(Bloomberg) — Another week of conflicting economic signals — and another painful lesson for Wall Street traders trying to front run the data-dependent Federal Reserve.
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After pulling money out of credit and crypto on inflation fears, while easing up on stocks, bears just took a hit as the S&P 500 and Treasuries notched their first in-tandem weekly gain in a month.
Constructive pronouncements from Federal Reserve Chair Jerome Powell and softer employment data fueled the uptick. Yet divergent economic reports are proving costly again and again for investors placing bets on the Fed’s next move on interest rates — a move that ostensibly hinges on the economic data.
But which? On Tuesday, a broad gauge of US labor costs rose by the most in a year, sending yields on two-year Treasuries above 5%. Three days later, a Labor Department report showed the smallest increase in wages since 2021, sending yields back down.
Recent reports suggest retail sales are surging along with slowing gross domestic product. Industrial production has been rising while manufacturing has been easing. Jobless claims are holding steady — yet hiring has ticked down. For traders convinced each and every input has the potential to influence monetary-policy decision making, it’s a recipe for confusion with one measure of intraday stock volatility jumping to the highest since November.
“There is a concern that the Fed is overly data-dependent,” Mohamed El-Erian, the president of Queens’ College, Cambridge and a Bloomberg Opinion columnist, told Bloomberg Television on Friday. “And what does that do? It amplifies the volatility in the market.”
Read more: Bond Market Parties On as Jobs Data Revive Fed Rate-Cut Bets
In the short term at least, the bulls have the upper hand thanks to Friday’s data while some froth has evaporated out of markets after day traders cashed out a chunk of their winnings.
“The biggest moment this week was Powell noting hikes are ‘unlikely,’” said Lindsay Rosner, head of multi-sector fixed income investing at Goldman Sachs Asset Management. “That coupled with the soft landing print this morning means there is great opportunity in yields.”
The S&P 500 gained 0.6% this week, while a Bloomberg index tracking US Treasury returns surged to end a four-week streak of losses. Day-to-day turbulence deepened, with average 20-day price swings in the stock benchmark reaching the highest since November.
Friday’s job report — which showed demand for workers is moderating after a series of strong reports this year — pushed the S&P 500 to its biggest single-session advance since February. It also followed a month-long stretch in which investors have been mostly backing away from the market.
Equity and bond exchange-traded funds saw $32 billion of net inflows in April, the smallest haul since August 2023, according to data compiled by Bloomberg Intelligence. Traders cashed out $3.6 billion from one of the biggest investment-grade credit ETFs in April as rising yields spooked Wall Street out of longer-duration assets. Citigroup’s Levkovich Index, which plots market sentiment by tracking metrics from options trading to short sales and fund flows, just turned neutral after flashing euphoria for weeks.
Mom and pop investors, who were staging a long-awaited comeback in the first quarter, are now showing signs of fatigue. Demand for bullish call options among retail trades tumbled to the lowest level this year, per JPMorgan Chase & Co., citing data on flows from options traders with fewer than 10 contracts.
“There has been a big inflection in options sentiment,” said Amy Wu Silverman, head of derivatives strategy at RBC Capital Markets. “Call exuberance peaked in early March. Right tail had waned substantially from the YOLO/FOMO we previously saw.”
The lack conviction isn’t confined to traders, with economists struggling to predict the direction of economic data and revising their interest-rate targets every few months. The Friday payroll number came in significantly lower than what Wall Street estimated and only five of the 61 economists surveyed by Bloomberg predicted a 0.2% gain in average hourly earnings. The Tuesday gauge of labor costs increase by 1.2% exceeding all estimates in a Bloomberg survey.
The upshot? With Powell this week sticking to the data-dependent script in setting monetary policy — while economic releases point to uneven growth — fast-twitch traders have found themselves at the mercy of conflicting data. Still for many, the short-term gyrations are a sideshow at a time when high-quality assets continue to offer handsome yields, a boon for income-orientated investors.
“We expect better inflation prints in the months ahead, creating conditions that would allow the Fed to start cutting rates in September,” said Brian Rose, senior US economist, UBS Global Wealth Management. “In our investment strategy, we maintain a preference for quality bonds.”
–With assistance from Lu Wang.
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