The U.S. jobs data were a bust, China remains a threat, the Fed won’t hike until, well, don’t ask, and bad news is good news for the stock market once again.
Stocks plunged and then rallied back to gains on Friday after payrolls data showed not just declining momentum in job creation, but static wage gains and the lowest labor participation rate since 1977.
The reaction is likely more a function of the conviction that distress in markets will be met with tender care by the Fed than anything else.
The data certainly wasn’t much to celebrate.
“From (an) economic viewpoint as bad as bad can be,” Citigroup strategist Steven Englander wrote of the data in a note to clients.
“Great for bonds as it raises the possibility that U.S. recovery is losing steam – slower jobs, low inflation. Data are weak from both a demand side and supply side perspective. It is premature to declare recovery dead, but nothing in data to suggest otherwise.”
The one clear market reaction to the not-dead economy was in interest rate futures markets, which now show a 30 percent probability of a rate hike in December, down from slightly less than half before the data was released. Expectations now center around March for a first increase in interest rates. The S&P 500 fell sharply, only to storm back to a gain of 1.4 percent in the afternoon, a swing of nearly 3 percent.
The data arguably helps to vindicate the Fed’s decision to remain on hold at its September meeting, though whether we should expect it to react to developments in China or those in the U.S. remains unclear.
Whatever might be driving the Fed, investors appear to feel it has their best interests at heart, though combined with a disquieting feeling that “benign” and “in control” are two different things.
Perhaps investors took heart from Fed Vice Chairman Stanley Fischer, who, in a speech which did not touch on monetary policy, made the case for not bursting bubbles with the hammer of monetary policy, citing the “significant costs”.
Instead Fischer argued for better “macroprudential” tools, essentially regulatory interventions like lending curbs which seek to cut systemic risk.
“The limited macroprudential toolkit in the United States leads me to conclude that there may be times when adjustments in monetary policy should be discussed as a means to curb risks to financial stability,” he said at a Boston Federal Reserve Bank conference. “A more restrictive monetary policy would, all else being equal, lead to deviations from price stability and full employment.”
That sounds very much like a policy maker keen not to drop all the eggs, even if willing to admit that sometimes eggs rot.
A STOOL WITH THREE LEGS
Boston Fed president Eric Rosengren argues that Fed policy is consistent with the idea that it has a third mandate, financial stability, to go along with the traditional ones of managing inflation and employment.
A paper released at the same conference and authored by Rosengren and colleagues from the Boston Fed illustrates how big a role the fear of financial instability plays in setting policy.
They counted up the times the Fed, between 1987 and 2009, used financial instability terms like “bust” and “crisis” in the transcript of policy-setting meetings. Believe it or not, but every 100 times such terms, which they call “moaning,” are used can account for a 45-basis-point drop in interest rates.
That’s a more powerful predictor than a 1 percent move in unemployment rate forecasts, and nearly double the move in rates prompted by a 1 percent move in inflation. (here)
Financial stability isn’t the third mandate, it’s the first.
Some of the words on the list are good for a laugh- “lending standards,” “price-to-earnings” and “supervision” are all indicators that we need easier policy, it seems.
When credit spreads are tight, “moaning” is an even more potent predictor of easing, with every 100 times negative words are used accounting for a 67-basis-point drop in interest rates.
Unsurprisingly to observers of the Fed’s ‘tails you win, heads I lose’ approach to investors and markets, the central bank doesn’t behave the same way when credit conditions are loose, perhaps indicating a bubble or similar risks. For every “100 words of moaning” during boom periods we only get 36 basis points of tightening.
So, bad news truly is good news if you have risk assets at stake, the only question being what form the easing will take if the bad news (good news) keeps coming.
(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. You can email him at jamessaft@jamessaft.com and find more columns at blogs.reuters.com/james-saft)
(Editing by James Dalgleish)
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