Wall Street Used to View Weak Economic Data as Good News—Why That's Changed

Starting successful 2022, astir nan clip nan Federal Reserve began raising liking rates to combat surging inflation, a caller paradigm took clasp connected Wall Street: “Bad data” was bully news. 

The U.S. system was increasing astatine an yearly complaint of astir 7% astatine nan extremity of 2021, its fastest gait successful 2 decades—excluding nan Covid-induced 33% jump successful Q3 2020. U.S. consumers, nan motor of nan U.S. economy, were spending manus complete fist arsenic they came retired of Covid lockdowns flush pinch savings. 

But nan economical roar was a double-edged sword. From January to December 2021, nan yearly ostentation complaint climbed from 1.4% to 7%. It would proceed to emergence earlier peaking successful June 2022 astatine 9.1%, its highest since nan 1980s.

The Federal Reserve homed successful connected ostentation and, successful March 2022, began its astir fierce run of liking complaint hikes successful decades arsenic it sought to support nan U.S. system from boiling over.

The Fed’s attraction could beryllium singular, contempt a Congressional mandate to negociate some ostentation and unemployment, because of a historically tight labour market.

Hiring crushed to a halt successful March 2020 arsenic Covid-19 shuttered businesses and closed offices crossed nan country. But arsenic nan system recovered and stone bottommost liking rates stimulated growth, companies went connected a hiring spree. Employers added an mean of 603,000 jobs a period successful 2021, reducing nan unemployment complaint from 6.4% successful January to 3.9% successful December. And yet successful March 2022, location were still much than 12 cardinal occupation openings successful nan U.S., astir double nan pre-pandemic level.

The labour marketplace remained abnormally tight passim 2022 and 2023, keeping costs maturation good supra nan pre-pandemic mean and subsequently supporting user spending and growth.

And truthful for a while, grounds of a weakening occupation marketplace and slowing system was bully news for nan Fed and markets, because ostentation was nan Fed's biggest risk.

Inflation is No Longer nan Main Concern

That has each changed successful caller weeks. 

Stocks had their worst time since 2022 successful early August aft July’s jobs report showed a astonishing jump successful nan unemployment rate, raising fears that nan labour marketplace had not conscionable softened but deteriorated and that nan system was connected way to gaffe into recession. Just days later, first jobless claims came successful little than forecast and stocks had their champion time since 2022. 

Inflation has taken a backmost spot to different economical information points. The S&P 500 earlier this period had its biggest guidance to maturation information since 2020, according to a caller study from Bank of America Securities. Meanwhile, nan index’s consequence to ostentation information was its astir muted since January. 

“Growth,” BofA analysts concluded, “is successful nan driver’s seat.”

And beardown maturation has stopped scaring markets, arsenic reflected successful nan beneath visualization by LPL Financial strategists Adam Turnquist and George Smith, who charted nan relationship betwixt nan S&P 500 and nan Bloomberg U.S. Economic Surprise Index. A affirmative correlation, they note, implies that bully economical news is bully news connected Wall Street, while a antagonistic relationship implies nan opposite. 

The 2 person oscillated betwixt antagonistic and affirmative relationship complete nan past year, though they person spent much clip negatively correlated. The antagonistic relationship astatine its astir terrible has besides been greater than nan affirmative relationship astatine its astir severe. 

The relationship turned affirmative successful early August successful what could beryllium a sign, Turnquist and Smith write, that “investors whitethorn nary longer beryllium giving nan system nan use of nan doubt.” 

Fed Increasingly Focused connected Labor Market

The Fed besides has stopped giving nan system nan use of nan doubt. “The economical outlook is uncertain, and nan Committee remains highly attentive to ostentation risks,” nan Federal Open Market Committee’s June argumentation connection read. In July, that condemnation became: “The economical outlook is uncertain, and nan Committee is attentive to nan risks to some sides of its dual mandate.” 

The minutes of nan Fed’s July meeting, released connected Wednesday, indicated officials were progressively concerned pinch nan authorities of nan labour market. According to those minutes, “Participants saw risks to achieving nan ostentation and employment objectives arsenic continuing to move into amended balance, pinch a mates noting that they viewed these risks arsenic much aliases little balanced.” 

On Friday, successful an eagerly anticipated reside astatine nan Fed's yearly Jackson Hole Economic Policy Symposium, Fed Chair Jerome Powell said, "The upside risks to ostentation person diminished. And nan downside risks to employment person increased." As a result, "The clip has travel for argumentation to adjust," Powell said, noting that gait of monetary easing would dangle connected incoming data.

Markets connected Edge Ahead of September Rate Cut

Wall Street has been eagerly awaiting liking complaint cuts for astir of this year. But now that those cuts yet look imminent, they whitethorn besides consciousness ominous. 

“Does nan marketplace really want nan Fed to trim liking rates because they’re worried astir nan labour market?” asked Quincy Krosby, Chief Global Strategist astatine LPL Financial. To a definite extent, yes, “because what nan marketplace doesn't want is nan Fed to neglect that—just spot deterioration successful nan labour marketplace and do thing astir it.” 

“But,” she added, “it besides past suggests that nan system is slowing astatine a faster pace” than nan marketplace thought. 

What markets really want, BofA analysts argue, is reassurance that nan cardinal slope won’t sacrifice economical description to tame inflation. “Equities conscionable request a motion that maturation is going to beryllium supported by nan Fed,” they wrote. 

Whether nan Fed accommodates will depend, successful Chair Powell’s words, connected “the totality of nan data.” And there’s a batch of data—two abstracted ostentation reports and nan August jobs report—between now and nan Fed’s adjacent gathering connected September 18.