A moment of calm before the next storm in the Trump 2.0 era

US bond markets halted their turbulent descent, which had previously sent shockwaves through global financial centers. Investors are now bracing for pivotal jobs data that could potentially redefine the Federal Reserve's interest rate trajectory.

Treasuries found a moment of calm after a fierce rout catapulted 30-year yields to their loftiest peaks since 2023. The bond market wrapped early at 2 p.m. in New York, marking a solemn national day of mourning for former President Jimmy Carter, while U.S. stock markets lay silent.

As we tread into 2025’s uncharted waters, every top-tier economic indicator becomes a litmus test for the market's aggressive reevaluation of a hawkish Federal Reserve, now priced even more hawkishly than the Fed projections. Yet, it might take a genuinely disastrous report to quell the bond market's bearish fervour—specifically, a sub-100 K headline and an unemployment rate above 4.3%—and tempt traders to reprice a January rate cut dovishly.

One of the looming macro-policy spectres haunting the U.S. economy in 2025, ergo the biggest bond market in the world, is the threat of relentless inflationary pressures, potentially reignited repeatedly by Donald Trump's economically stimulating "2.0" agenda, which will not get priced out fully until calmer inflation reality pushes back on economic theory.

As Asia navigates through the final stretch of a tumultuous week, investors are likely headed for the sidelines. Yet, they hope the tranquillity that enveloped the dollar and US debt markets overnight will seep into Friday's Asian markets and hold things on an even keel.

Anticipation is heavy as the critical December U.S. employment report looms. Global markets are still rattled by this week's spike in long-term bond yields. This backdrop sets the stage for cautious, constrained trading in Asia, with all eyes fixed on the pivotal Non-Farm Payrolls—an economic indicator as heavyweight as they come.

Amidst this cautious backdrop, USD/JPY remains tightly wound around 158, setting a restrained tone for the opening of Japanese equities. Despite a generally weaker Yen this week, the Nikkei is on track for a weekly drop, strained by the global rise in yields.

Meanwhile, Chinese stocks are teetering on finishing the week without losses—a scenario essentially a double-edged sword after a 5% drop the previous week. While it offers a brief respite amid the persistent pessimism surrounding China's economic prospects, merely filling the weekly bear gap highlights investor tentativeness, reflecting deep-seated concerns about the country's economic trajectory amidst trade war uncertainties.

Across the pond, the British pound dipped to a one-year nadir. UK government bonds, or gilts, plummeted amid escalating worries that the Labour government may struggle to control the deficit as borrowing costs skyrocket.