Disinflation Incoming?

1.) RATES – Non-farm payrolls came out this morning and were quite a bit weaker than expected. But, as I’ve commented in the past, the headline number shouldn’t be the focus… revisions should. In that regard, downward revisions were fairly heavy. April was revised down by 31,000 jobs and May was revised down by 43,000 jobs. Both the labor and bond markets are signaling a disinflation style environment likely to be reported here in July. Markets tend to not love disinflation if it is accompanied by a deceleration in growth as well. Q1 2026 GDP came in at 2.1%, which was an acceleration from Q4 2025 of just 0.5%. In April and May markets responded accordingly as both growth and inflation accelerated. Q2 GDP is expected to be a slight deceleration. CPI is also expected to decelerate given the crash in oil prices. Some CPI Nowcasts for July show it dropping to 3.59%. The cycle peak in May was 4.25%. If both of these hold true – GDP and CPI decelerate – we could see some downside equity market volatility and rates would likely continue to drop. This was a good spot for rates to reverse, tapping the top end of trend (shaded area), now making another lower high. What’s this saying? If an investor wants bond exposure, this isn’t a bad spot to add. Bond volatility (MOVE Index) continues to slowly trend lower as well. Good for that asset class.

2.) HEALTHCARE – Right now, a sector that might be ready to see more rotation into is healthcare. Consensus expects the sector’s EPS growth to accelerate from 3% in 2026 to 19% in 2027—the fastest pace since 2021. Valuations remain moderate, and the sector is trading at a 7% discount to the S&P 500. Right now, the healthcare sector makes up about 8-9% of the S&P 500. Rotation is everything. It doesn’t matter how cheap a stock looks. If the market decides to rotate into another sector, money will follow that rotation. Cheap stocks can stay cheap, and expensive stocks can keep getting more expensive. This is why understanding market flows is so valuable. Don’t fight the flow of capital. Follow where the market is sending it.

3.) OIL – If oil is going to bounce, this is near the spot where it would likely happen. The oil price slump has been faster and deeper than consensus estimated. Brent and WTI are now below the end of February levels. Why? Because the rise was mostly a geopolitical risk premium in spot prices, not a consequence of structurally tighter supply. That risk premium has been washing out. Meanwhile, a hoard of Iranian oil is building up at sea, as the Islamic Republic struggles to find buyers before the expiry of a 60-day window granted by Washington.