Jason Daw:
Hello and welcome to Macro Minutes. During each episode, we'll be joined by RBC Capital Markets experts to provide high conviction insights on the latest developments in financial markets and the global economy. Please listen to the end of this recording for important disclosures.
Lori Calvasina:
Welcome to RBCs Macro Minutes podcast recorded April 30th, 2025. I'm Lori Calvasina, head of US Equity Strategy at RBC Capital Markets. I'm joined by Elsa Lignos, head of FX strategy, and Blake Gwinn, head of US Rate Strategy. The title of today's episode is a little Less Terrified. We're going to talk about current views on the trade war, the dollar equities rates earning season, and we'll wrap up with a brief discussion of treasury refunding. So let's get into it. And Elsa, I want to start with you. You've been on the road in the Middle East and the US over the past few weeks. What are you hearing in your conversations about where this trade war is headed?
Elsa Lignos:
Thanks, Lori. Yeah, like you say, I was in Washington last week for the IMF Spring meeting. Spent a couple of days in New York visiting clients there and then the previous week was in the Middle East seeing some of our central bank and sovereign wealth clients. And I think it's fair to say at the end of a week in Washington, the general feeling both from private investors and also public sector officials was one of increased optimism. I think in private meetings with the Trump administration, both sides, again, private and public, got the sense that the US is really showing it once a deal, acknowledging that the devil will be in the detail and it will take time to get there. But people are encouraged by best essence, seemingly taking center stage and the way some put it, the worst may well now be behind us. That's not to say that view is unanimously held. There's definitely a minority out there still concerned about how this is going to get resolved between the US and China. China has publicly dismissed all the administration claims that they have been talking and certainly best essence claim that a US China deal would arrive in the very near future. That does look questionable, but I'd say the consensus has clearly moved towards that more optimistic outcome.
Blake Gwinn:
Elsa FX has been one of the key markets where investors are expressing views on the trade war. What's your thought on direction of the US dollar in that context and just kind of curious what you're hearing from clients about the US Europe rotation in financial assets?
Elsa Lignos:
Okay, so two separate questions and as you say, people have to some extent been expressing views on the trade wall, though I think it's been the confluence of a number of factors. We entered the year with a lot of optimism on the US dollar, on the US economic outlook, but just a lot of general dollar bullishness and on our positioning monitor. And as you know, RBC has a positioning monitor where we don't just track RBC flows, we track market wide flows. We find a very helpful way of quantifying where the market is at any point in time. So on our position monitor, the market was really quite aggressively long dollars in January that had lightened up into March, particularly after the German fiscal announcement, but even still we were sitting around net 50 to 60% dollar long. That's now flipped to net 50 to 60% dollar short on aggregate.
And within that there are some currency pairs in particular like Euro dollar where that's actually 80% net short dollar, so 80% net long euro dollar. And so where does that leave the dollar going forward from here? And I think as I said, based on that optimism and the scaling back of some of the worst case fears around tariffs, the dollar has stored and in part because people are somewhat pricing out the risk of a US recession led by a policy mistake, aggressive tariff policy, the optimism Miranda deal is assuaging those worst case fears. But there's still this underlying current of an expectation for some rotation out of US assets and into European assets, into rest of world assets. I'd say in conversations with clients, while the sell side appears to be unanimously bearish on the dollar, that's not necessarily the case on the buy side.
That's definitely a bearish bias for the dollar. But I did speak to handful of clients that think as we get into the second half of the year we're going to see return of us exceptionalism, we'll see tax cuts, we'll see deregulation, we'll see other drivers from the Trump administration leading to more positive US outlook, and those same people are likely to question the timing of German fiscal support and question how long it could actually take to play out. Now if I take a step back, I typically find that for the last 10, 15 years it's always been easier to trade and call currencies on a one week to one month horizon than it is on a much longer term horizon. It's always felt like that was our sweet spot in terms of positioning, in terms of trade ideas, I actually feel now it's almost the complete reverse.
If I zoom out and think about Eurodollar or even more so dollar yen over an 18 month horizon, I have a lot more conviction that we are likely to see this rotation play out. It's not dollarization, not aggressive liquidation of all US dollar assets, but it is a slow readjustment of exposure to the US reduction of that heavy overweight position. In certain cases it will be putting hedges back on US assets as the Fed potentially cuts rates more in 2026 and that all put together should lead to Eurodollar trading up to levels we've really not seen in many, many years. So we could get well above one 20, above 1 25. Even for me, dollar yen is the most obvious call where we've had this longstanding view that the cycle was turning in dollar yen from the tail end of last year and that was without calling for US recession or without calling for aggressive fed cuts, which is really more down to the domestic hedging dynamics coming from the Japanese investor base. So I put it all together one 20 in dollar yen timing of it, how long it takes to get there. I think it's really hard to call, but if I look out over an 18 month horizon, my conviction is pretty high that that's where we end up.
Lori Calvasina:
Okay. Blake, I think this is a good segue over to you. If you think about the bond market and treasuries in particular, this has been another key battleground in all of the policy debates that have been going on recently. What is your thought on the different vibes issues driving treasuries? What are your latest thoughts on what we should be looking at here?
Blake Gwinn:
Yeah, sure. And I think it's been a bit of a wild April for rates markets. Obviously we had the reaction to liberation day announcement, but a lot of it was also a daily leveraging event where we saw very, very crowded positions and swap spreads kind of get unwound and I think we're kind of through the worst on that. So I do think we're kind of settling back into a bit of a range. It feels a lot calmer the last few days and I think we're back into this waiting mode. I think we probably on net settle, we settled a little bit lower range than what we had pre liberation day because I do think I'll talk just in a second about where we see how we see the vibes around the trade war, but I would say what's very clear is that the outcome is a little bit worse.
So we probably settle in a slightly lower range for tens, but I do think we are settling into that range versus some of the volatility we've come out of in early April on that kind of trade vibe. I mean, I think where we're at now, it almost feels like we have kind of taken a step back to where we were pre liberation day, which is that the faith in a Trump put if you'll has been restored in some respects, a number of people or at least some of the sentiment I've picked up in conversations with clients is that what we saw over the last few weeks, the rollback with the delays, with the exemptions that we've seen, that it does feel like there is a level now where Trump does not want to see the markets struggle and will kind of roll back if forced.
Also, I think there's kind of this view that maybe Bessant has taken a little bit more of a commanding role in this whole saga, and I think people generally view that positively. I'm a little bit wary of this to be honest. Like I said, it's a bit of a step back to the vibe that we had all the way through February and March where people thought, okay, well the worst instincts on trade and the worst outcomes on tariffs are going to be avoided because they don't want to have negative impact on markets, et cetera, et cetera. That's kind of where we were at, and then everybody kind of got the rug pulled out from under them by liberation day. So I'm still a bit wary that we're getting a little too comfortable with that again, and I would say that even if those risks have come down, and even if you believe that there's a higher probability of this Trump put now maybe say two or three weeks ago, now we're moving into a period where the rug pull might actually be coming from the data where we could actually start to see some of the real impacts rather than just the expected impacts of these tariffs.
So you don't only have the headline risk around Trump, but you also have this, I think increasing risk that we start to see some signs in the data that give us a little bit more of a scare. So I'm still kind of biased towards lower yields and I think we're kind of settling into a bit of a range here, but we're really just waiting for that other shoe to drop either on the actual trade headlines or in the data as we start to see the early impacts of these tariffs on the actual activity. Turning that around, Lori, on your end, big bounce back in US equities since the tariff pauses. I think we're s and p basically back to flat at this point. What do you think is priced in at the moment for the trade war? I was just kind of mentioning I think we're kind of back to where we were a month or so ago in rates. Is that the same kind of idea inequities? Are we pricing in recession risks? Is it adequately priced for those risks? And also I know you look at flows very, very closely. Are you seeing anything, again back to this kind of geographical rotation issue where you're seeing any kind of shifts away from the United States into other regions?
Lori Calvasina:
Yeah, I mean these are all great questions Blake, and this has really been the focus of my meetings over the last week or so in terms of what's being priced in and what's going on with this rotation issue. And I would say just in terms of the bounce, we have had a big bounce since the early-ish April low, but we're still meaningfully below the February highs. If I go back to that low point in the market, it very much looked to me like we were pricing in a near miss of a recession or a big crisis, what we would call tier two on our tiers of fear framework, had an 18.9% draw down. It was a very similar draw down to what we saw in 20 10, 20 11, 20 15, 20 16, and 2018, which were all sort of fears of a recession or big crisis that didn't end up materializing.
Recession pricing would've taken this more down to like 4200, 4500 on the s and p and we didn't do that, and I do think those fears were starting to seep in but then pulled back pretty closely. If I think about our modeling, stepping away from just equity market declines and levels and that kind of thing, and just think about our modeling, we've had a stagflationary scenario baked into our earnings and valuation models, and I'll spare you all the details, but the math, if I bake in say half a percent, GDP, a few fed cuts inflation in the mid threes and a little bit of margin contraction takes us to about 53 51 on the s and p and we've been trading as we record this a little bit above that, we view all these models as compasses, not GPSes, but I've been saying the last week or so, I think markets, if you buy into that stagflationary forecast, we're about where we deserve to be.
Clearly there's another step down if we have an actual recession where exactly the s and p would end up on the year is difficult to say because usually we have a little bit more lead time when recessions set in and markets tend to discount that well in advance. And then actually negative GDP years, we do tend to see the s and p rise, so the timing's a little tricky if we actually do end up having to price in a recession. Anecdotally, what I would tell you is that every I've met with recently has been absolutely exhausted. I do think there is probably maybe a more negative tone when I talk to non-US folks than US folks and US folks. I had one person say to me recently, he's really just trying to stay focused on company fundamentals and we're in earning seasons. So I think that's where people's heads are.
At the same time, I am seeing the exhaustion, I'm seeing the worry. I've had people say, is there a cliff coming in August or September as some of these layoffs that were announced earlier this year in the government sector start to show up in data. Our mitigation strategy is going to run out by then for corporate America. So the tone is not fantastic. If I sort of turn my attention to flows, we've been watching the EPFR data really closely. Funds flow, datas do all tend to differ a little bit and we know that there are issues with all of them in terms of the samples that they're looking at. But what I have been seeing on this data is if I look at US flows, there has been a deterioration in US equities, but it looks like a worse trend in bonds. So I do feel like the shift out of the US may being felt a little bit more acutely on the bond side just based on that data.
When I look at the non-US flows, what I'm seeing is that the European rotation took a little bit of a pause but is bouncing back and we're actually starting to see improving trends on things like France and the uk. So it looks like that Europe interest is broadening out a little bit on the equity side. When I look at kind of non-US and non Europe geographical flows, everything is really choppy, but trends do seem to be improving. So when I look across all of this data, I do feel like that a door has been opened for interest into non-US equities and it still looks to me frankly, like it's still pretty early innings. I do think that US Europe rotation, we've been doing some work to try to separate out US domiciled funds versus non-US domiciled funds. And what we're seeing is that US to Europe rotation feels a little bit more acute and discreet on the non-US domiciled funds as opposed to what we're seeing in terms of US trends, which sort of syncs up with conversations that we've been having.
Blake Gwinn:
Lori, one more question for you. I know you've been really busy this week and last week going through corporate earnings, what are you hearing from companies on their ability to manage through the trade war? So if current policy remains in place, 145% tariffs on China, 10% tariffs on the rest of the world, when do you see to expect the impacts really hitting and any color on how companies are thinking about fx?
Lori Calvasina:
Yeah, also, those are all great questions and I mean just to give you some context, I counted it up last week and I think there were 290 companies in the s and p that were reporting last week and this week, my math may be off a little, but it was basically right around 300. So my team and I have been trying to read through as much of this as we can because we really feel like this is the bridge between the soft data and the hard data, getting some things that are tangible, even if they're not quite the hard economic data prints. And I would say on Friday my team, and we just were exhausted all of the clients I guess, but we sort of sat around and just said, what are your overall impressions? What are your gut feels? And we all agreed that the tone that we read last week and last week was really the first week where we had a decent breadth of sectors.
So we had a lot of industrials come in, a few tech few consumer, but we felt like the tone was better than what we'd anticipated and what financial markets had been anticipating and what the soft data was signaling. That being said, there's a lot of negative terms being used, right, dynamic, evolving, uncertain. There's a lot of difficult adjectives that are coming in. Guidance trends vary. Some companies are moving from annual guidance to quarterly guidance, which is something I'm very much sympathize with, just sort of the idea of more limited visibility. Other companies are saying that they can manage through current policy within the realm of their current guidance. Others have lowered things. We had one company obviously even push their investor call back a few days in terms of some of the debates we're monitoring pull forward versus pull back. We think both of those are going on and it just sort of differs by industry, differs by product.
Clearly some pause in CapEx plans, big decision making, but if you look at the industrial companies, they really emphasize one of their mitigation tools for managing through. They've all pulled forward inventories. That's been interesting to see. If I think about the financial companies that were coming in last week and we still had a few, they were heavier the prior week. They're generally telling us the consumer is fine, but even their corporate customers are fine. All the stats look good. They sound like proud parents bragging about their children when they talk about how the consumers are not overextending and some of them are slipping in comments about damage to the US brand that's being done abroad and they're not really getting too deep into it, but I've seen probably three or four companies drop that breadcrumb on the consumer. Again, it's a mix. The consumer companies generally have a much more negative tone.
We're not hearing from a lot of the retailers that sell goods right now. It's more sort of travel services, restaurants, those sorts of things. But one thing I heard from the telecom companies is it seems like everyone pulled forward a mobile device purchase. I know we did that in our household more than we should have. Cars are another thing that have been pulled forward. Other big ticket items though we're hearing about delays and pauses, we're also hearing a lot about trade down by high-end income consumers. So while the banks may be telling us as the proud parents that everything is okay, what the consumer companies are really telling the teachers at school, I guess, is that there is some concerning behavior regarding the macro that's starting to emerge underneath the surface. And if I just sort of circle back to the industrial companies, even though the guidance isn't that clean, they are giving us a fire hose of information in terms of how they're mitigating around tariff impacts.
They're generally sending the message that they can manage through for at least a few quarters where people are talking about potentially seeing impacts kind of varies, but I would say a quarter or two, I think companies are going to manage through, based on what I'm reading second half of the year next year, there may be problems that emerge if current policy stays in place, they're adjusting footprints. There's lots of detailed discussion on pricing. Some contracts are going to keep companies for a while. Some companies are trying to pass through pricing already. But one thing we're clearly hearing no layoffs, that's not coming up and we are hearing a lot of macro discussion where companies seem to be aware that strong employment is the key to getting through this unscathed. So that all kind of makes me feel a bit better, to be honest, at least in the short term and on FX also, I was thinking of you when I was reading through some of these light last week.
I saw a number of healthcare companies actually call out the weaker dollar and a better FX backdrop, and it's not that it's a huge tailwind for them yet, but if I think back to the last reporting season, I was seeing a lot of companies, not just healthcare but industrials and other sectors that were like, this is two to three points on our revenue. I'm not getting that anymore. And they're not really calling out that discreet. This is adding back two to three points or whatever it is to the revenue. But it does seem like FX in the weaker dollar is one of those little things that's going to help companies get through this. It's not clear exactly how much, but it does seem to have shifted from the stronger dollar being a clear head when a big problem in the last reporting season too. It's not being called out as a problem anymore and a few companies are starting to actually say, Hey, this is going to help us a little bit.
Lori Calvasina:
Thanks, Laurie. That's really interesting and interesting. Healthcare companies are mentioning that dollar weakness though I guess in a longer term context it still remains very strong compared to historic averages. I'm going to pivot a little bit now, Blake, we're going to ask you to do a quick fire round. Laurie and I are going to be coming at you with questions. So we just had the quarterly refunding announcement right before we started recording here. What did we learn there?
Blake Gwinn:
Honestly, not a ton changed. I mean we titled our preview high on uncertainty, low on action. I think that's kind of what we got. That in and of itself is probably notable the fact that they didn't change coupon auction sizes, the fact that they didn't change their forward guidance because there had been, I think following all the volatility and pressure we hadn in treasury markets a few weeks ago, there'd been this kind of growing chatter about them maybe taking some actions to shore up treasury markets either by cutting issuance or expanding the buyback program or something. So the fact that they didn't was probably somewhat notable, but overall nothing really kind of changed at this refunding.
Elsa Lignos:
Blake, can you expand a little bit on what they announced on buybacks and how meaningful changes to that program could be for markets?
Blake Gwinn:
Yeah, so I just mentioned that was one of the potential changes that people have been kind of talking about. Just for context right now, they're doing two different types of buybacks. There's liquidity support. These are kind of ongoing buybacks that they're doing to just shore up liquidity. They're kind of buying essentially bonds that the rest the street doesn't really want. Then presumably replacing it with new issuance at auctions. They've also got cash management, which is really just about controlling these swings that they have around the year in cash balance. So we get these big cash influxes in tax season and they kind of wanted to smooth those out. So that's what they're doing right now. I think a lot of the excitement or what would be most meaningful for markets, and when most people talk about, oh, they could expand buybacks, what they're really thinking about is something almost more akin to a QE program from the Fed where the treasury is going out and removing a meaningful chunk of duration for the market or really kind of forcing down yields or forcing the curve flatter.
But those two programs that they're doing, I think the really important aspect of those to remember is that they're not reaching to buy bonds. They're taking, they're buying things that are cheap to the market. They're taking the streets trash, they're taking it out basically. So that's very different than going out and reaching for bonds and really buying rich bonds and removing duration and pushing yields down. So what they said, they said they would look at ways of making the buyback programs a bit more efficient, timing sizing all these things, but all those really apply to the two variations of buyback programs we have now. We're still not talking about that QE light type of program that I think markets are probably thinking about when they get excited about buybacks or whether there's chatter about buybacks. So really not something that I would expect to impact yield levels or curve levels or anything like that. It's really more about market functioning for dealers and maybe it impacts a few RV type players.
Elsa Lignos:
And Blake, final question. Anything on the debt limit from treasury, what's your thinking on the potential timeline for the so-called debt state?
Blake Gwinn:
Yeah, so they said, I'd been kind of thinking maybe they would give us a little bit more info on the timing around this today. They said they're not able to produce a timeline for that right now, which is a bit interesting given that they asked all the dealers to provide timelines. But they said they currently don't have enough certainty or information to do that. They're saying maybe first half of May, they'll give us an update on when that X date, that's the potential default date when that's actually going to happen. At least for our view. We pushed out a little bit, we'd been kind of thinking mid August, that pushed out to the end of August given that tax receipts have come in a bit stronger than we expected for the April tax season. Also, we're starting to get some very early reads on tariff revenue.
If those tax receipts continue to come in strong in the next few weeks, if we continue to see tariff revenue at the kind of levels we've had this first month, that could easily push beyond August. So right now we're at the end of August, but just barely hitting at the end of August. It's not going to take much to push that out. And once we get past the end of August, you get tax inflows with the September corporate tax date. You get some delayed tax inflows because of the wildfire. Some of those deadlines were pushed back to October. That should be enough to carry you to the end of October. So right now we're looking at this kind of bimodal distribution where it's either the end of August or it's going to push out all the way until the end of October. So that's kind what we're thinking around that timing right now.
Lori Calvasina:
All right. So I think that's a great place to end things. Thanks Blake. Thanks Elsa. It's always fun to catch up with both of you and there's obviously a lot going on. Also a huge thank you to our listeners for your time. If you'd like to continue the conversation or have any questions, please reach out to your RBC representative.
Speaker 5:
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