Goldman Sachs has lowered its forecast for a U.S. recession next year to 30%, down from 35%. This change follows improved trade relations after recent talks between the U.S. and China, which included agreements on tariffs and easing Chinese export rules on rare earths. Financial conditions are mostly back to what they were before tariffs, with a slight drop in uncertainty around trade policies. Although inflation data is limited, the impact of tariffs on consumer prices seems less serious than expected. Due to this better economic outlook, Goldman Sachs raised its GDP growth forecast for 2025 from 1% to 1.25%. They also expect peak unemployment to hit 4.4%. In simpler terms, this news indicates a more stable economy ahead, though some caution remains. The lower recession estimate shows renewed confidence, likely stemming from a stabilization in international trade. The discussions and actions regarding tariffs are significant. The immediate stress on companies that rely on imports has eased, which should change risk expectations over the next two to three quarters. What’s important is not just that the recession forecast has fallen but that financial conditions now resemble those before tariffs were implemented. This subtle return to stability is meaningful. With stricter tech export rules being relaxed and rare earth output not as tightly controlled, sectors that were uncertain can start adjusting their outlooks. The updated GDP projection—now at 1.25%—might imply a belief that corporate investments won’t face significant delays. Meanwhile, the unemployment peak of 4.4% is slightly higher than some optimistic labor market forecasts, but it’s not alarming. It reflects the expected slowdown in hiring, typical of a slower yet growing economy. We need to fully understand what these changes mean. Reduced market fear around policy shifts suggests that volatility in trading may lessen, especially in rates and equity-linked derivatives. We are seeing volatility in Treasury markets and major indices smooth. Demand for options protecting against downturns has eased, showing a move away from aggressive hedging. We are not facing a complete trend shift but rather a reduction in extreme pressures. The chance of sharp changes in macro indicators—like jobless claims, purchasing manager indices, and CPI surprises—has decreased. This leads to a drop in the risk premium pricing across forward curves. This reduced macro risk should influence how we position ourselves. We recognize that more of the realized volatility may now be driven by internal factors rather than large-scale macro events. This understanding should guide our construction of UV curves and skew management this month. Also, with fewer firms in urgent need of risk reduction, liquidity issues could lessen, providing short-term opportunities to capture mispricings without aggressive hedging strategies impacting returns. Monitoring this momentum means reassessing our convexity exposure. With less fear of sudden changes from central bank statements or trade news, the potential for sharp price adjustments is narrower. This affects strategies based on long gamma or calendar spreads, which may need to be adjusted until new catalysts arise. Given this situation, adjusting our views on risk premiums is essential. Tail hedges, once costly under earlier assumptions, are less useful now unless linked to specific micro events. Directionless positions may yield lower rewards if the trend of returning to average continues. We’re seeing premiums flatten, especially in fixed income vega structures. We should pay attention to early signs of surprises in job data, but the urgency has decreased. The main takeaway is to lower expectations for large market moves unless triggered by smaller, specialized events. This is a good chance to reassess not only position sizes but also the instruments we use for our directional views. The current data allows us to reduce protective strategies and, when priced right, focus more on relative value opportunities.

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