Hi YXI friends,

November FOMC would normally happen on a Wednesday, but Powell was kind enough to move it to a day after the US Election results.

We keep this note brief as the market seemed to have forgotten we have an FOMC on anyway, and it’s happening in just a few hours.

The market expects the Fed to cut 25bp today. I don’t see any reason to disagree with it. It is more interesting to see how Powell thinks about the surging long-term yields, inflationary pressure from Trump’s incoming government, and a weakening labour market after last week’s nonfarm.

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. Market front-ran the US Election with surging inflation expectations

US10Y Yield vs Fed Funds (https://www.tradingview.com/x/7ZxXWiax/)

It’s pretty incredible that the 10Y yield has risen by over 70bp since two days before the September FOMC, when the Fed cut the base rates by a whooping 50bp.

US10Y Yield vs USO v 5Y Breakeven (https://www.tradingview.com/x/ZQ7kWMWM/)

Initially, the move in long-term Treasury yields were driven by a spike in oil prices from Middle East conflicts. Higher oil prices can drive headline CPI expectations, which in turn push yields up.

However, concerns over oil supply have eased since October, but yields keep climbing. The market priced in a Trump victory quite early on, with inflationary concerns more focused around his tariff and tax cut plans. Higher tariffs and an expansionary economy are both inflationary (the former would have a higher, faster impact).

The market pretty much front ran the Election results. Now, the 5-year inflation expectation (i.e. 5Y Breakeven) is at 2.46%.

2. The Fed is getting cornered

The Fed now risks getting stuck. Given the rising inflation expectations, cutting rates would fuel the inflation concerns further.

However, given the latest nonfarm payrolls, not cutting risks falling behind the curve on saving the labour market.

Last week’s nonfarm payrolls show only 12k jobs were added, against 106k expected. Government hires were the second largest sector, which means a even gloomier, net-negative number for the private sectors.

Moreover, if Trump follows through on the mass deportation of illegal immigrants and tighten future immigration controls, it should have a tightening effect on the labour market.

3. What is the market pricing?

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