Insights 
VT 
Improved Economic Outlook
As a result of the improved economic outlook, Goldman Sachs increased its forecast for GDP growth in 2025, from 1% to 1.25%. It also anticipates peak unemployment will reach 4.4%.
In plain terms, this development suggests a more stable economic footing ahead, albeit with a few caveats. The lowered recession estimate reflects renewed confidence—driven, it appears, by the recent stabilisation in international trade dynamics. The shift in rhetoric and actual movement on tariff easement is not trivial. Immediate pressure on firms reliant on import chains has softened, and that should alter expectations for risk over the next two to three quarters.
What matters here is not only that the forecast for a downturn has decreased, but that financial conditions now mirror a version of the pre-tariff period. That return to form is quiet but telling. With tighter tech export rules now in partial reverse and rare earth outputs no longer as tightly controlled, sectors previously pressured by uncertainty can begin recalibrating their outlooks.
Solomon’s revised GDP projection—modestly raised to 1.25%—may signal an underlying assumption that corporate investment won’t suffer a prolonged delay. Meanwhile, the unemployment tip—peaking at 4.4%—is a nudge higher than many labour market optimists might have hoped for, but it’s not a red flag. Rather, it points to the expected cooling in hiring that comes with a slower, but still expanding, economy.
Reduced Macro Risk
From our side, we should fully appreciate what these pieces imply. Lower market fear linked to policy shifts means that volatility around trading desks may taper, especially in rates and equity-linked derivatives. We’re watching implied vol surfaces smooth, particularly across Treasuries and major indices. Option demand tilted toward downside insurance has relaxed somewhat, indicating a step back from hard hedging.
What we now face is not a binary shift in trend but a narrowing of tails. The odds of dramatic movement in macro indicators—jobless claims, purchasing manager indices, CPI surprises—are reduced. And so the pricing of risk premium across forward curves begins to dampen.
This subtly reduced macro risk must factor into our positioning. We need to recognise that a greater share of realised volatility might now stem from endogenous factors, rather than top-down macro shocks. That should inform UV curve construction and skew management this month. Additionally, with fewer firms urgently de-risking, liquidity-side dislocations could ease, opening short-term windows to capture mispricings without aggressive hedges eating into alpha.
Tracking this momentum also means reviewing convexity exposure. With less fear-driven movement expected in central bank rhetoric or trade announcements, there’s a narrower base for sharp repricings. This affects strategies anchored in long gamma or calendar spreads—both may need trimming on conviction until new catalysts appear.
Given this context, readjusting attitude toward risk premia is not just healthy—it’s necessary. Tail hedges, richly priced under May expectations, no longer offer the same utility unless linked to more isolated micro events. Directionless positioning becomes less rewarding if mean reversion continues. We’re seeing premiums leaning flatter, particularly in fixed income vega structures. Watching the front end for early signs of surprise in job data remains key, but the urgency has lowered.
The overall message is to downgrade big-move expectations, unless triggered by under-the-radar, idiosyncratic events—a decent opportunity to reassess not just position size but the instruments used to express directional views. The data is giving us permission to pare back protection, and when priced appropriately, lean into relative value expressions.
