02-03	49.3 2025-01-03	▲ 1.6
PMI (svc)	index	52.8 2025-02-05	54.1 2025-01-07	▼ -1.3
Policy rate	%	4.5 2025-02-28	4.5 2025-01-31	→ 0
2s10s slope	pp	0.25 2025-02-28	0.36 2025-01-31	▼ -0.11
Unemployment	%	4.2 2025-02-01	4 2025-01-01	▲ 0.2
10Y yield	%	4.24 2025-02-28	4.58 2025-01-31	▼ -0.34
2Y yield	%	3.99 2025-02-28	4.22 2025-01-31	▼ -0.23

China

Indicator	Basis	2025-02	2025-01	Change
CPI (YoY)	% YoY	0.5 2025-02-09	0.1 2025-01-09	▲ 0.4
FX vs USD	px	7.29 2025-02-28	7.18 2025-01-31	→ 0.1
GDP	% YoY	not recorded
PMI (mfg)	index	50.2 2025-02-01	49.1 2025-01-01	▲ 1.1
PMI (svc)	index	not recorded
Policy rate	% (1Y LPR)	3.1 2025-02-20	3.1 2025-01-20	→ 0
2s10s slope	pp	0.29 2025-02-28	0.38 2025-01-27	▼ -0.09
Unemployment	%	5.4 2025-02-01	5.2 2025-01-01	▲ 0.2
10Y yield	%	1.72 2025-02-28	1.63 2025-01-27	▲ 0.09
2Y yield	%	1.43 2025-02-28	1.25 2025-01-27	▲ 0.17

Euro area

Indicator	Basis	2025-02	2025-01	Change
CPI (YoY)	% YoY	2.5 2025-02-24	2.4 2025-01-17	→ 0.1
FX vs USD	px	1.04 2025-02-28	1.04 2025-01-31	→ -0
GDP	% YoY	-0.3 2025-02-24	0.4 2025-01-17	▼ -0.7
PMI (mfg)	index	47.3 2025-02-21	46.1 2025-01-24	▲ 1.2
PMI (svc)	index	50.7 2025-02-21	51.4 2025-01-24	▼ -0.7
Policy rate	%	not recorded
Unemployment	%	not recorded
10Y yield	%	2.99 2025-02-01	3.09 2025-01-01	▼ -0.1

Japan

Indicator	Basis	2025-02	2025-01	Change
Core CPI	% YoY	1.5 2025-02-21	1.6 2025-01-24	→ -0.1
CPI (YoY)	% YoY	4 2025-02-21	3.6 2025-01-24	▲ 0.4
FX vs USD	px	150.01 2025-02-28	154.1 2025-01-31	▼ -4.08
GDP	% YoY	not recorded
PMI (mfg)		not recorded
Policy rate	%	not recorded
Unemployment	%	not recorded
10Y yield	%	1.37 2025-02-01	1.25 2025-01-01	▲ 0.12

ThesisL0

(historical week — no Claude narration run)

Standing pictureL1

United States

overheating / late-cycle

stall · above target · on hold

Above-trend growth with above-target inflation. Late-cycle: cyclicals and inflation beneficiaries can still run, but the central bank is biased to tighten, so duration and high-multiple growth are exposed.

● 1 active

China

deflation watch

stall · deflation risk · on hold

Activity is soft and inflation is at/below zero — the risk is entrenched deflation. Favors duration (long bonds) and quality; cyclicals struggle until policy eases decisively. The catalyst to watch is stimulus / a policy cut.

● 1 active

Euro area

disinflationary stall

contraction · at target · easing

Sub-trend growth with low, easing inflation. Duration and quality tend to lead; cyclicals lag until growth re-accelerates. Policy easing is the usual circuit-breaker.

● 2 active

Japan

overheating / late-cycle

unknown · above target · tightening

● 3 active

Mechanisms & channelsL2

United States

M13Contraction easing (sub-50 PMI, rising)

Trigger: pmi_mfg: 48.4 → 49.3 (+0.9)

Manufacturing PMIPMI — Purchasing Managers' Index. Above 50 = the sector is expanding vs last month; below 50 = contracting. A timely read on activity. is below 50 but rising.
Why: Activity is still contracting in absolute terms (below 50), but the rate of contraction is easing — the second derivative has turned up, which historically clusters near cyclical lows.
Forward-looking investors start to price the trough.
Why: Markets discount the turn before it completes; an improving-but-sub-50 PMI often coincides with the low in cyclical risk assets, well before the PMI itself crosses back above 50.
Early-cycle cyclicalscyclicals — Sectors whose earnings rise and fall with the economic cycle — industrials, materials, energy, consumer discretionary. and small-caps tend to lead off the low; defensivesdefensives — Sectors whose demand is steady through the cycle — consumer staples, utilities, healthcare. They outperform when growth slows.' relative edge fades.
Why: The names most beaten down in the contraction have the most operating leverage to even a marginal improvement, so they re-rate first when the deterioration stops.

Helps
early-cycle cyclicalssmall-capsEM equity

Hurts
defensives (relative)long government bonds (if the recovery firms)

Caveat: A one-month uptick that doesn't persist is a head-fake; the turn needs follow-through, and a sub-50 level still means activity is contracting in absolute terms — this is an inflection signal, not an all-clear.

House-view hook — empty (textbook default; Stephen's view bakes in here).

What would change the read

Inflation surprise (upside) Core inflation is steady, so the upside-surprise channel is quiet. It would fire on a core reading ≥0.2pp above the prior — watch it because that is what forces a central bank to stay restrictive and pressures the longest-duration assets first.
Inflation surprise (downside / disinflation) Core inflation isn't cooling fast enough to trigger the disinflation channel. A fall of ≥0.2pp would fire it — worth watching because it is the cleanest tailwind for long-duration growth and government bonds.
Monetary easing (rate cut) The policy rate is on hold, so the easing channel is dormant. A cut would fire it — it matters because the first cut of a cycle typically broadens a rally and pressures the currency.

China

M5Growth acceleration (expansionary PMI)

Trigger: pmi_mfg: 49.1 → 50.2 (+1.1)

Manufacturing PMI is above 50 and rising.
Why: A reading above 50 means more firms report expanding activity than contracting; rising means the breadth of expansion is widening — a timely, forward-looking growth signal.
Earnings expectations broaden toward economically-sensitive sectors.
Why: Stronger activity feeds revenue and pricing power first in the parts of the market geared to the physical economy.
Cyclicals, small-caps, EM and commodities lead; defensives lag.
Why: Capital rotates toward the cycle — industrials, materials, energy, smaller and more leveraged firms, and the commodities their activity consumes — while steady-demand defensives become relatively less attractive.

Helps
cyclicals (industrials, materials, energy)small-capsEM equitycommodities

Hurts
defensive sectors (staples, utilities)long government bonds

Caveat: If acceleration also stokes inflation fears, the bond-yield response can offset the equity benefit (good growth becomes 'too good'), especially late-cycle.

House-view hook — empty (textbook default; Stephen's view bakes in here).

What would change the read

Monetary easing (rate cut) The policy rate is on hold, so the easing channel is dormant. A cut would fire it — it matters because the first cut of a cycle typically broadens a rally and pressures the currency.
Monetary tightening (rate hike) The policy rate is steady, so the tightening channel is dormant. A hike would fire it — watch it because it hits long-duration growth, long bonds, and gold first.
Growth slowdown (deepening contraction) Manufacturing is not both below 50 and falling, so the deepening-contraction channel is dormant. It fires when a sub-50 PMI turns lower — that is the trigger for the defensive rotation and a bid for duration (a sub-50 PMI that is *rising* is the trough channel, M13, not this one).

Euro area

M3Monetary easing (rate cut)

Trigger: policy_rate: 3.15 → 2.9 (-0.25)

The central bank cuts its policy ratepolicy rate — The interest rate a central bank sets directly (e.g. the Fed funds rate, the ECB deposit rate, China's LPR). It anchors all other rates..
Why: The policy rate anchors the entire rate structure, so a cut lowers the risk-free baseline against which every asset is valued.
Discount ratesdiscount rate — The rate used to convert a future cash flow into today's value. A higher discount rate makes far-off cash flows worth less now. fall across asset classes and liquidity expectations rise.
Why: A lower risk-free rate raises the present value of future cash flows everywhere, and a cut signals the bank will keep conditions loose.
Risk assets re-rate up; the currency softens.
Why: Cheaper money flows toward higher-returning assets, and a lower local rate narrows the yield advantage of holding the currency, so it weakens.
The weaker currency lifts exporters, commodities, gold, and EM.
Why: Commodities priced in the easing currency rise in that currency; exporters gain competitiveness; and EM borrowers with dollar debt benefit as the dollar softens.

Helps
equities (broadly)goldEM assetslong-duration bondscommodities

Hurts
the easing currencycash/money-market real yield

Caveat: If the cut is an emergency response to a fast-deteriorating outlook ('cutting into a recession'), equities can fall even as bonds rally — the growth signal outweighs the liquidity boost.

House-view hook — empty (textbook default; Stephen's view bakes in here).

M13Contraction easing (sub-50 PMI, rising)

Trigger: pmi_mfg: 45.1 → 46.1 (+1)

Manufacturing PMI is below 50 but rising.
Why: Activity is still contracting in absolute terms (below 50), but the rate of contraction is easing — the second derivative has turned up, which historically clusters near cyclical lows.
Forward-looking investors start to price the trough.
Why: Markets discount the turn before it completes; an improving-but-sub-50 PMI often coincides with the low in cyclical risk assets, well before the PMI itself crosses back above 50.
Early-cycle cyclicals and small-caps tend to lead off the low; defensives' relative edge fades.
Why: The names most beaten down in the contraction have the most operating leverage to even a marginal improvement, so they re-rate first when the deterioration stops.

Helps
early-cycle cyclicalssmall-capsEM equity

Hurts
defensives (relative)long government bonds (if the recovery firms)

House-view hook — empty (textbook default; Stephen's view bakes in here).

Japan

M4Monetary tightening (rate hike)

Trigger: policy_rate: 0.25 → 0.5 (+0.25)

The central bank raises its policy rate.
Why: It lifts the risk-free baseline and signals an intent to drain liquidity to cool demand or inflation.
Discount rates rise; the most rate-sensitive assets are hit first.
Why: A higher risk-free rate lowers the present value of future cash flows, and long-duration growth, long bonds, and non-yielding gold have the most distant or rate-sensitive payoffs.
The currency firms; exporters and dollar-debt EM borrowers are pressured.
Why: A wider yield advantage pulls in capital and strengthens the currency, which hurts exporters' competitiveness and raises the real burden on dollar-denominated EM debt.

Helps
the tightening currencycash/short-duration real yieldbanks (early-cycle)

Hurts
long-duration growth equitieslong-dated bondsgoldEM assets

Caveat: Late in a hiking cycle, a hike can paradoxically rally bonds if the market reads it as the last one and pulls forward the eventual cuts.

House-view hook — empty (textbook default; Stephen's view bakes in here).

M9Long-end yield spike / term-premium rise

Trigger: yield_10y: 1.245 → 1.37 (+0.125)

The 10-year yield jumps.
Why: The long yield sets the cost of long-term money for the whole economy and the discount rate for the longest cash flows.
The discount rate on all long-dated cash flows rises.
Why: Equity valuations and long-bond prices are present values of distant cash flows; a higher long yield shrinks those present values.
Long-duration growth equities compress, long bonds fall, gold is pressured.
Why: The longest-duration assets are most exposed to the discount-rate move, and a higher real yieldreal yield — The yield after subtracting expected inflation — what a lender actually earns in purchasing power. Real yield ≈ nominal yield − expected inflation. raises the opportunity cost of holding non-yielding gold.

Helps
banks/insurers (reinvestment)cashvalue over growth

Hurts
long-duration growth equitieslong-dated bondsgoldrate-sensitive REITs/utilities

Caveat: Granularity is daily, so a single-session jump can be noise; a sustained multi-session move is the real signal. Distinguish a growth-driven rise (risk-on) from a supply/term-premium rise (risk-off).

House-view hook — empty (textbook default; Stephen's view bakes in here).

M12BOJ normalization / yen-carry risk

Trigger: policy_rate: 0.25 → 0.5 (+0.25)

The BOJ hikes away from its zero/negative-rate regime.
Why: Japan was the world's last anchor of ultra-cheap funding; raising its rate narrows the gap that made the yen the preferred currency to borrow in.
JGB yields rise and the yen tends to strengthen.
Why: Higher policy rates pull Japanese government bond yields up, and a higher yield plus repatriation flows increase demand for yen.
Yen-funded carry tradescarry trade — Borrowing in a low-rate currency (long the yen's case) to buy higher-yielding assets elsewhere. It unwinds violently when the funding rate rises or the funding currency strengthens. unwind, transmitting volatility into global risk assets.
Why: Investors who borrowed cheap yen to buy higher-yielding assets abroad face higher funding costs and a rising yen on their debt, forcing them to sell those assets — so the shock spreads well beyond Japan.

Helps
JPYJapanese banksyen-based savers

Hurts
JGBs (yields up)yen-funded carry tradesglobal risk assets (on a disorderly unwind)

Caveat: A small, well-telegraphed hike may be absorbed smoothly; the global-risk transmission only bites on a surprise move or a disorderly carry unwind.

House-view hook — empty (textbook default; Stephen's view bakes in here).

The dataL3

United States

Indicator	Current	Prior	Δ	As of
CPI (YoY)	2.80	2.90	-0.10 ▼	2025-02-01
Core CPI	0.25	0.20	+0.05 ▬	2025-02-01
Core PCE	2.97	2.80	+0.17 ▲	2025-02-01
Policy rate	4.50	4.50	+0.00 ▬	2025-02-02
GDP	2.30	-0.60	+2.90 ▲	2025-01-30
PMI (mfg)	49.30	48.40	+0.90 ▲	2025-01-03
PMI (svc)	54.10	52.10	+2.00 ▲	2025-01-07
Unemployment	4.20	4.10	+0.10 ▲	2025-02-01
10Y yield	4.58	4.52	+0.06 ▲	2025-01-31
2Y yield	4.22	4.18	+0.04 ▬	2025-01-31
2s10s slope	0.36	0.34	+0.02 ▬	2025-01-31
FX vs USD	108.37	107.80	+0.57 ▲	2025-01-31

China

Indicator	Current	Prior	Δ	As of
CPI (YoY)	0.10	0.20	-0.10 ▬	2025-01-09
Policy rate	3.10	3.10	+0.00 ▬	2025-01-20
GDP	5.40	4.60	+0.80 ▲	2025-01-17
PMI (mfg)	50.20	49.10	+1.10 ▲	2025-02-01
PMI (svc)	50.20	52.20	-2.00 ▼	2025-01-27
Unemployment	5.40	5.20	+0.20 ▲	2025-02-01
10Y yield	1.63	1.65	-0.02 ▬	2025-01-27
2Y yield	1.25	1.32	-0.06 ▼	2025-01-27
2s10s slope	0.38	0.34	+0.04 ▬	2025-01-27
FX vs USD	7.18	7.17	+0.01 ▬	2025-01-31

Euro area

Indicator	Current	Prior	Δ	As of
CPI (YoY)	2.40	2.40	+0.00 ▬	2025-01-17
Policy rate	2.90	3.15	-0.25 ▼	2025-01-30
GDP	0.40	0.40	+0.00 ▬	2025-01-17
PMI (mfg)	46.10	45.10	+1.00 ▲	2025-01-24
PMI (svc)	51.40	51.60	-0.20 ▬	2025-01-24
Unemployment	6.30	6.30	+0.00 ▬	2025-01-30
10Y yield	2.99	3.09	-0.10 ▼	2025-02-01
FX vs USD	1.04	1.04	-0.00 ▬	2025-01-31

Japan

Indicator	Current	Prior	Δ	As of
CPI (YoY)	3.60	2.90	+0.70 ▲	2025-01-24
Core CPI	1.60	1.70	-0.10 ▬	2025-01-24
Policy rate	0.50	0.25	+0.25 ▲	2025-01-24
GDP	n/a
PMI (mfg)	n/a
Unemployment	2.50	2.50	+0.00 ▬	2025-01-31
10Y yield	1.37	1.25	+0.12 ▲	2025-02-01
FX vs USD	154.10	155.17	-1.07 ▼	2025-01-31

Concept libraryL3

Terms marked ✓ are linked inline above — click any dotted term in the text to expand it in place.

2s10s: The gap between the 10-year and 2-year government bond yields. Positive = normal upward-sloping curve; negative ('inverted') = a classic late-cycle/recession warning.
PMI ✓: Purchasing Managers' Index. Above 50 = the sector is expanding vs last month; below 50 = contracting. A timely read on activity.
carry trade ✓: Borrowing in a low-rate currency (long the yen's case) to buy higher-yielding assets elsewhere. It unwinds violently when the funding rate rises or the funding currency strengthens.
credit impulse: The change in the flow of new credit into an economy. A rising impulse front-runs stronger demand for commodities and cyclical goods, with a lag.
cyclicals ✓: Sectors whose earnings rise and fall with the economic cycle — industrials, materials, energy, consumer discretionary.
defensives ✓: Sectors whose demand is steady through the cycle — consumer staples, utilities, healthcare. They outperform when growth slows.
discount rate ✓: The rate used to convert a future cash flow into today's value. A higher discount rate makes far-off cash flows worth less now.
disinflation: Inflation that is still positive but falling (prices rising more slowly) — distinct from deflation, where prices actually fall.
duration: How sensitive an asset's price is to interest rates. 'Long-duration' assets (long bonds, fast-growing stocks whose profits are years away) move most when rates change.
net interest margin: The spread a bank earns between what it charges on loans and pays on deposits. Higher short rates / steeper curves tend to widen it.
nominal yield: The headline interest rate on a bond, before subtracting inflation.
policy rate ✓: The interest rate a central bank sets directly (e.g. the Fed funds rate, the ECB deposit rate, China's LPR). It anchors all other rates.
rate path: The market's expectation of where the policy rate goes over the next year or two — not just today's level, but the whole expected trajectory.
real yield ✓: The yield after subtracting expected inflation — what a lender actually earns in purchasing power. Real yield ≈ nominal yield − expected inflation.
term premium: The extra yield investors demand to hold a long bond instead of rolling short ones — compensation for tying money up and for issuance/inflation risk.