For markets and, in some ways, for the US economy, this is probably as good as it gets. Assuming the Fed can’t pull off a soft landing, that is.

On an unrounded basis, headline inflation was below 3% in June, we learned this week. Consumer sentiment rebounded dramatically early this month, data released on Friday showed. And big bank earnings suggested that although borrower trends are normalizing, upper-middle-income Americans (you know, the suburbanites who persist in the fantasy that leasing an X5 means you’re rich) aren’t in anything like dire straits.

Sure, you could conjure a few ostensibly troubling headlines from the first of this reporting season’s bank results. For example, losses on loans in Citi’s personal banking unit jumped 78% YoY (and 13% from Q1).

Credit costs rose sharply amid write-offs tied to the cards business, but as Mark Mason pointed out, we aren’t even back to normal loss rates yet. Note that revenue in the personal banking business rose 11% from the same quarter a year ago.

Not to be uncouth, but it might not be the worst thing in the world from the perspective of an economy still grappling with elevated core inflation if credit trends normalize.

Obviously, you don’t want lower-income households struggling to pay for essentials (and there’s evidence of that, unfortunately). But at the same time, credit card rates are the highest in at least 50 years+, according to Fed data. If loss rates don’t rise at least a little bit against that backdrop, it’d suggest the inflation battle is nowhere near won.

As Bloomberg put it Friday, bank customers are “borrowing more and stomaching higher rates to do so.” That’s fine as long as it doesn’t suggest that a combination of legacy pandemic cash buffers, hot wage growth and a rekindled wealth effect (from rising stock and home prices) has emboldened consumers such that they believe their collective capacity to service debt is now far higher than it was just three years ago. If that were the case, the Fed’s job would be more difficult. And the stakes would be higher in a hard landing scenario.

For now, though, it’s Goldilocks. Soft landing odds have clearly risen. The tail risks haven’t materialized in the US, and even when one did (in March, with the regional banking crisis), it ended up a tempest in a teapot. The Fed will hike at this month’s policy gathering, but that may be it. The market now sees a path to 150bps of cuts by the end of 2024.

Terminal rate pricing came off the boil this week commensurate with evidence of disinflation in the CPI and PPI figures. The visual above gives you a sense of how expectations have changed in just seven days.

This isn’t what bears want to hear, but I don’t know what to tell you. It is what it is. Maybe it’ll be something different in a month or two, but right now, inflation in the US is receding, and while the YoY headline prints may rise later this year, core should trend lower. Wage growth is cooling, albeit not quick enough. And although progress is a bit choppy, job vacancies have come down a lot from the peak, with virtually no increase in the unemployment rate, an unprecedented conjuncture. At the same time, Treasury’s cash rebuild looks to be proceeding in a benign way+ — so far.

Headed into the weekend, bonds sold off on the ebullient University of Michigan sentiment report. But even with Friday’s bear flattener, two-year US yields were still 35bps below the cycle highs reached last week. Small wonder equities were content to trade sideways on the way to a solid week of gains.

From here, things get binary. If we continue along the current path, inflation and wage growth moderate, the labor market bends but doesn’t break and corporate guidance over the next three weeks suggests America’s earnings recession did in fact trough last quarter. That’s the soft landing path.

The other path dead ends in a hard landing either way. Maybe it’s an abrupt acceleration in layoffs amid a sudden loss of overall economic momentum. Or maybe it’s a stubborn labor market that refuses to give any ground and a likewise obstinate consumer who won’t stop spending, forcing the Fed to push the envelope until something really breaks.

Choose your own adventure.