It’s probably fair to say US soft landing odds increased materially over the past several sessions.

Notwithstanding some cracks in the household survey, the May jobs report showed the labor market’s hanging in there, and then some. And back-to-back favorable reads on inflation (CPI and PPI) pretty plainly suggest downside “risk” to the new PCE forecasts from the June SEP (with the scare quotes to denote that “risk” is a good thing in this context).

In short, the soft landing crowd likely feels emboldened. As Nomura’s Charlie McElligott put it, confidence in the narrative is again at “peak volume” thanks to the benign CPI print.

That’s “particularly” true, he said, given the “increasingly obvious seasonality issue in the post-COVID economic data world.” By that, he meant upside surprises (i.e., ostensible US macro reheats) appear to be a structural data issue during Q1, but markets are beginning to get the joke: There’s a giveback in Q2, when the data appears to mean revert.

But getting the joke doesn’t always mean not trading it, and the slowdown optics are “emboldening buyers” in duration, Charlie said, noting that in Q1, buying was generally in the front-end, but it’s now migrating out the curve, into the belly, as “higher prices beget more buyers.”

Note that 10s were 4.23% at one point on Thursday. That’s nearly 50bps off the 2024 peaks, good news for the equity market leadership. America’s tech mega-caps are long duration assets, you’re reminded.

If you ask McElligott, the next two months are likely to be “a grinding vol bleed across assets,” as a summer slowdown in discretionary trading will be set against the same tyrannical vol supply overhang discussed in these pages on any number of occasions over the past year. Those strats and funds (VRP, and so on) “have to trade their strategy and AUM regardless,” after all.

That juxtaposition (between subdued discretionary trading and the same systematic vega supply) could amplify the impact of vol-selling, thereby feeding “a ‘grind higher’ move” for the benchmarks, Charlie went on, before noting that investors are pretty plainly inclined to “reward what’s work,” where that means the AI trade, mega-caps, quality, momentum and growth, “while the rest of the equities universe continues to yawn.”

The divergence of fortunes between what’s worked and what hasn’t (which, I’d note, mirrors the corporate “haves” / “have-nots” divide) is itself a vol bleeder through the correlation channel.

“Dispersion’s being  rewarded again, which perpetuates the index vol-selling cycle — rinse, repeat,” Charlie remarked.

Oh, and he suggested small-caps could feel crashy when they manage to rally. Although the spot-vol correlation for the S&P’s trying to normalize, the Russell’s likely to exhibit the “spot up, vol up” phenomenon on occasion.

Small-cap cyclicality, “maintains [a] positive spot / vol correlation… because it’s so shorted and under-owned that the only real hedge fear is of the right-tail,” McElligott wrote. That means that although the Russell “may very well stay ‘hated,’ when it rallies it will crash up.”