MUFG on rotation, yields, and Fed cuts (with Jonathan Ferro, Annmarie Hordern)

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MUFG 7.0
Commercial Bank
George Goncalves 8.5

MUFG on rotation, yields, and Fed cuts (with Jonathan Ferro, Annmarie Hordern)

ndx

We have this idea that we're going to rotate out of really highly valued sectors like technology into the industries that need it... If you start to kind of have wrinkles and some sort of constraint on credit in those areas... how can you rotate, at least in the U.S.? Argues the rotation from tech to cyclicals is fundamentally flawed because the cyclical industries depend on easy credit (private credit) which is now showing stress. This implies near-term pressure on tech/NDX as the rotation narrative fails.

1 calls

-3

no reliable edge (random outcomes)

yields

I don't agree [that yields have to bounce] for a number of reasons. Look at what's happening in Japan. Japan's inflation is lower, Japan's rates have started to turn to lower. We are still in a fungible global bond market and people are looking for the highest yields. We still think the Fed is going to cut three times this year. Global disinflationary pressure from Japan, Fed cuts, and fading fiscal concerns support lower yields. The bond rally is described as 'defensive' amid equity rotation.

3 calls

no reliable edge (random outcomes)

12/11/2025 1:47:48 PM	medium term cautious down	21 days later	-0.17%	+0.08%

Introduces George Goncalves and the theme of high conviction for a banner year versus market inconsistency.

Jonathan Ferro
George Goncalves

The starting point matters. The idea of rotating out of highly valued tech into industries that need it is challenged because those industries have been kept afloat by low rates and private credit.

If credit constraints emerge in middle-market lending, small businesses will suffer, making a rotation difficult.
Asks if the private credit issues are canaries in the coal mine like 2007-2008.

Jonathan Ferro
George Goncalves

It's worth monitoring, but the focus is on individual credits and providers. This may be part of a cycle where overcapitalized banks didn't lend, forcing private credit to step in, and now we're coming full circle.
Asks about consumer stress given the K-shaped economy.

Jonathan Ferro
George Goncalves

You cannot look at data in aggregate. The 80-90% are stressed. It comes down to collateral and market valuations, making a perfect rotation into industrials difficult.
Notes the S&P is only 2% off highs despite the coiling market and asks why growth optimism isn't reflected.

Jonathan Ferro
George Goncalves

The bull market has stalled. There's a vicious rotation beneath the surface.
Asks if he agrees that yields have to bounce, given they've come down to 4%.

Jonathan Ferro
George Goncalves

I don't agree for a number of reasons. Look at Japan: inflation turned lower, rates are heading lower. We're still in a fungible global bond market. We still think the Fed is only going to cut three times this year.

Fiscal concerns may be easing, taking that pressure off the bond market. The bond rally feels defensive compared to the equity rotation.
Asks why we would get a bond rally if the administration will find other ways to enact tariffs.

Annmarie Hordern
George Goncalves

You'll have a market reaction if IEEPA is struck down, but we think there's a Plan B and Plan C. The market would react to the strike-down.
Asks why he still sees three rate cuts despite hawkish Fed commentary on the labor market and goods inflation.

Annmarie Hordern
George Goncalves

Goods inflation is a small part of the basket. Disinflation is happening in housing. The Fed has been scared by inflation and did a disservice by not cutting sooner. Those three cuts should have been done already.

The minutes saying they're thinking about hiking was premature.
Questions the Fed's commitment to 2% inflation given they've been above target for five years.

Jonathan Ferro
George Goncalves

It is about the outlook of where you think you'll land. They cut when inflation was even higher. Now they're getting skittish.
Asks if he agrees the Fed is on a prolonged pause until leadership changes.

Jonathan Ferro
George Goncalves

That's convenient. Everyone puts their views in the second half. Our view is more nuanced. Any Fed will do the right thing if the data turns.

If we get a series of weaker jobs data and inflation heading the right direction, Powell could cut at his last meeting.
Asks why he moved from four to three expected cuts.

Annmarie Hordern
George Goncalves

The Fed is not showing a sense of urgency. There will be a reluctance to cut right ahead of the midterms. You have to start easing sooner to see the net benefits.

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