Hi YXI friends,

There is a lot of bearish sentiment out there, with the dominant narrative being that the US will enter a tariff / DOGE induced recession.

Today, we will review in detail the macro picture, including the labour market, inflation, and the GDP. I will lay out what Trump’s current strategy may be for markets and where his pain threshold is. I do think it is very important to remain balanced in the face of existing versus estimated data, and think more holistically about where markets are headed.

For rates, I remain bullish on bonds (i.e. prices higher, yields lower), although I understand that a 4th year of bear market creates a lot of investor skepticism.

For equities, my read is rather optimistic - I think there is a quiet liquidity upturn right now which should start to support risk assets. Moreover, I read the relentless selling to be much more panicky-sentiment driven into this week, where valuations have already reset to reasonable levels compared to the recent history.

Table of Contents

• 1. Are We In A Recession?

  • Nonfarm Payrolls Remain Solid

  • CPI Came In Cool

  • Atlanta Fed’s GDPNow at -2.4%

  • Does Trump Not Care?

  • When Pain Stops?

• 2. TLT

  • FOMC Projection

  • Term Premium

  • Fed Liquidity Turning Up

  • 10Y and 30Y Treasury Yields

  • TLT (https://www.tradingview.com/x/h8HuWBWu/)

• 3. SPY

• 4. QQQ

• 5. IWM

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. Are We In A Recession?

That is the most common question I hear this month.

Nonfarm Payrolls Remain Solid

While we foresaw the rise in the unemployment rate for February’s Nonfarm Payrolls data, the overall numbers are still very solid.

The US saw 151k net new jobs added even as the Government sector retreated from 44k new jobs in January to just 11k in February. 151k is a very healthy number - right at the median of the past 13 months.

The unemployment rate ticked up from 4% to 4.1%, which is still comfortably below the Fed’s red line of 4.3% and the same level as last June. The overall picture of the labour market remains reassuring for the Fed to continue fighting inflation.

The market’s main concern is the impact of DOGE, which likely leads to large public sector layoffs that are yet to be reflected in future NFP data. Will the private sector be able to absorb the Government exodus?

The market current thinks no, because of the uncertainties that tariffs are bringing to hiring. However, if 1) more companies are investing to build in the US due to the tariff threats and 2) Trump can go above and beyond on the tax cuts for corporates, the private sector could potentially absorb the government layoffs.

CPI Came In Cool

Ahead of the CPI, we suspected that the Headline CPI was going to come in lower than expected due to falling energy prices. I leaned towards a lower Core CPI too due to the hourly earnings, but felt unsure about Shelter costs.

Headline CPI and Core CPI both missed the consensus, coming in at 0.2% MoM. This translated to 2.8% YoY for the Headline and 3.1% for Core.

CPI Breakdown (MoM%)

The slowdown in CPI was broad-based. The most eye catching (although a very small component) was the airline fairs, which actually declined by 4% in the month. Shelter costs stayed flat.

This report should be welcomed by the Fed and the market, especially given that Core CPI got stuck at 3.2%-3.3% for 8 months.

But the market could be taking cooling inflation as recessionary signals.

Atlanta Fed’s GDPNow at -2.4%

This chart is what really spooked the market in the past 3 weeks. Atlanta Fed’s GDPNow estimate, based on a mathematical model that updates with economic data releases, suggest the Q1 GDP is -2.4%

Specifically, the estimate dropped from a +2.3% on February 23 to -1.5% on February 28 (net exports and PCE growth got revised down), and -2.8% on March 03 (both PCE growth and real private fixed investment growth were revised down).

There seems to be a heightened sense of uncertainty among both businesses consumers on the outlook of inflation and the economy. This anxiety could be self-fulfilling. As businesses and consumers anticipate tougher times ahead, they conserve cash and reduce spending. This can lead to a vicious downward cycle for the economy.

Does Trump Not Care?

Trump 2.0 does seem a bit different to Trump 1.0.

Firstly, Trump 1.0 was very much about the stock market performance, which Trump used as a barometer of his success as the President.

This time round, the focus is very much on the bond market instead. Trump, Bessent, and Musk are trying to carefully bring down the 10-year Treasury yield, regardless of the Fed’s willingness to cut.

Their plan is to first use DOGE to move towards a more balanced budget, which reduces the budget deficit and the costs of financing. I think in their strategy, short term pain in the stock market coupled with a brief recession is probably tolerable. Also, if a recession is on the card, the Fed may be forced to preemptively cut rates, like they did in 2019.

They want to extend and introduce new tax cuts to spur growth in the private sector, which is something of Reagonomics.

Bessent will continue managing the yield curve through issuing short-term bonds until the long-term yield is more manageable, by which I think means at least a 3% handle for the 10-year.

Finally, tariffs can drive companies to manufacture in the US, but also fill in some of the missing revenue from tax cuts. (There are a few more reasons for tariffs, but we won’t go there today.)

When Pain Stops?

I do suspect that there is a threshold - everyone has a number in their mind, including Trump - below which the current strategy’s aggression probably needs to dial down.

My best guesstimate right now is 15% from peak in the S&P. Why?

SPY has already fallen 10% from peak to trough, and Trump has not regressed on the tariff speak etc yet.

However, it’s likely NOT 20%, because Elon Musk is already feeling the pain of Tesla dropping by more than half. Otherwise, he would not have needed Trump to do a Tesla car show this week. A 20% drop in SPY, the formal bear market threshold, should be out of the question.

Therefore, I think the bottom line is probably right in between, and a 15% drawdown - near bear market but not quite - is probably an ok cost to pay.

Please note that it does not mean I think the market will tank to 15% drawdown - the market may do what it chooses to do - just that 15% is probably the number in Trump’s head as the bottom line.

2. TLT

FOMC Projection

The market currently projects almost 3 cuts for 2025, which is slightly more hawkish than last week.

I think it is reasonable to keep the expectation at 2-3 cuts for this year, as both the labour market and inflation are more or less on track with the Fed’s expectations. And the Fed expects 2 cuts if things are going according to plan.

This FOMC projection does not scream recession. It represents an orderly sequence that brings the Fed Funds rates towards Neutral.

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