For as far back as some of Wall Street’s freshman can remember, the narrative was always the same. Bad news is good news and good news is bad news. Why? Simple. Because good news means no more monetary heroine from the Fed while bad news means the party will likely continue for the foreseeable future.
This was helped immensely by the fact that central banks seemed far more likely to take good news with a grain of salt while greeting bad news with an alarmist reaction that could serve as a perpetual excuse for not normalizing policy. Just look at this month. There are actually those arguing that a single poor ISM print should be cause for forestalling a second hike – despite the generally positive NFP data. Put simply, the market seems to have gotten what it wants. It’s been this tug-of-war ever since the “taper tantrum” demonstrated the kind of destruction the mere suggestion of policy tightening might bring and since then, there’s been a palpable sense that the market will tolerate one more hike as long as the long-end doesn’t freak out too much and as long as equities remained levitated.
Here’s some interesting color from Deutsche Bank’s Aleksandar Kocic:
“2016 so far has confirmed that everyone is on the same page and major surprises are unlikely. Both rates and risk assets are converging to those conclusions. Rates are less reactive to the payroll – they embrace it as a signal of recovery, but expectations of possible hikes are front loaded while the rates path is being priced out – beta is significantly lower than before. Similarly, stock market does not overreact to payroll in either direction, but takes good and bad print as such, although with lower beta than before. Fed’s resolution is just not there anymore and the market does not feel it needs to express its discontent as strongly as before. Its message has already been internalized by the Fed.”
(Charts: Deutsche Bank)
In other words, the market has won. The Fed’s crusade for liftoff (if there ever was one) is over.