Hi YXI friends,

In this weekly update, we look ahead to the key data on Friday - the February Nonfarm Payrolls. This time, my concern is a worsening in the labour market since January. I will walk through exactly what forms this expectation.

I will explain how rates could respond, across the Fed Funds, 10-year and 30-year Treasuries, and TLT.

In the second half of the article, I provide a historical perspective on S&P 500, as well as the latest seasonality and price technicals for SPY, QQQ, and IWM.

Let’s dive in!

Table of Contents

• 1. US Nonfarm Payrolls Preview

• 2. Rates (TLT)

• 3. S&P 500 (SPY)

• 4. Nasdaq 100 (QQQ)

• 5. Russell 2000 (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. US Nonfarm Payrolls Preview

There are a few key events tomorrow worth watching out for. First, we receive the US Nonfarm Payrolls number for February at 8:30 ET.

The Fed has been comfortable pausing rate cuts because the labour market has been pretty strong, with the unemployment rate well below the “panic” threshold of 4.3% (I derived this number from their FOMC Economic Projections). The last set of Payrolls also saw strong upward revisions of the previous data.

Secondly, we also get the Fed’s Monetary Policy Report, which highlights the Fed’s latest thinking around the labour market, inflation, financial conditions, and potentially QT. The last set of report actually highlighted (not sure if many people took notice) that US equity markets were expensive. This could tilt the Fed towards holding rates for longer as they don’t feel financial conditions are too tight for markets.

Finally, Powell speaks at the University of Chicago Booth School of Business after midday on the topic of the Economic Outlook. I don’t think he will surprise the market in any meaningful way ahead of the FOMC later this month, but he could provide further reasoning on holding rates steady in the near term, especially around tariff uncertainties, immigration impact on labour market, and the inflation trend ahead.

Nonfarm Payrolls Expectations

The market expects Nonfarm Payrolls to arrive at 156k in February, which if realised would be stronger than January. The market expects Unemployment Rate to remain steady at 4%.

I think the labour market could show weakness on Friday, with unemployment rate potentially ticking up to 4.1%.

Changes Unemployment Rate vs Initial Claims

In our Nonfarm Payrolls analysis, I find that the changes in initial claims for the month holds the highest predictive power for unemployment rate changes. Higher initial claims tend to precede an uptick in unemployment rate.

In February, initial claims came in at 224k, an 11k rise from January. This could power a move up in unemployment rate from 4.0% to 4.1%.

Moreover, the labour market could have slowed on tariff uncertainties and DOGE efforts. Businesses may be unwilling to hire too quickly while Trump announces tariffs every other week. At the same time, the Federal workforce should start to take a hit with DOGE aggressively cutting costs - at least the hiring wouldn’t keep the prior pace. In December and January, the Government hired 30k+ new workers each month.

We will talk about the impact of a potentially weaker-than-expected report on rates and stocks below

2. Rates (TLT)

While it’s fun to beat “the consensus” on data calls, it’s more important to know what to expect in terms of market impact.

If the labour market does weaken in terms of unemployment rate rising, we could see yields moving lower on the back of it, as more rate cuts get priced into the curve.

The Current Market Projection of FOMCs

The rates market currently expects the first cut to take place in June, and a second cut in September. This sounds about right given the weakening growth outlook amidst intensified tariff talks.

However, if the unemployment rate ticks up, we could see the December meeting also penning a cut. This will take the total for 2025 from 2 to 3, higher than the Fed’s December projections.

Fed Liquidity vs Yields

Moreover, the bond yields have recently benefited from rising Fed liquidity, primarily due to the Treasury General Account running down its balance ($270 billion in the past month).

This has provided critical liquidity to the bond markets, which meant higher bond prices and lower yields. This is a benign environment for bonds, combined with the general economic growth concerns as well as Musk’s DOGE efforts to cut the budget deficit.

Yield Analysis and TLT

US 10-Year Yield (https://www.tradingview.com/x/2EihFNzk/)

Since January 13th, the 10-year Treasury yield has fallen by 50bp. Although there has been a rebound this week, my primary expectation is for yields to continue lower after Nonfarm Payrolls, especially if the labour market data came in worse than market consensus. The wave v target is just below 4%.

US 30-Year Yield (https://www.tradingview.com/x/cDMxoIRZ/)

I see a similar downward trend for the 30-year bond yield, although the forward yield for the 30-year region is 20bp higher than the 10-year region due to term premium. My wave v target is below 4.3%.

TLT (https://www.tradingview.com/x/jzpRy3Ek/)

TLT has a duration of 16 years, meaning a 1% change in interest rate moves TLT’s price by 16%. I expect TLT to move higher upon weaker Payrolls. The wave (v) target is $94+.

Investors who want to shy away from the long-duration supply risk (e.g. rising budget deficit puts pressure on the long-term bond prices) can take a look at TLH instead, which is less sensitive to interest rate changes.

3. S&P 500 (SPY)

Claim Your 7-Day Free Access To YXI Premium