I don’t know if maybe you noticed, but this is playing out exactly like I said it probably would.

In fact, I’m not sure I’ve ever been quite this right in terms of the direction things seem to be headed.

No, stocks haven’t plunged (yet), but what you’re seeing is the reflation narrative dying on the vine while yields reprice sharply higher. That’s not what you want – at all. And it’s exactly what I meant when I warned that should a policy shock trigger a quick selloff in rates, the virtuous negative correlation between stock and bond returns could flip as rising yields are seen not as a risk-on sign, but rather the exact opposite. Collapsing crude and widening HY spreads (two other outcomes I’ve long argued were virtually inevitable) only serve to darken the outlook.

“Treasuries fell, sending five-year yields to their highest levels since 2011, ahead of the Labor Department’s employment report for February on Friday, which has potential to cement expectations for a faster pace of Federal Reserve rate increases,” Bloomberg wrote on Thursday afternoon, adding that “the five-year yield climbed as much as four basis points to 2.133 percent, exceeding last year’s peak by about a basis point [while] ten- and 30-year yields rose more than four basis points, each coming within about three basis points of last year’s highs.” Or, visually:

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But here’s the dangerous part: “…the sell-off accelerated at about 1:30 p.m. in New York, concurrently with a drop in U.S. equity benchmarks.”

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That’s a positive stock/bond return correlation or, alternatively, a negative rates/stock correlation. Increasingly, bonds and stocks look prone to selling off together. Bad news. And, you’ll recall, something I warned about earlier this week in “Trouble“…

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Put simply, this was always the risk. That is, a few Fridays ago it was 10Y yields (which were sitting at YTD lows) that threatened to undermine the narrative. Crude was still rangebound. Then came a barrage of hawkish Fed speakers, who together with Donald Trump’s speech to Congress, succeeded in jawboning March odds from something like 40% to damn near 100% in the short space of a week, restoring the reflation meme.

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But now it looks like that might have been too aggressive. Especially when taken with Wednesday’s blockbuster ADP print. Now, the reflation narrative is under siege not from rates (which are rising), but from plunging crude (and the concurrent widening of HY spreads), pressure on EM, and the distinct possibility that an overzealous Fed might move too aggressively and choke off the good thing we had going. Meanwhile, the equity market looks like maybe it wasn’t quite ready for such a rapid rethink of Fed expectations.

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So that’s your setup for tomorrow’s NFP report. And as you can see, things could get pretty damn interesting.