Hi YXI friends,

Here is a quick take on the latest FOMC Minutes as well as a Nonfarm Payrolls Preview ahead of the data release at 8:30am ET on Friday.

I will perform a full analysis on the December Nonfarm Payrolls and yields after the market close, over the weekend.

There is also a service announcement regarding China in part 3.

Table of Contents

• 1. FOMC Minutes Show Fed’s Concerns For Tariff Pla …

• 2. Could Nonfarm Payrolls Increase Bets On Cuts?

• 3. China (Service Update)

DISCLAIMER: This newsletter is strictly educational. Any information or analysis in this note is not an offer to sell or the solicitation of an offer to buy any securities. Nothing in this note is intended to be investment advice and nor should it be relied upon to make investment decisions. Any opinions, analyses, or probabilities expressed in this note are those of the author as of the note's date of publication and are subject to change without notice.

1. FOMC Minutes Show Fed’s Concerns For Tariff Plans

The FOMC minutes on Wednesday indicated that several FOMC members have become less optimistic about the timeline of inflation returning to the 2% target. This was due to their speculation on the incoming administration’s tariff policies.

The key words here are “uncertainty” and “assumptions”.

While one could use the 2018 playbook, I have some pushbacks against the market’s front-running (yes, getting ahead of actual policy announcements) of the tariff plans so early in the game.

Firstly, the US-China trade deficit has substantially decreased since the 2018 peak, from $418 billion to $245 billion in 2024.

Moreover, China has significant leverage in its control over rare earth minerals that are key to both civilian and military technologies, providing a source of negotiation leverage for China.

Secondly, as China enters an economic recession (the official statistics won’t show this, but the reality is one on the ground), there will be a decline in their energy needs, putting downward pressure on oil prices. Combined with an oversupply capacity (producing more goods than needed domestically and trying to export them instead) and a strong US Dollar, the inflationary effect of tariffs (still unannounced) may not be as big as the market predicts.

Therefore, I would caution chasing yields here as the market paints a very pessimistic scenario.

2. Could Nonfarm Payrolls Increase Bets On Cuts?

While bond yields are soaring, the very front end of the yield curve has been largely stable, predicting just a 40bp cut for 2025.

Nonfarm Payrolls are out at 8:30am ET, predicting a sizeable 164k net new jobs added, and a 4.2% (flat MoM) Unemployment Rate.

However my analysis of the changes in Initial Claims from December suggests a potential uptick in unemployment rate.

The caveat is that unemployment rate has been notoriously challenging to predict perfectly. It often diverges from the headline Nonfarm Payrolls data, due to the differences in the Household Surveys (unemployment rate) and Establishment Surveys (Nonfarm Payrolls).

A softening in the labour market could increase the market’s bet on more Fed cuts.

In late 1970s, Volker ignored the rising unemployment and focused on putting inflation to bed. However the result was that after raising the Fed Funds rate to 19%+, a recession was triggered with unemployment rising to 10%.

While Powell admires Volker’s decisiveness to raise rates aggressively, he probably would not want a recession to taint his legacy.

3. China (Service Update)

This is more of a service update. I am considering creating more content around the Chinese economy, as it is becoming an increasing source of global economic uncertainty as well as liquidity in the coming years. This is on top of a potential Trade War 2 under Trump.

The advantage of my analysis is that I speak Chinese natively and I can read the local news as an insider rather than an outsider. As a rates trader during the first Trade War in 2018-19, I understood the severity of the situation, from both sides of the aisle, much better than my competition. This helped me successfully predict the Fed cuts in 2019 and making significant returns being long rates (lower yields). I hope to bring that edge to my subscribers here.