June payrolls cooled to a solid-but-softening pace. The read that matters isn't the headline — it's that wage growth stayed muted even with steady hiring. The labor market is not the source of inflation, and it isn't cracking either. The front end took that as room for the Fed to stop leaning hawkish.
The tape: 2Y 4.12% (−6.4bp), 5Y 4.21% (−3.8bp), 10Y 4.47% (−1.8bp), 30Y 4.98% (+0.5bp). 2s10s +34bp (+4.6 on day), 2s30s +86bp (+6.9). Dollar softer, gold $4,127 back above $4,100, IG OAS ~76bp and HY ~275bp roughly unchanged — soft, not recessionary.
A cooling labor print used to bull-flatten. Under Warsh it bull-steepened. With forward guidance retired, the front end does all the reacting — and it did, unwinding hike premium in a 6bp move. But the long end refused to follow: 20s and 30s cheapened. Strip the guidance that anchors it, and term premium stays bid even on soft data. The reaction function changed, and today is the proof.
The bigger point: inflation has run above the 2% target for five years. The old playbook assumed a softening labor market would deliver the disinflation; instead unemployment held near 4.3% while inflation ran hot, and core never returned to target. Warsh can't wait for the labor market to crack to declare victory — it won't, and the miss is structural, not cyclical.
The read: a solid-but-softening labor market gives Warsh space to keep pressure on inflation without forcing the issue on the front end. The market will let the front end reflect data but won't trust the target at the long end — so it steepens. Watch the wage line, not the headline count.
Full PDF: https://tinyurl.com/Dispatch070226
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