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Follow the Data

Published on July 2, 2026

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Dennis DeBusschere

Kevin Brocks

Sophia Wang

DAILY STRATEGY: Warsh being dovish or not dovish, yesterday, is a side show. It’s the data that matters. Our view remains that economic growth slows some in the back half of 2026. Our view would be consistent with the Fed on hold if Core PCE inflation comes in at 0.21% MoM for the remainder of 2026. Or a December 2026 or 1Q27 hike if Core PCE comes slightly above the 0.21% MoM. Under our forecast a hike between now and September – which the market puts at 73% odds – doesn’t happen. That would be positive for Cyclicals in general and the Retail, Banks, Transports and Airline names we are long.

Unfortunately, we have relatively low conviction (6 out of 10) on the data being dovish enough to take a September hike off the table. The risk of well above 0.21% MoM on Core PCE is real. Also, the labor market has not been the source of the core inflation overshoot. The risk of the labor market starting to contribute to the inflation overshoot would increase if the labor data is hot. Hot being defined as the declining unemployment rate. That would be hawkish.

In-line payroll readings (4.3% urate in particular) would be BULLISH. Slightly weaker than expected payroll would be bullish. Yields would have significant downside risk. Given 75% odds of a hike by September.

Again, we have lowish conviction on how the data will come in, which means our views of the world can shift quickly depending how the next few payrolls and inflation prints. Apologies for this in advance.

FYI – Our pre-payroll survey showed the highest level of risk-on positioning since December 2025, which is somewhat surprising given respondents also expect an above consensus payroll number and lower U-rate, which would lean hawkish. Participants expect payrolls of 133k (vs. 115k Bloomberg consensus), average hourly earnings in line at 0.3%, and the unemployment rate to fall to 4.2% (vs. 4.3% consensus). Despite those expectations, 52% believe the market reaction will be risk-on.

We wonder if the decline in oil prices is leading some investors to believe that hot economic data is now ok. I.e. the Fed won’t have to hike in response to hot data. We disagree. See the continued divergence between 2yr yields and oil prices, which is related to investors pricing in stickier core inflation. A lower unemployment rate, as an example, would increase the odds that Core Service inflation remains sticky.

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