Since the Fed moved from forward guidance to data dependence, markets have been increasingly volatile on days of major economic releases. More recently, the phrase “bad news is good news” has been popularized, referring to how markets have reacted positively to traditionally negative economic data. The rationale behind this phenomenon is simple: if data suggests the economy is weakening (strengthening), we are (not) closer to a Federal Reserve policy pivot, and investors take on a bullish (bearish) stance. To see when this ideology began to grip markets, we look at one-day changes in the S&P 500 and the 10-year Treasury on days when “major” labor market data has been released.
Since early-July, the S&P 500 has seemed to adopt the “bad news is good news” mindset, with 85.7% of releases that were weaker-than-forecasted resulting in daily gains in the S&P 500 and roughly 70% of releases that were stronger-than-forecasted resulting in declines.
The 10-year UST also seemed to adopt this mindset around the same time in July. Since then, 62.5% of weaker-than-forecasted releases resulted in the 10-year yield falling and 77% of stronger-than-forecasted releases resulted in the yield rising. Year-to-date, the 10-year yield has had an average daily change of +0.53%, but on days of positive labor data releases, the average change is more than double at +1.33%.
Until a Fed pivot actually occurs or labor data begins to move in a definitive direction, there is no reason to think this relationship will end.