US yield curve signals real growth fears, not just safe-haven flows

Amid all the geopolitical rumblings, reports are surfacing that Zelenskyy is now set to sign the mineral deal—after supposedly being nudged by his European handlers and the Biden-Obama crowd who, rumour has it, put him up to the task of testing Trump’s resolve in the Oval Office. That experiment, as we all saw, ended in a diplomatic faceplant.

But while the political theatre plays out, markets have shifted their focus to something far more pressing: a potential U.S. economic slowdown. This tells us that while the tariff tantrums and geopolitical chess moves dominate headlines, the real story unfolding is the market’s growing conviction that the U.S. economy is losing steam—fast. The debate is no longer if the Fed cuts, but when and by how much. Given the risk-off environment and the U.S. yield curve reflecting genuine growth concerns rather than just safe-haven demand, this sets up well for a short USD/JPY trade.

Of course, the lingering tariff risk is the one glaring issue keeping us from unloading a massive clip of unused gunpowder. If Trump pulls the trigger on the next round of trade levies, the market’s reaction function could throw a temporary wrench into the setup. Still, for now, the yen’s safe-haven appeal looks good in a world where real economic risks are mounting, and that’s a trade worth watching.

This sets the stage for a high-stakes January U.S. payrolls report on Friday. A weak print would send rate-cut bets into overdrive, with markets potentially starting to price in three or even four Fed cuts this year.

The shift in rate expectations has already been dramatic—just a week ago, Fed fund futures implied 46bps of easing by December; now, that number has jumped to 69bps. Meanwhile, 10-year Treasury yields have extended their rally, tumbling to 4.22%, marking a 35bps drop in February—the biggest monthly decline since late 2023.

And if that’s not enough for the macro bears, Fed Chair Jerome Powell will step into the spotlight just hours after the jobs report to offer his take on the economy’s trajectory. He won’t be alone—at least seven other Fed officials are scheduled to speak this week, making it a potential minefield for markets already second-guessing the timing and scale of the Fed’s next move.