Tell Me A Story

With the exception of sessions when the catalyst is obvious, “explanations” for a given day’s price action are almost always unsatisfactory.

As Macro Risk Advisors’ Dean Curnutt put it last week, the market has an “almost insatiable need for narratives” and the financial media doesn’t really exist without them.

Hundreds of years on from the advent of daily market news (which played a role in the South Sea Bubble and arguably catalyzed the collapse of The Great Railway Mania), financial journalists are closer to storytellers than they are reporters.

That’s not to suggest the financial media is full of lies. I mean, it is, but your typical daily market wrap isn’t. By “storytellers,” I just mean that part of the media’s job is to tell a story about why equities did what they did in a given session — even when there’s no discernible “why” and even when today’s narrative blatantly contradicts yesterday’s or this afternoon’s contradicts this morning’s.

Tuesday’s US session was a good example. The day began with the media declaring that sentiment was bolstered by Fed officials, whose dovish message had soothed the savage beast, and ended with the same outlets suggesting that relatively lackluster new home sales data combined with more evidence of surging house prices and a marginal miss on consumer confidence, “outweighed” the Fed’s “transitory” cooing.

That’s not what happened. In fact, not much of anything happened. Well, other than Amazon getting sued by the attorney general for Washington, D.C., and the western powers debating options for dealing with Alexander Lukashenko.

It’s true that the housing data and the color accompanying the Conference Board survey for May underscored the impact of price pressures, but exactly nobody expects housing prices to cool off appreciably anytime soon and we already knew surging inflation expectations were denting sentiment thanks to the preliminary read on the University of Michigan survey out earlier this month.

So, if there was a story to tell on Tuesday, what was it? Probably Richard Clarida’s remarks to Yahoo! Finance (and I’ve been informed we’re still using the exclamation point with “Yahoo” because we’re a nation of children, apparently).

“It may be [that] in upcoming meetings we’ll be at the point where we can begin to discuss scaling back the pace of asset purchases,” Clarida said. “That’s not something that was the focus of the April meeting. Again, I think it’s gonna depend on the flow of data that we get.”

There was nothing new about that remark. Not only was Clarida just repeating (verbatim) the April FOMC minutes, but he also said explicitly that he was doing just that: “I think the minutes stated well my thinking and obviously, most of the committee.”

Yes, “obviously.” But the market doesn’t want to hear about tapering right now. Or ever, really.

Of course, this is maddeningly self-referential. The Fed is ultimately what matters for markets, but the data is ultimately what matters for the Fed, except that on multiple occasions over the past decade we’ve learned that the market can (and will) dictate Fed outcomes in true “hall of mirrors” fashion (figure, below, from Goldman).

Where does that leave us? (Chasing our tails.)

Commenting on Tuesday afternoon, BMO’s Ian Lyngen and Ben Jeffery made Clarida’s remarks the anchor for their own daily wrap which is infinitely more incisive and accurate than anything you’ll read from the financial media.

“If nothing else, the pullback in risk assets as the Fed contemplates slowing QE speaks to the worry that scaling out of the extremely accommodative monetary policy stance would have negative ramifications for domestic equities,” Lyngen and Jeffery wrote, after recapping Clarida’s comments to Yahoo! (with an exclamation point).

“The feedback between weaker stocks, higher equity volatility, and tighter financial conditions is well worn at this stage and while there was nothing in Tuesday’s price action to suggest such an inflection is currently underway, it’s a reminder of the divergent interpretations of the ultimate end of QE,” they added.

Why “divergent”? Because Treasurys rallied on Tuesday, which makes sense in the context of weaker stocks, but not necessarily in the context of a QE taper. We got another bull-flattening impulse (again inconsistent with taper talk), and that should have been bullish for equities given the source of pain (especially in tech) lately has been higher yields and concurrent fears of an unruly bear steepener that could trigger disorderly unwinds in a decade’s worth of accumulated duration-linked trades.

Note that thanks to the Fed, “the easing of US financial conditions in this cycle has been faster and more extreme than post the financial crisis, and the pace of the current recession and recovery is likely to be much quicker,” as Goldman wrote Monday (see the figures, below).

So, how should the price action be contextualized vis-à-vis the data?

Isn’t bad news good news now to the extent “every little miss helps” when it comes to keeping the Fed at bay?

And while it makes sense that worse data would be bullish for bonds, what about the read-through for inflation of still surging home prices and suddenly concerned consumers?

Financial news portals could use those three questions to test job applicants. The person who gets hired is the gal who answers “It depends” to all three.