week #27 - 2025
Positioning for Growth Surprises and Curve Steepening
Good afternoon folks,
The first six months of the year are now behind us, and we look ahead to the second half—where much will unfold. We're carrying forward several key themes with targeted thematic exposure.
I’ll start with European markets, then move on to the US, and finish with a few thoughts on the UK.
Europe
We had PMI prints recently, and today we got German CPI, which came in below expectations at 2%. In PMIs, Germany continues to show signs of improvement, with the composite index pushing back above the 50 growth threshold—now at a 3-month high. This rebound is mostly driven by the manufacturing sector, although job creation remains weak. However, given the improvement in new orders, we believe there’s room for further upside.
What stands out most about Europe is that the periphery remains the main engine of job creation, while Germany and France continue to lag.
We maintain a constructive view on Europe, especially after receiving a clear green light for further fiscal spending in Germany, along with the recent NATO agreement. These developments should support further curve steepening.
Our preferred expressions remain:
2s10s steepening
5s30s steepening
ERM6/ERM7 steepening
The bar is set quite low going forward. While 2025 has seen only minor revisions, 2026 growth is currently projected at just 1.1% due to tariff impacts. However, the US administration seems open to reaching deals—if that materializes, it could remove uncertainty and trigger a powerful restocking cycle, leading to a repricing in forward growth expectations. That’s broadly how I see the setup.
This environment remains supportive of further spread tightening. We continue to favor BTP/Bund and BTP/OAT as our core expressions of this view. However, OAT/Bund is also on our radar—excluding the current short-term political noise around pensions, OATs look attractive from a factor perspective.
United States
Last week, policymakers turned dovish, allowing the market to price in further curve easing. I'm positioned on the opposite side—I expect both NFP and CPI to surprise to the upside. In my view, the data doesn’t justify pricing in 75bps of cuts by year-end.
I maintain a steepening bias in 2s10s, while US bonds are neutral on our macro score.
United Kingdom
I’m currently expressing a U5H6 flattening view, as the UK labor market appears to be toast.
Below, I report our latest macro scores and systematic signals.
Take care,
spaghettilisbon