The “no landing” scenario – where the US economy keeps growing, inflation creeps back, and the Federal Reserve finds itself with no room to cut interest rates – had almost vanished from bond market chatter in recent months. And yet, all it took was one record-breaking jobs report to resuscitate this stubborn spectre.

Last Friday’s data, showcasing the fastest job growth in six months, a surprising drop in unemployment, and wage gains, sent Treasury yields soaring. Investors were left scrambling, hastily recalculating their bets and suddenly preparing for a larger-than-expected half-point rate cut next month.

This is yet another recalibration of the key. Traders who had been banking on a slower economy, easing inflation, and a juicy string of rate cuts pouring into short-term US bonds now find their strategy undone.

Instead, Friday’s report has rekindled fears of an overheating economy, derailing the Treasury rally that had comfortably driven two-year yields to multi-year lows.

Of course, the real issue on the horizon was always higher interest rates, not the cuts many were dreaming of. The Fed might now halt its rate-slashing spree – or, the irony of ironies, even be forced to hike rates again.

The market debate has been circling the same old question: Can the economy pull off a “soft landing” without triggering a recession, or are we hurtling towards a “hard landing” as growth slows sharply? The Fed had cautiously shifted gears in September, starting its pivot with a half-point cut to safeguard a labour market it had spent two years battering in its inflation battle.

Yet Friday’s job report has fuelled those who believe there’s a glaring mismatch between the Fed’s cuts, record-high stock prices, a robust economy, and inflation still miles away from the Fed’s 2% target. In other words, the “no landing” scenario is back—alive and kicking.

Commentators like Mohamed El-Erian and former Treasury Secretary Larry Summers have already weighed in, warning the Fed not to be boxed in by the markets’ optimistic rate cut projections. El-Erian reminded us that “inflation is not dead,” while Summers jumped in on X (formerly Twitter) to declare that the Fed now faces both “no landing” and “hard landing” risks—adding that last month’s hefty rate cut was “a mistake.”

For some, the Fed’s disproportionate cut, coupled with China’s surprise stimulus, has tilted the odds against growth. A 50-basis-point cut? That should definitely be off the table now. The combination of Fed easing and China’s stimulus could very well set us on course for a crash landing.

Meanwhile, inflation worries are bubbling up again, thanks to rising oil prices. The 10-year breakeven rate, a measure of bond traders’ inflation expectations, hit a two-month high after plunging to a three-year low in mid-September – all just in time for next week’s all-important consumer price data.

Swap traders, who previously hoped for a quarter-point Fed cut, are now bracing for just 24 basis points of easing at the November meeting. That’s a significant downgrade from the 200 basis points they had been betting on just a month ago. Still too optimistic? Perhaps.

This rethink of Fed rate expectations has certainly doused the bond-buying frenzy that delivered five straight months of gains for Treasuries – the best streak since 2010. Ten-year Treasury yields have spiked more than 30 basis points since the Fed’s last meeting, nearing 4% for the first time since August.

The sudden shift has also derailed a popular strategy in recent months: betting on aggressive Fed easing by “steepening the curve” – essentially wagering that short-term bonds would outperform longer-term debt. Instead, two-year yields surged 36 basis points last week, the largest jump since June 2022. At 3.9%, two-year yields now hover just 6 basis points below the 10-year bonds, down from a 22-point gap at the end of September.

But let’s not get too carried away – one jobs report doesn’t make a macro view, as some analysts argue the labour market is still showing signs of weakening. Whether Jerome Powell moved too early after moving too late remains a million-dollar question. Stay tuned – the next few months will reveal if the Fed’s balancing act has been more stumble than stride.