On Friday morning, the knee-jerk reaction to June payrolls served as a stark reminder of just how entrenched the “good news is bad news” dynamic has become over the last couple of months.
When the headline jobs number blew away estimates, US equity futures immediately knee-jerked lower, while yields surged (by the end of the day, two-year yields had risen the most since January 4).
To be sure, this isn’t a “new” phenomenon. The post-crisis years have, at various intervals, been defined by it. When central bank liquidity provision and the promise of perpetual monetary accommodation are all that stands between price discovery reasserting itself in a world of extreme distortions (e.g., negative-yielding junk bonds), any data point which threatens to compel policymakers to rethink their commitment to more easing is bad news for risk assets.
At the current juncture, with markets sure that the Fed will deliver at least a 25bp cut later this month, a blowout jobs number was indeed “bad” news, and it was treated as such.
The hangover persisted into the new week, serving to damp sentiment for global equities on Monday and Tuesday.
So, just how pervasive and entrenched is the “good news is bad news”/”bad news is good news” regime in 2019? Well, pretty damn entrenched.
“1H19 was mostly a ‘bad news is good news’ regime as softer global growth resulted in more central bank easing giving support both to ‘risky’ and ‘safe’ assets, which were sending conflicting bullish and bearish signals respectively”, Goldman wrote Monday evening, on the way to delivering the following rather poignant visual, which shows that the worse things get economically, the better for stocks.
If this goes on for another five years, they’re going to have to start amending the entry-level finance textbooks to include a series of caveats, footnotes and disclaimers explaining that while owning stock is supposed to represent an investors’ claim on the expected upside in the companies that power the US economic machine, the setup is now such that the biggest gains are to be had when that same economic machine is sputtering or, “better” yet, stalling altogether.
Oh, and going forward, they’ll probably need to be a chapter (or two or three) in the corporate finance texts dedicated to negative-yielding debt, because in the new normal, CFOs can plan on getting paid to borrow. “Last week, the credit market yield dropped to a record low of 0.65% [and] this was still much more than equivalent 5y Bund or OAT yields but very low nevertheless”, SocGen’s European credit team wrote Friday, adding that “more and more corporate bonds have a negative yield and this is particularly true for the higher-rated and shorter-maturity bonds”.