If there were questions as to whether we’re living in a “bad news is good news” macro regime, Tuesday’s price action helped answer them.

With all the usual caveats about thin August markets (this week particularly) and the increasingly pervasive influence of option hedging dynamics and systematic flows, it’s safe to say US equities (and rates) were listening closely to the first of this week’s deluge of key macro data out of the world’s largest economy.

The downside JOLTS surprise and a big drop in consumer confidence might suggest the US is finally hitting that air pocket the recession crowd warns about week in, week out, but markets were more than happy to embrace the “disappointing” prints with open arms.

Why? Simple: Until Tuesday, it looked as though the US economy might be accelerating again, a perilous development with core inflation still more than double target and the vaunted “wealth effect” back in play thanks to the summer equity rally and renewed gains for home prices.

Consider this: The Cleveland Fed inflation nowcast has (or at least had, as of this writing) August CPI running 0.8% MoM and core at nearly 0.4%. That’s too hot. Data like Tuesday’s goes a long way towards allaying inflation concerns and thereby helps ease fears of an overzealous Fed.

Rates reflected as much. Tuesday’s bull steepening impulse was fairly pronounced, and the front-end rally saw two-year yields fall 12bps, sinking well below the five-handle they reclaimed this month.

Aside from payrolls Friday, it was the biggest short-end rally since mid-July. The bullish tone in Treasurys was aided by a solid seven-year sale.

There were meaningful shifts in Fed pricing. Hike premium for November was trimmed, markets pulled forward the first cut by a month (to June) and added 15bps of incremental easing to year-end 2024 pricing compared to Monday.

The read-through for stocks, which were bedeviled in August by rising rates, was obviously bullish, led by rate-sensitive tech.

“The Fed has endeavored to engineer a controlled deceleration of the real economy and, at present, the process continues to go according to plan,” BMO’s Ian Lyngen and Ben Jeffery remarked. “The net of this week’s events thus far has conformed well with our ongoing expectations that as the rest of this year unfolds, the no landing scenario will decrease in probability, swiftly giving way to a soft landing narrative and, eventually, a drop in economic activity that is significant enough to trigger the ‘overtightening’ conversation that is likely to follow the current honeymoon of the hiking cycle.”

One Bloomberg blogger was less optimistic. “Recessions tend not to happen gradually, but precipitately,” Simon White wrote, warning that now is not the time for complacency, particularly when “most assets are pricing in a low probability of a recession.”

White’s urgent tone aside, the downturn probably hasn’t started yet. As the assiduously even-keeled Lyngen put it, “the sun is still shining, the sea is calm, the drinks are plentiful and no one is yet lamenting the return to reality.”