As Volmageddon Anniversary Approaches, Is Good News Bad News Again?

As absurd as it sounds coming at a time when the US labor market is still almost 10 million jobs shy of pre-pandemic levels, the market might be approaching “good news is bad news” territory.

To be sure, that assessment could be out of date come Friday if January’s jobs report prints a downside “surprise.” Indeed, even a miss on jobless claims could serve as a reminder of how tenuous the situation still is on Main Street.

But inflationary signals from PMI data, the ADP beat, and rapidly falling COVID case counts alongside vaccine deployment, all suggest the US could be turning the corner at long last.

Headed into a vicious winter wave that claimed thousands upon thousands of American lives, Donald Trump habitually claimed the country was “rounding the turn.” In reality, the crisis was spiraling. Now, though, it appears the worst may in fact be over.

All of that is good news, of course, but it could make the hurdle for stimulus higher.

Democrats now appear poised to go it alone if necessary in the face of Republican opposition to the size of Joe Biden’s relief proposal. On Wednesday, Biden told House Democrats that failing to deliver $1,400 stimulus checks would amount to breaking a promise to Americans during the first months of his presidency. Needless to say, he’s not particularly enamored with that prospect.

Biden did indicate, however, that the White House would consider tightening eligibility requirements, which isn’t a terrible idea (unless you’re long GameStop, in which case you probably want as many people to get a new check as possible, because the only way to justify paying $100 for a share is if the money you’re using was free). The GOP wants that, but they also want the check size reduced to $1,000.

Chuck Schumer offered a boilerplate soundbite. “Our caucus is united in our resolve to deliver a rescue plan that [gives] the American people the relief they so desperately need,” he said.

The market “desperately” wants (as opposed to “needs”) more liquidity. While there’s no chance of monetary policymakers being swayed from accommodation by “evidence” of price pressures in PMIs, a combination of better jobs data, falling virus caseloads, and signs that the economy is beginning to reopen could prompt market participants to reassess the rates path, even if the Fed itself isn’t.

After all, the FOMC statement now explicitly mentions vaccinations. So, if the vaccine push accelerates as planned, market participants may begin to reprice the Fed. If that happens, financial conditions could tighten with or without the “consent” of Jerome Powell.

All of that may seem far-fetched right now, but a quick look at virus hospitalizations shows a clear downward trend (figure below). It’s likely fatalities will begin to exhibit a similar trajectory, on a lag. It’s also likely that as vaccinations continue, hospitalizations will keep falling.

One of (if not the) key impediments to rising US yields has been the “here and now” reality of the virus and the read-through of that for services sector activity and employment. If the market gets the idea that reality is beginning to catch up to what the Russell 2000, for example, began pricing in starting in November, it’s not terribly difficult to imagine bonds resuming the selloff that stalled last month.

In the wake of Wednesday’s ADP and ISM data, one major bank suggested that NFP could print 700,000 or more on Friday. Consensus is, of course, nowhere close to that. Specifically, 700,000 would be 10 times consensus.

You might be inclined to think that an upside surprise of that magnitude would be unequivocally positive. And it would be in many respects.

But perhaps not for markets. Indeed, it’s entirely possible to imagine a multi-standard deviation beat tipping dominoes in the same fashion as the dramatics that presaged “Volmageddon” in 2018. Nomura’s Charlie McElligott alluded to such a tail risk last month.

Notably, Friday is the three-year anniversary of the above-consensus average hourly earnings print which ultimately triggered the implosion of the VIX ETN complex the following Monday.

Obviously, there will never be another Volmageddon. That was a technical phenomenon tied to the rebalancing needs of the relevant products. But the macro trigger was higher yields and the realization of hotter inflation.

Read more: Nomura’s McElligott Talks Georgia, ‘Neon Swan’ Parallel