Buy the rumor, sell the fact into Fed + global macro updates

Consensus narratives are starting to embrace the idea of more aggressive Fed cuts, with a focus on labor market risks. Given the price action so far, the Fed meeting next week could end up being a “buy the rumor, sell the fact” event.

We are taking profits on our long SOFR, while retaining a long USD bias into next week. We add long USDKRW as our preferred long USD exposure alongside short EURUSD. We close our short CNHKRW for flat and stop out of short AUDUSD.

Today has a few similarities to September 2024. In particular, there are heightened concerns about the US labor market against a backdrop of resilient growth leading indicators, while at the same time the USD is selling off and yields are falling. We suspect the Fed cut next week could mark a tactical low in yields and the US dollar given the relatively benign growth and inflation outlook foreseen by our leading indicators (laid out in our September G3 Leading Indicator Watch). 

The US 2s5s10s spread has fallen persistently all year long and is starting to stabilize. Back in January, we noted how the surge in 2s5s10s at that time could be interpreted as the market worrying about the Fed hiking the economy into a slowdown, which warned of a yield peak and equity drawdown risks. 

Today the opposite is true: the drop in 2s5s10s now suggest the market sees the Fed cuts helping to stabilize the economy, which could mark a low in yields. SOFR March 2026 futures have already risen 40bps off the August lows, reducing the risk-reward of betting on lower yields from here and encouraging us to take profits.

At the same time, it is notable that our US dollar FX Edge models are starting to stabilize and recover, pointing to an improving cyclical outlook for the US dollar. The DXY has also essentially traded sideways for the past 2 months, with stabilizing breadth. This leads us to retain our long USD bias.

In particular, one new long USD exposure we like is long USDKRW, which triggered a new medium-term buy signal on our FX Edge model this month.

Carry matters again as seen in the performance of EM FX so far this quarter. Higher carry currencies have been outperforming quarter-to-date. The worst fears about Trump's trade negotiations have not been realized, removing a support for Asian FX. We close our previous short CNHKRW trade for flat and embrace a long USDKRW position.

At the same time, we are stopping out of our short AUDUSD, which has broken higher out of its recent range. The large speculative short positioning is now at risk of further squeezes. At the same time, economic data in Australia is improving again, for example home purchase sentiment is rising. 

Finally, we are sticking with our short EURUSD position and recommending an alternative expression for the trade, betting on a convergence in the SOFR Dec 25/26 spread with the Euribor Dec 25/26 spread.

The SOFR and Euribor curves are discounting a big policy divergence in 2026, with 3 Fed cuts priced vs 0 cuts for the ECB. We think this spread is too wide given our leading indicators do not see a massive divergence between US and Eurozone growth or inflation. It is also notable EURUSD has diverged with the Euribor vs SOFR curve.