‘Deliberately Patient’

If you had to choose one quote from Friday’s session that encapsulates the interplay between macro and policy, it would almost surely be Loretta Mester’s characterization of the May jobs report as “solid” but not sufficient.

“Bottom line, I’d like to see further progress than where we are right now,” Mester told Steve Liesman.

The 559,000 jobs added in May were “very good news,” she said. “But I’d like to see further progress.”

You have to love it. They’re working their own forward guidance into the conversation as though it’s a casual assessment. Mester wants “further progress.” Which, by definition, means that in her judgement, the labor market hasn’t made “substantial further progress” as it relates to the Fed’s goals. So, there’s no urgency to pull forward a taper announcement and as for rate hikes, well, you can forget about that.

In case it wasn’t clear enough, Mester drove it home. “We want to be deliberately patient,” she remarked. “It’s easy to shut down an economy, it’s much harder to have it come back.”

The figure (above, from BofA) gives you some global context for “deliberately patient.” As a quick aside: I’m not sure I’d include China’s foreign exchange reserve move if that were my table. It wasn’t exactly a “taper action.”

The price action Friday was wholly predictable. The NFP miss cleared the way for Treasurys to rally and the fact that April’s NFP headline wasn’t revised sharply higher was a bearish impetus for the greenback. The dollar followed yields lower. Stocks dutifully rose, with duration-sensitive tech leading the way. Big-cap tech had one of its best sessions in weeks (simple figure below).

“May’s employment report has gone a sufficient distance in offsetting any expectations that 10s will see 2.0% in H1 and further undermined such prospects for Q3 as well,” BMO’s Ian Lyngen said Friday. “As the seasonals come into play and we’re seeing the familiar pattern of actual economic data underperforming the lofty expectations brought into the New Year, we’re increasingly of the mind the rates are set to settle into a well-established range.”

For equities, that’s certainly not the worst news in the world. In fact, you could make the case that the rates mini-tantrum (in Q1) did just enough damage in terms of catalyzing steep declines for so-called “hyper-growth” shares and other corners of the market seen as woefully stretched, to put the broader market in a less perilous position headed into summer. That the steep selloff for the likes of ARKK, TAN, TSLA, Bitcoin, etc. didn’t lead to a serious correction for the benchmarks was comforting, I’d suggest.

Laugh as you will, but selloffs aren’t triggered by scary-looking charts with sarcastic captions. And with all due respect, nobody cares if Jeremy Grantham sees a “Real McCoy humdinger bubble” or if Stan Druckenmiller sees an “absolute raging mania.” You need an actual, real catalyst to break the “stasis” (as Nomura’s Charlie McElligott described the current drift). Maybe May CPI (next week) will do it, but I have my doubts. Markets digested April’s scorcher with relative alacrity and shrugged off PCE without so much as a flinch.

Speaking of flinching, the Fed isn’t ready to blink yet. During the same interview cited here at the outset, Mester told CNBC the US economy isn’t “anywhere near” a wage-price spiral.

Again: Scoff as you will, but she helps set the price of money. You don’t. And her opinion counts when it comes to determining when the liquidity spigot gets dialed back. Yours doesn’t. As I put it Friday morning, all macro data is contextualized by the read-through for Fed policy because ultimately, liquidity and the price of money are what matters for markets. A miss (even when that miss entails the economy adding more than a half-million jobs) counts as a reason to keep rates glued to zero and kick the can on a taper. It is what it is.

That’s not to say everything is going higher, it’s just to suggest that anyone waiting for gravity to reassert itself on the way to vindicating every naysayer all at once, is almost sure to be disappointed. Global stocks took in another $14.7 billion last week, the latest data showed. That brings this year’s haul to $527 billion (figure below).

While I used “disappointing” in describing May payrolls, I also noted the obvious. “For markets, it’s possible this could be construed as a ‘Goldilocks’ report,” I wrote, adding that “the headline wasn’t soft enough to cause extreme consternation and it certainly wasn’t hot enough to burn anyone’s tongue. No burned tongues means no additional urgency for Fed tightening.”

Apropos, the title of TD’s weekly rates wrap was “Not Too Hot, Not Too Cold.” “The data will likely reinforce the view of most Fed officials that progress has not been ‘substantial’ enough for them to start signaling tapering,” the bank’s Jim O’Sullivan and Priya Misra said. “The weaker report should keep 10s in a 1.5-1.7% range for the time being.”

In the latest edition of the bank’s popular weekly “Flow Show” series, BofA’s Michael Hartnett reiterated that stagflation is a risk in the second half. “Wall Street leads Main Street, market leads macro,” he remarked. “[The] Fed knows this hence desperation to prop up asset prices [and] ignore financial stability risks.”

That may be true. And I’m certainly amenable to that interpretation, especially when I’m in a snarky mood, as I was when I wrote “So-Called Bubbles,” for instance.

But in the meantime, between now and whenever the proverbial chickens come home to roost, it’s probably best to just go with the flow. As should be abundantly clear from the last visual (above), folks are doing just that.