Sometimes, bad macro news is just bad news.

Common sense interpretations of incoming data went out of style in the post-Lehman era, when evidence of economic vibrancy was generally greeted with skepticism by stimulus-addicted markets.

Subdued growth and below-target inflation in developed economies gave central banks the plausible deniability they needed to persist in emergency policy settings despite the conspicuous absence of any emergency. Those policy settings were generally credited with inflating financial assets of all sorts for the better part of a decade, so evidence that growth was beginning to run hot or that inflation might be anything other than muted, was eyed warily by risk assets. Never mind that the whole point of accommodative monetary policy was to engineer brisker growth and steady inflation. Ostensibly, there were targets. But in reality, nobody, least of all market participants hooked on cheap money, wanted to hit them.

That meant the bar for bad news to be treated as anything other than an excuse for more easy money (and thereby as an excuse for stocks to rally) was very high — or very low, if you like. Simply put: If the data wasn’t outright recessionary and/or if any adverse developments didn’t threaten a systemic event, bad news was fine to the extent it elicited dovish cooing from central banks.

Things are more complicated these days. Extremely hot nominal growth and runaway inflation during the stimulus-fueled rebound from the fleeting pandemic slump were unequivocally bad for markets in 2022, which meant that signs of decelerating demand are welcome indeed if they presage softer inflation. But what of unequivocal recessionary prints?

That’s a question markets were compelled to ponder this week, when retail sales and factory output posted wide misses which, when taken in conjunction with the struggling housing market, and the prospect of slower business spending and layoffs as corporates retrench, suddenly revived hard landing fears.

“‘Hard US recession’ trading snap[ped] back with a vengeance, particularly as the US economic data downside surprises are occurring against a labor market which refus[es] to roll over and placate the FOMC, hence the ultra-rare sighting of a ‘bad news is bad news’ market regime,” Nomura’s Charlie McElligott wrote, in a Thursday note, calling the retail sales miss a “new pain point” and describing the Microsoft layoffs as a “signal that the dreaded ‘margin compression’ is very much a ‘here and now’ phenomenon at even the best-run companies.”

On the flows front, that’s meant the “re-acceleration of forced buy-to-cover flows from legacy G10 bond ‘shorts’ to the tune of an estimated $24 billion of notional buying over the past week in the CTA model, as ‘hard landing recession’ buy-in sees an underlying price impact across fixed-income,” Charlie wrote.

At the same time, there’s been “substantial deleveraging within recently re-accumulated equities ‘longs,’ with an estimated -$32.1 billion of selling” concentrated in US and Japanese shares, he added.

One risk from here is that the rest of the world does indeed continue to outperform expectations from a macro standpoint, even as the US economy decelerates further. That scenario could put the Fed in a bind, thereby raising the odds of an over-tightening “accident.”

“The RoW being ‘less bad than feared’ is a global growth stabilizer, but one that is greatly complicating matters for the Fed, because it’s now occurring at the same time that domestically we see this stark juxtaposition, where the US economy is showing accelerated strains due to the ‘lagged and variable’ implications of [policy] tightening,” Charlie wrote, suggesting that the new “better-global-offsetting worsening-domestic” regime may embolden the Fed, or even necessitate tighter policy (e.g., in the event Chinese demand pushes up commodity prices, and thereby inflation), risking the dreaded “terminal for longer” scenario.

Of course, as McElligott went on to say, terminal for longer would “increase the likelihood of policy error, which is why we see implied Fed cuts growing over the past week, as the deepening likelihood of a hard landing will merit even larger cuts to offset the damage later.”