All News Is Good News As Long As The Fed Stays The Course

They say that markets don’t like surprises.  How then do we rationalize the market’s enthusiastic response to what would appear to be a surprise of the nastiest kind?

I was aghast to see that non-farm payrolls rose by 278,000 versus an expected 1 million increase.  That is a staggering miss by the economists surveyed – reported to be the largest payroll miss ever.  Equity investors have been pricing in a robust post-pandemic recovery, and today’s payroll number was expected to be another milestone on that path.  Not so fast, it seems.

The bond market made its move first, with 10-year yields dropping nearly 10 basis points almost immediately.  It took a few seconds, but equity futures began rising in response, with most of the rally coming in NQ, the Nasdaq 100 E-Mini.  I believe that this response was triggered algorithmically.  Since bond yields began to rise early this year, we have seen the Nasdaq 100 (NDX) and the mega-cap tech stocks that comprise the majority of that index respond inversely to bond yields.  In theory, higher yields reduce the present value of those stocks’ future cash flows and their lofty valuations.  In practice, the valuations remained lofty regardless, but remember that algorithms react to (and sometimes amplify) tradeable relationships.  Besides, we have seen markets rally on seemingly bad news before.

Even though bonds gave back about ¾ of their basis point improvement, stocks continued to rally regardless.  The narrative changed immediately to “this keeps the Fed on the sidelines”.  Remember that Chairman Powell and various Fed governors have been adamant about asserting that the FOMC is not inclined to reduce monetary accommodation until or unless the economy reverts to full employment and sustainable 2% inflation.  Today’s payrolls miss certainly appears to push back the timing of full employment, thus keeping the monetary accommodation in place.

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