Well, the good news is, the US economy — all Potemkin Village derision aside — is doing pretty well.

That was the overarching message from this week’s raft of top-tier macro data, virtually all of which topped estimates, and in some cases handily.

Friday’s NFP headline and revisions suggested the world’s largest economy is adding jobs at a pace unseen in two years. The message from the government data was largely consistent with similarly robust figures from two private-sector estimates of last month’s job creation.

Meanwhile, the marquee surveys of manufacturing and services sector activity in the US spent a fifth month in expansion together, suggesting both sides of the economy are growing even with the headwind from rising input costs.

And despite the accelerated pace at which AI’s replacing humans in the technology sector, a separate government report suggested there are now more open jobs than Americans counted as officially unemployed for the first time since last summer.

The “bad” news is, all of that underscores the notion that the neutral rate for the US is likely higher in the 2020s, and as discussed here, the AI capex boom may make that argument even stronger. That, in turn, means the odds of more rate cuts are lower. Or should be lower if monetary policy isn’t beholden.

The saving grace for a new Fed chair under pressure to cut rates — or at least to avoid raising them in the presence of a return to four-handle headline inflation — may be an AI-driven productivity boom. But that’s a longer-term, secular story, not necessarily an argument for ignoring plain-as-day upside risks to inflation in the here and now, and certainly not an argument for cutting rates when you’ve already lowered them by 175bps from the cycle highs.

In the wake of Friday’s US jobs report, the short-end of the Treasury curve underperformed, with two-year yields up more than 10bps against a 6bps jump in benchmark 10-year yields and a modest 3bps move for the long bond.

The figure below, presented with a hat tip to BofA’s Michael Hartnett, shows you the long-term history of headline inflation, the unemployment rate and the 2s10s.

The unrounded UNR for May was 4.296% in Friday’s BLS release. Consensus for next week’s headline YoY CPI print is 4.2%.

So, we’re on the brink of a macro inversion — headline inflation may soon be higher than the jobless rate. Historically, that presages yield curve inversions and, unsurprisingly, trouble for markets.

Since 1960, there are only a handful of episodes during which the US unemployment rate equaled or fell below headline CPI. None of those episodes, Hartnett remarked, are “remembered well on Wall Street.”

The figure below shows you the spread between twos and Fed funds. With Friday’s selloff at the US front-end, we were back to the widest levels there since late-2022.

At more than 50bps above EFFR, twos are essentially arguing against the notion that the most likely trajectory for short-term rates is lower.

Equities may be oblivious to geopolitics, but they aren’t quite so unmindful of rates and Fed expectations. Headed into Friday afternoon on Wall Street, big-cap US tech was on track for its worst session since October 10 (when Donald Trump threatened new tariffs on China).

Before the jobs report, market pricing reflected about a 70% chance of a Fed hike this year. That pricing shifted meaningfully in the wake of the strong payrolls figures.

As the chart shows, traders have now fully priced a hike this year. Any upside to consensus on next week’s core inflation prints will almost surely see the market begin to wager on more than one increase.

At this juncture, I almost don’t have an opinion on where Fed funds will be at year-end. Trump’s going to pound the table for cuts, and many observers still insist we haven’t even begun to feel the impact of the three-month disruption to maritime traffic in the Strait of Hormuz.

But that latter contention, if true, could cut both ways. As the impact “realizes,” it could be a further upside risk to inflation, but it could also manifest as a downside risk to jobs through the demand destruction channel as prices rise. And it could impact corporate bottom lines in any number of ways.

Moreover, we haven’t seen the last escalation from Trump in 2026. I think everyone knows “Cuba’s next,” so to speak. What that’ll look like is anyone’s guess. It’s not obvious why the crusade to Make Cuba Great Again should be bearish for equities, but… well, any attendant drama will be another reminder of just how “interesting” these times of ours really are. For better or worse.

Coming full circle, spending power concentrated in the upper-half of the “K” complicates what might otherwise be a straightforwardly bearish assessment of a consumption-driven economy where household sentiment’s never been worse and the personal saving rate’s (almost) never been lower.

“US household equity wealth’s up $6 trillion YTD, follow[ing] a $10 trillion gain in 2025 and a $9 trillion gain in 2024,” Hartnett said, in the same note cited above.

“The K-shaped economy’s booming due to the wealth-equity ‘boom loop,’ and inflation’s flaring due to the ‘wealth-price spiral,'” he went on, before offering a word of caution ahead of the mid-terms: “Not all consumers are created equal, but voters are, and Trump’s inflation approval is now below the Biden lows.”