It’s been a week since the combination of a blockbuster US jobs report and a surprisingly robust read on services sector activity across the world’s largest economy forced a rethink of peak Fed funds.

Of course, US monetary policy outcomes reverberate globally. That means market participants the world over are compelled to take note when both traders and policymakers shift their expectations for US rates.

The repricing witnessed since last Thursday is material — some 30bps, which had the effect of aligning market pricing with the December dot plot. Just as importantly, implied expectations for easing in the second half of the year faded, suggesting more buy-in for the “higher for longer” narrative.

“The market was gonna have to adjust terminal rate [pricing] higher, as the ‘imminent H1 recession’ / ‘Fed pause then cuts’ scenario was mispriced too rich, while an ‘animal spirits’ / ‘economic reawakening’ scenario from the recent Fed-fueled FCI easing was ridiculously underpriced as too cheap,” Nomura’s Charlie McElligott said Friday.

This represents an effective widening of the outcome distribution — markets have begrudgingly accepted that it might not be as simple as the consensus macro narrative coming into 2023 suggested it would be.

Remember: Many assumed a near-term deceleration in the economy, which would then justify a Fed pause as inflation continued to cool, all of which would open the door to rate cuts in the back half of the year. Accompanying that thesis were sequencing assumptions about the likely path of equities, which many believed would revisit the lows before getting the all-clear to recover later this year concurrent with a Fed pivot.

By the time January payrolls rolled around last Friday, all of that was out the window. Stocks were up sharply and animal spirits were stirring both on Main Street (e.g., signs of reinvigorated housing activity) and on Wall Street (e.g., rallies in speculative “junk+” and a meaningful re-rating in big-tech). Then came the jobs report which, all seasonal adjustment derision aside, cast considerable doubt on the idea that Fed hikes delivered thus far are sufficient to restore balance.

“Accordingly, the distribution of Fed rate-path outcomes has gone from an assumed view of ‘narrowing options’ over previous months to again now something with optionality for a higher ultimate destination and held longer,” McElligott wrote.

That’s ominous because, as Charlie went on to say, the reintroduction of uncertainty around the rate path is a recipe for cross-asset vol to “again percolate.”

Writing ahead of next week’s crucial CPI report, TD analysts including Priya Misra cautioned that, “Any indication that prices may be decelerating more slowly than anticipated could continue to increase the pricing for May and June hikes.”

Of course, the opposite is also true. A cool CPI report could see traders quickly reprice terminal back lower, setting the stage for another rally in bonds and stocks, which would then ease financial conditions, risking upside inflation prints down the road. And around we’d go on the merry-go-round of madness.