In today’s briefing:
- SLBs in 2025: Where Step-Ups Create Event-Driven Alpha
- Fed Cuts Policy Rate to Mitigate Rising Unemployment Risks, but Retains Cautious 2026 Guidance
- A Market Divided Against Itself
- Will America Get Old Before It Becomes Great Again?
SLBs in 2025: Where Step-Ups Create Event-Driven Alpha
- Set-Up and scale: 245 SLBs face 2025 KPI tests; applying a 19% 2024 miss rate implies ~50 step-ups of ~25 bps, worth ~20–60 bps PV. >$80bn notional, heaviest in Q4.
- Trade design, credit and equity: Pre-position where slippage exists and no pre-test calls; run structure pairs; trade post-print drift; for equities, SLB misses flag delivery shortfalls and funding-cost creep.
- Why the market is inefficient: ESG KPIs hide in footnotes and annexes, overlooked by analysts. Verification lags and slow vendor updates delay repricing, so step-up structures stay mis-weighted and mispriced.
Fed Cuts Policy Rate to Mitigate Rising Unemployment Risks, but Retains Cautious 2026 Guidance
- The Fed reduced the federal funds rate by 25 basis points last week, but offered somewhat hawkish forward guidance for 2026. Risks of higher unemployment have increased, requiring policy recalibration.
- A growing number of commentators are expressing concern about a US recession, but the Sahm and Federal Reserve Bank of New York recession probability measures have been falling during 2025.
- Much faster rising unemployment amongst younger workers since April 2023 could indicate that greater embracement of generative artificial intelligence by companies has adversely impacted the number of entry-level jobs.
A Market Divided Against Itself
- The market’s bullish tone is constructive for the price of risk assets,
- But numerous negative divergences raise the risk of a short-term pullback.
- These conditions put a different spin on Lincoln’s famous quote of “a [market] divided against itself cannot stand”.
Will America Get Old Before It Becomes Great Again?
- The U.S. population will peak in about 2033 in the absence of immigration, and working age population would be peaking about now or in the near future.
- In the U.S., the combination of a weak labour supply and rising fiscal deficits is conducive to stagflation
- Investors would have to be very bullish on AI adoption to project significant gains in productivity beyond trend growth in the face of the pivot in immigration policy.
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