It’s hot. Too hot.

Both here, on the island where I reside, and also across the US economy where, according to the latest ADP report, the labor market is adding jobs at the briskest pace in 16 months. After 500bps of Fed hikes and counting.

If NFP underwhelms, or just matches expectations, Thursday’s flaming-hot ADP report will be a distant memory, but the combination of a stunningly robust read on private sector hiring, still elevated vacancies, a sharp drop in announced job cuts and an above-consensus read on the services sector plainly suggested the Fed has a lot of work to do to engineer below-trend growth.

Markets responded accordingly, with a belly-led selloff in rates and what counted these days as a “bad” session for equities. Good news was bad news by virtue of being a little too good. Treasurys were off their cheapest levels by the close, but two-year yields reached a new cycle high near 5.12%.

Although the move was faded, the 2s10s flattened beyond -107bps at one juncture, before re-steepening. The return of four-handle 10s was another notable from Thursday.

To be sure (and to reiterate), NFP and CPI can effectively veto the signal from all other US data as it relates to Fed policy, but with officials clearly intent on hiking this month, and the market all but fully priced for another move (23bps), it’s very difficult to see a path to another skip, particularly given the length of time between the July FOMC meeting and the September gathering (the “next chance,” so to speak).

The incoming data and the read-through for rates is too much for equities to ignore, much as they’d prefer to keep rallying. Every print like June’s ADP headline looks like evidence to suggest “sufficiently restrictive” is at least 50bps higher, and also nods in the direction of a higher neutral rate. That’s challenging for an equity market dominated by long-duration growth stocks.

Recall that although the rally is narrow, stocks are broadly expensive. The median P/E is nearly as rich as the aggregate index multiple, which has re-rated fairly aggressively despite stubbornly elevated real yields. 10-year reals neared 1.80% on Thursday and now look entirely disconnected from the rally on Wall Street.

It’s very unlikely that stocks will be able to ignore the data for much longer, especially given the Fed’s explicit pretensions to a higher terminal rate and determination to hold near terminal (wherever it is) until the economy cools consistent with a return to price stability as policymakers arbitrarily define it.

With the caveat that cooling wage growth unquestionably helps take the edge off, the risk of a positive stock-bond return correlation (i.e., stocks and bonds selling off together as they did in 2022) rises the longer the data outperforms. You could argue that irrespective of what happens from here, the majority of the tightening is behind us unless you think terminal is in the double-digits, so rates vol should at least be more stable going forward. But there’s still very little visibility about the medium- to long-term.

Presumably, voter demands on fiscal policy will only increase going forward. The likelihood of developed market electorates accepting austerity or any sort of “belt-tightening” is low given seismic shifts in the socioeconomic backdrop. Rearmament will likewise demand more federal spending, re-shoring is inflationary and so on. With some of the structural enablers that helped keep inflation low over the past three decades lost to the pandemic and the war, it’s possible that macro volatility will remain elevated in virtual perpetuity, which makes forming consensus about the “appropriate” level of bond yields very difficult.

In that kind of world, the outlook for 60/40 — the bedrock of multi-asset, balanced portfolios and the religion under which a generation of investors was reared — is uncertain.

“The disinflationary momentum since Q4 last year has been a major reversal of last year’s ‘high and rising inflation’ regime, which triggered a large drawdown for 60/40 portfolios,” Goldman said Thursday. “Inflation has declined materially from elevated levels but without much growth damage, creating something similar to ‘Goldilocks’ momentum for markets… a key tailwind for 60/40 portfolios YTD.”

Sessions like Thursday’s in the US — when the data suggests additional disinflationary momentum may be hard to come by due to persistent labor shortages and manifestations of a nominal growth impulse that refuses to be extinguished given nearly $30 trillion in “extra” household wealth versus pre-pandemic levels — raise the specter of renewed pressure on stock-bond portfolios.

As Goldman’s Andrea Ferrario put it earlier this week, “less worrying inflation should contribute to a more negative equity/bond correlation,” but a recent flip back into positive territory “caution[s] against dismissing too early the risk of higher rates weighing on equities.”