April 10, 2025
Releases
CPI
March 2025: Core And Full CPI Inflation Measures Came In Softer Than Expected, With Full CPI Posting The First Monthly Decline In Almost Five Years. According to Bloomberg, “US inflation cooled broadly in March, indicating some relief for consumers prior to widespread tariffs that risk contributing to price pressures. The consumer price index, excluding often volatile food and energy costs, increased 0.1% from February, the least in nine months, according to Bureau of Labor Statistics data out Thursday. The overall CPI declined 0.1% from a month earlier, the first decrease in nearly five years.” [Bloomberg, 2025-04-10]
- While The Headline Rise In Shelter Costs Was Moderate, That Was Due To A Steep Decline In Hotel Stays. Primary Housing Costs Accelerated. According to Bloomberg, “While all eyes have been on the impact tariffs will have on goods prices, one of the key drivers of inflation in recent years has been housing costs — which are the largest category within services. Shelter prices rose at a moderate pace, reflecting the steepest drop in hotel stays in more than three years. There were still signs of lingering price pressures facing households. Owners’ equivalent rent accelerated to a 0.4% monthly pace and grocery costs increased 0.5%, matching the biggest gain since October 2022. Meat prices accelerated, while the cost of eggs posted a smaller advance than a month earlier.” [Bloomberg, 2025-04-10]
Outlier Categories Driving Changes
Jason Furman: Median And Trimmed CPI, Measures That Try To Avoid Outlier Categories “Were Much Less Rosy Than Core CPI[.]” According to Jason Furman, “Notably the median and trimmed mean were much less rosy than core CPI, suggesting that the great headline and core numbers were driven by very volatile items. In fact, core-median divergence largest since 1984 & core-trimmed largest since 2010 (both excluding COVID).” [Jason Furman, 2025-04-10]
- Jason Furman: Excluding COVID, This Was The Largest Divergence Between Core And These Anti-Outlier Measures In More Than A Decade. According to Jason Furman, “Notably the median and trimmed mean were much less rosy than core CPI, suggesting that the great headline and core numbers were driven by very volatile items. In fact, core-median divergence largest since 1984 & core-trimmed largest since 2010 (both excluding COVID).” [Jason Furman, 2025-04-10]
Context
The tariffs have blown up the narrative that was taking hold: inflation gradually moving back towards the Fed’s target. Bloomberg quotes a Parthenon Macroeconomics note showing that with washing machine prices in 2018, it took three months for tariffs to show up in CPI Data. Furthermore, a narrative could be constructed with the report that the disinflation exhibited in the report was due to a slowing economy, rather than an abatement of inflationary pressures.
I think that narrative is a bit weak, as it relies on things like the continued high rate of owners equivalent rent, which has shown to be a heavily lagging indicator.
Jobless Claims
Last Week’s Jobless Claims Rose Marginally, Almost Exactly In Line With Expectations. According to Reuters, “The number of Americans filing new applications for unemployment benefits rose slightly last week and could trend higher as companies navigate President Donald Trump’s tariffs on imports. Initial claims for state unemployment benefits increased 4,000 to a seasonally adjusted 223,000 for the week ended April 5, the Labor Department said on Thursday. Economists polled by Reuters had forecast 223,000 claims for the latest week.” [Reuters, 2025-04-10]
Context
In the best of time, it is hard to read too much into jobless claims. The information is noisy, and revisions are common. So it is worth watching to see if there are any spikes, or if long running trends emerge. But most reports, like this one, are not particularly useful.
Tariff Fallout
Bloomberg Chief Economist Anna Wong: Even With Trump’s Pause, The 125 Percent Tariff On China Brings Tariffs On Consumer Goods Higher Than After Trump’s Initial Announcement. According to Anna Wong, “We calculated that post Trump “put” today, the tariff mix is actually worse —China exports more consumer goods to US than other countries, so boosting that (to 125%) relative to others will boost the hit to consumption goods.” [Anna Wong, 2025-04-09]
Basis Trade
Apollo: Around 40 Percent Of The $2 Trillion In Outstanding Prime Broker Balances Was Tied Up In The Basis Trade, With Leverage Up To 100 To One. According to Apollo, “In the basis trade, hedge funds put on leveraged bets, sometimes up to 100 times, with the goal of profiting from the convergence between the futures price and the bond price, as the futures contract approaches expiry. How big is the basis trade? It is currently around $800 billion and an important part of the $2 trillion outstanding in prime brokerage balances. It will continue to expand as US government debt levels continue to grow, see charts below. Why is this a problem? Because the cash-futures basis trade is a potential source of instability. In case of an exogenous shock, the highly leveraged long positions in cash Treasury securities by hedge funds are at risk of being rapidly unwound. Such an unwind would have to be absorbed, in the short run, by a broker-dealer that itself is capital-constrained. This could lead to a significant disruption in market functions of broker-dealer firms, such as providing liquidity to the secondary market for Treasuries and intermediating the market for repo borrowing and lending. For example, during Covid, the Fed was at the peak buying $100 billion in Treasuries every day.” [Apollo, 2025-04-08]
- This High Leverage Turns A Risk-Neutral Trade Into Something That Could Threaten Market Participants. According to Apollo, “Why is this a problem? Because the cash-futures basis trade is a potential source of instability. In case of an exogenous shock, the highly leveraged long positions in cash Treasury securities by hedge funds are at risk of being rapidly unwound. Such an unwind would have to be absorbed, in the short run, by a broker-dealer that itself is capital-constrained. This could lead to a significant disruption in market functions of broker-dealer firms, such as providing liquidity to the secondary market for Treasuries and intermediating the market for repo borrowing and lending. For example, during Covid, the Fed was at the peak buying $100 billion in Treasuries every day. In addition, if the supply of Treasuries grows further, for example, because of a growing budget deficit or the Fed doing quantitative tightening, it will potentially depress Treasury prices, hurting the long leg of the trade, and stress repo funding, as dealers have limited balance sheet capacity. The bottom line is that the large and growing cash-futures basis trade, driven by leveraged hedge fund positions in Treasuries, poses a risk due to potential market disruptions and liquidity issues, especially in the event of an exogenous shock or increasing Treasury supply.” [Apollo, 2025-04-08]
April 2025: The Bank Of England Noted Hedge Funds Facing “Significant Margin Calls” Over The Basis Trade. According to Bloomberg, “The Bank of England said hedge funds have faced ‘significant’ margin calls from their prime brokers as they navigated extreme market volatility in the aftermath of US President Donald Trump’s tariff announcements and warned that the risk of ‘further sharp corrections’ remains high. While the central bank’s Financial Policy Committee found that so far those firms had been able to meet margin calls, it warned that the overall global risk environment has deteriorated, according to minutes from meetings it held on April 4 and April 8. ‘Uncertainty has intensified,’ the committee said. ‘The probability of adverse events, and the potential severity of their impact, has risen.’” [Bloomberg, 2025-04-09]
Context
The basis trade is relatively simple intuitively. For structural reasons, if you buy a futures contract on treasuries, a financial instrument which obligates you to take delivery of a specified amount of treasuries at a certain future date at a certain price, the combination of the contract price and the price you are obligated to pay for the treasuries will be more than purchasing those treasuries today.
For hedge funds, this is an opportunity. They can sell treasury futures, and buy the treasuries they will have to deliver today. That trade in itself isn’t particularly lucrative, but if they borrow money to buy the treasuries, their return will be multiplied. Given the fact that they are functionally long and short the same asset, the trade can be considered “risk-neutral,” which means that any profits made juice the all important measure of risk-adjusted returns.
To banks lending to those hedge funds, the trade is similarly attractive. They are essentially lending against treasuries, and a guaranteed payout. As a result, they do not need to hold large amounts of excess reserves against those loans.
The problem arises when an outside shock hits the market. During a time of market stress, there is a tendency to sell what you can, not what you would like to. The treasury market has been, for decades, one of the deepest and most liquid in the world. As a result, treasury holdings are easy to unload, but, when market participants are big enough as to not be price takers, that can still make things complicated.
When you add a lot of leverage to that mix, the market infrastructure involved in unwinding the basis trade can quickly get overstretched. That is why the Fed has been thinking about creating a facility to help it deal with market stress. The market stress is, however, here now, and it remains to be seen how everything will play out.
Degrading Rule Of Law
March 2025: Despite Determining That Trump’s Tariff Declarations Were Likley Illegal, The Retail Industry Leaders Association Decided Against Suing Due To “The Current Climate.” According to Bloomberg, “The Friday before President Donald Trump’s April 2 announcement of across-the-board tariffs, the top lawyer for one of the biggest US retail industry groups updated members on planning for a potential lawsuit over the trade levies. Those efforts had been put on hold, said Deborah White, general counsel for the Retail Industry Leaders Association, even though the group’s research indicated a legal case had a good chance of succeeding on the merits. ‘However, given the current climate, the members of our groups were unwilling to proceed despite the heightened economic uncertainty caused by the various shifting EO’s and pronouncements,’ White wrote in the March 28 email seen by Bloomberg News. She said the group had ‘officially paused’ its efforts a week earlier.” [Bloomberg, 2025-04-08]
- Retail Industry Leaders Association General Counsel Deboarh White Noted The Challenge In Finding A Law Firm That Would Go Against The Administration. According to Bloomberg, “In her email, White also noted the potential challenge of finding law firms willing to bring suits over tariffs in light of Trump’s attackson some of the biggest names in the legal profession. ‘Given the multiple EO’s that have been lodged at law firms, it’s not clear which firms would be willing to do so,’ she said.” [Bloomberg, 2025-04-08]
After Being Told Not To Include A Wide Range Of Criticism Against Trump’s Tariffs, A Top J.P. Morgan Strategist Redacted Parts Of His Report. “People Are Being Held Accountable For Their Views And The Things That They Say In Ways That They Probably Shouldn’t Be.” According to Bloomberg, “A JPMorgan Chase & Co. strategist whom Jamie Dimon has lauded as ‘one of our firm’s great thinkers’ is taking an unusual approach to highlight fears on Wall Street over speaking out against the Trump administration. On Monday, before Donald Trump pivoted on tariffs, Michael Cembalest ended a 45-minute client presentation about the levies with a caveat. After calling the president’s plan a ‘sledgehammer, brute force’ approach, the JPMorgan analyst said he withheld certain material with his firm and colleagues in mind. His remarks built on a report from last week in which he voluntarily blacked out several passages. He titled it Redacted: Straight talk from the CEO front lines on Liberation Day, invoking Trump’s branding for the day the tariffs were announced. ‘This is the first time I”ve ever had to do a call where I had to think about the things that I was saying, not just in terms of how they reflect our views on markets and economics,’ Cembalest said in his presentation, adding that he had never before taken such considerations into account in a career spanning more than 30 years. ‘People are being held accountable for their views and the things that they say in ways that they probably shouldn’t be,’ he said. ‘So I”ve said most of what I wanted to say on this call — but not all of it.’ […] On Wall Street, Cembalest is a widely followed senior analyst, known for refusing to invest with funds tied to Bernie Madoff because his group couldn’t reverse-engineer how the financier made money. A key associate of JPMorgan’s billionaire whisperer, Mary Erdoes, he doesn’t shy away from controversial takes. Still, Cembalest highlighted in his Monday presentation that he wanted to include criticism from a wide-ranging group of voices about the tariff-calculation formula — but he said he was told not to do so. ‘I had a bunch of their pithy and critical responses,’ he said on the webinar. ‘Our compliance people didn’t want me to include them because they felt they were one-sidedly negative.’” [Bloomberg, 2025-04-10]
Threat To Generic Drug Makers
After Trump Previewed Tariffs On Imported Pharmaceuticals, Makers Of Generic Drugs Could Use Tariffs As An Excuse To Exit A Low Margin Business. According to the Washington Post, “Trump said Tuesday that his administration will ‘be announcing very shortly a major tariff on pharmaceuticals,’ a bid to force companies to make more of their medicines in the United States. On Wednesday, Treasury Secretary Scott Bessent said a 90-day pause Trump announced on most of his country-specific ‘reciprocal’ tariffs would not apply to sector-specific tariffs such as pharmaceuticals. But raising tariffs on prescription drugs could carry additional risks for the new administration, as well as for drug manufacturers and insurance companies. […] [Marta] Wosińska said she also is concerned about the impact of tariffs on companies that make generic injectable drugs — including cancer medications — and operate on razor-thin margins. ‘What I worry about is we actually are going to see some manufacturers walking away from this market and saying, “I can’t make money,”’ she said. While companies generally take pains to avoid exiting a market and causing a shortage, it could be different if they can blame it on tariffs, she said.” [Washington Post, 2025-04-10]
Canceled Orders
Five Below Asked Vendors To Turn Away Products It Had Ordered In China. According to Bloomberg, “Five Below Inc. shares dropped on Friday after the retailer asked vendors to turn away products waiting for shipment in China before they set off for the US, according to a memo reviewed by Bloomberg. Shares declined as much as 10% after shipping giant A.P. Moller-Maersk A/S sent a letter to suppliers on behalf of the discount retail chain saying that the company has elected to suspend its cargo shipments, following the US and China tariff impact. It was unclear from the memo if it went out to all Five Below vendors, or a subset. The Maersk letter says that no containers are to be delivered to the yard starting April 10, and all containers that are loaded must be unpacked and returned to the carrier.” [Bloomberg, 2025-04-10]
April 1 - April 8 2025: Global Container Bookings Dropped 49 Percent From The Previous Seven Day Period. According to Bloomberg, “Amazon Inc. is among a number of retailers — big and small — that have begun canceling orders from China and other parts of Asia. Global container bookings made between April 1 and 8 dropped 49% from the seven-day period immediately before, according to estimates from Vizion Inc., a tech company that gathers supply chain data.” [Bloomberg, 2025-04-10]
For The First Time In A Decade, Walmart Decided Not To Premake Price Stickers For Christmas Ornament Packages Due To Uncertainty. According to Bloomberg, “At a factory in China’s Zhejiang province that churns out Christmas ornaments for Walmart Inc., it’s always been standard practice to add price stickers to packages as the last step before the goods are shipped off to the US. But for the first time in more than 10 years, Walmart has asked the factory to leave price stickers off the items, according to Barry Shan, the Ningbo city-based supplier’s vice president, reflecting the deep uncertainty caused by Trump’s tariffs.” [Bloomberg, 2025-04-09]
Kohl’s Asked For Production To Be Suspended On Clothing Accessories It Had Already Arranged. According to Bloomberg, “Kohl’s Corp. had negotiated prices and placed orders for clothing accessories with one Chinese supplier last week, but has now asked for production to be suspended though raw materials have already been prepped, said company owner Alice Lu.” [Bloomberg, 2025-04-09]
Pennsylvania-Based True Places Paused Shipments Of Chairs From Cambodia, “There Is No Point Completing The Product If We Are Not Able To Bring Our Product To the US.” According to Bloomberg, “Ben Knepler, who runs Pennsylvania-based True Places, a designer of outdoor chairs that retail for up to $150, asked his Cambodian suppliers to pause shipments while he waited to see what happened to tariffs. ‘There is no point completing the product if we are not able to bring our product to the US,’ he said. ‘There are still massive amounts of uncertainty.’ While Knepler is hopeful of resuming production, that decision is dogged by uncertainty. The latest question looming over him: Whether Trump will decide in 90 days to impose the 49% tariff on goods from Cambodia he announced April 2, or continue with the 10% ‘baseline’ tariff they are subject to during Trump’s pause. ‘This new round of tariffs is existential for us,’ Knepler said in an interview.” [Bloomberg, 2025-04-10]
Turn Towards Opaque Private Credit
DoubleLine Founder Jeff Gundlach: Private Markets People Are Saying They Are A Barbor In The Storm, But It Is A “Ridiculous Assertion.” According to Jeffrey Gundlach, “When public markets experience a sharp decline, like now, it is nonsensical to think private markets are a harbor in the storm. Yet I have heard this absurd assertion twice in the past week. ‘Don’t worry, we”re not down’. Sure.” [Jeffrey Gundlach, 2025-04-08]
Policy For Sale
Following A $1 Million Per Person Dinner At Mar-A-Lago Attended By Nvidia CEO Jensun Huang, The Trump Administration Changed Policy Plans, Deciding Against Export Restrictions For A Powerful AI Processor To China. According to NPR, “When Nvidia CEO Jensen Huang attended a $1 million-a-head dinner at Mar-a-Lago last week, a chip known as the H20 may have been on his mind. That’s because chip industry insiders widely expected the Trump administration to impose curbs on the H20, the most cutting-edge AI chip U.S. companies can legally sell to China, a crucial market to one of the world’s most valuable companies. Following the Mar-a-Lago dinner, the White House reversed course on H20 chips, putting the plan for additional restrictions on hold, according to two sources with knowledge of the plan who were not authorized to speak publicly. The planned American export controls on the H20 had been in the works for months, according to the two sources, and were ready to be implemented as soon as this week.” [NPR, 2025-04-09]
Outlook
Yesterday, I asked the question, what happens when the prevailing story of the market changes. I didn’t like the answer, and it leads me to what I am thinking about today: how deep are automated markets?
At the end of last month, Bloomberg had an in depth story about how currency traders are worried that the automated market makers (companies in the business of making sure trades go through) they have come to rely on could be more fragile then they think.
The Bank of England then yesterday published a report on AI in financial markets, finding something similar: in normal times, AI would be expected to increase market efficiency, but in unusual circumstances it could amplify shocks.
Bloomberg Columnist Matt Levine is fond of saying that one of the best services a broker can provide is to not pick up the phone during a market crash. In the man who solved the market, Zuckerman details a story about how Jim Simons manually stopped the Medallion fund from trading as much as it wanted to during some early market fluctuations. That ability to say, things don’t look right, let’s hold off for a beat is something that has historically served as a bit of stabilizing force in markets.
Today, that is unlikely to happen in most markets. Most trading now takes place off of public exchanges, and much of that trading is fully (or almost fully) automated. The danger in an outside event causing a crash that leads to pricing failures like those the airlines dynamic pricing programs saw during the early days of the pandemic cannot be fully discounted.
I know that on Monday, I wrote about how the pause in activity that uncertainty causes can be more damaging than an increase in risk, but while that is true in the real economy, finance is a bit different. While real assets depreciate over time, financial assets are always valued at what people will pay for them, so a dramatic pricing failure can see what value they have vanish into air.
I do not think that a pricing failure of this kind is a likely cause of a financial crisis. But its possibility is something to consider.