Bad news is good news. Or not.
The market’s reaction to Friday’s NFP report betrays the extent to which investors and traders no longer have any idea how to read the Federal Reserve.
There was a time when negative data was a guaranteed boon for risk. The worse the data, the better for stocks. Why? Simple. If the data was unequivocally bad, the Fed unequivocally had to keep monetary policy accommodative.
This perverse dynamic became so entrenched that it was virtually the law of the investing land for at least half a decade in the post-crisis years. If you owned stocks, you wanted the economic data to come in bad. The worse the print, the better.
Of course non-farm payrolls is the grandaddy of them all. The US economic data point par excellence. A direct read on one of factors the supposedly “data-dependent” Fed looks to when setting policy.
So over the past seven or so years, if you were long stocks and NFP printed below expectations, well then you were in good shape. It meant the monetary policy punchbowl wasn’t about to be withdrawn any time soon.
This morning, the jobs report was a disaster. No hyperbole necessary. It was an unmitigated disaster. The Street was looking for 160,000 jobs added in May. The print: 38,000. Here’s a breakdown from BofAML:
(Chart and Table: BofAML)
That should have been enough to send stocks soaring. Instead, we’re in the red. Some will say this indicates the market is becoming rational again. That’s probably not the case. What’s probably going on here is that the market no longer has any idea how to read the Fed and thus this subpar jobs print added to the uncertainty.
Here are some of the questions running through the pros’ minds this morning:
“If volatility in China is enough to cause the Fed to delay a hike, then surely an abysmal jobs report would be too, right?”
“Wow, this is some coincidence. The market was blindsided by hawkish Fed rhetoric and now, all of the sudden, the economy adds the fewest workers since 2010. Was this engineered to get the Fed out of a pickle of its own making?”
“Wait a minute, if this was engineered, it makes no sense. No one was pricing in a June hike in the first place, so why would the Fed put it back on the table only to ask the BLS to effectively take it away?”
That last question is probably the most critical. Yes, it does implicitly suggest that the numbers we get are “massaged.” That’s not some kind of wild conspiracy theory and it doesn’t mean that the US is China. It simply means that there are a whole lot of very important people who see these numbers before the market does and you have to take that into consideration when you reflect on the extent to which the data paints an accurate picture.
Last week, here in the TheoDark Report, we noted that in terms of oil, the 10-year, and the dollar, it was generally “all quiet on the Western front” in terms of the market reaction to hawkish Fedspeak.
However, we also said the following:
“You should be aware that China did set the yuan fix at its lowest level since 2011 last week, and Bank of Singapore FX strategist Moh Siong Sim said today that the currency could very well face more pressure going into next month.”
Remember last August when everyone thought a September Fed hike was imminent, China effectively took it off the table by devaluing the yuan. Well, the yuan is flirting with five-year lows. That’s not an accident. It’s not a free floating currency.
For what it’s worth, here’s BofAML’s take on Friday’s jobs number and what it means for the Fed:
“There was no saving grace in this disappointing report, and the recent sluggishness in the labor market warrants increased Fed cautiousness. We think a June hike is off the table (and the markets agree, pricing in less than a 5% chance of hike after the number this morning). While a hike in July is still a possibility, we are increasingly comfortable with our September call. There is simply not enough time leading up to those summer FOMC meetings to see the growth and labor data rebound convincingly, and inflation continue to accelerate—all necessary conditions for another increase in rates. After today’s report, Fed Chair Yellen’s speech on Monday will be even more important.”
The magnitude of the market’s repricing of June expectations is remarkable and speaks directly to what we said at the outset here: investors and traders no longer have any idea how to read data or the “data-dependent” Fed.
We’ll close with a quote from Bloomberg’s Richard Breslow:
“Forget June under any circumstances, but let’s see what the not-quite-data-dependent Chair has to say about July.”