Good, Bad And Everything In-Between

It was the same story on Thursday, when US equities meandered ahead of payrolls: Bad news is good news, but too much of a good thing can be bad.

In the context of the US macro narrative, that means evidence of job losses is actually bullish, but only to a point. The balance of the week’s pre-NFP jobs data skewed towards a softer labor market. An uptick in initial claims capped a string of releases that together appeared to tip a meaningful loss of momentum.

That could be ancient history by Friday afternoon, but if the jobs report “validates” the slowdown narrative, the next question’s this: Where’s the threshold beyond which bad news is just bad news?

I don’t know the answer, and neither does anyone else, but Q2 GDP tracking’s down to 2.6% on the Atlanta Fed’s nowcast. It dipped below 2.0% in the wake of Monday’s ISM manufacturing miss. It was 4.2% a month ago (figure below).

“US growth expectations have crashed in the wake of recent weaker-than-expected data,” SocGen’s Albert Edwards remarked, employing some of his trademark hyperbole. “What’s going on? Surely that recession which almost everyone has given up on isn’t about to hit?” he wondered, sarcastically.

Equities are (plainly) operating on the assumption that for now, lost momentum is disinflationary without being recessionary. Between that and what someone who mistook themselves for clever dubbed “Jensanity” (i.e., the mania around Nvidia CEO Jensen Huang’s “new Industrial Revolution” narrative), equities are comfortable notching new records in the face of an underperforming economy.

Of course, the US economy’s only “underperforming” relative to consensus. The data’s fine and, on some days, it’s robust (e.g., a big overshoot on ISM services mid-week). But expectations matter, and as a quick glance at Bloomberg’s US Economic Surprise Index (figure below) makes clear, the data’s coming up short on that score. Habitually.

“More economic releases are falling short of forecasts and the data is starting to soften,” JonesTrading’s Mike O’Rourke said. “The equity market appears to have ignored [these] developments, but that strength is primarily Nvidia.”

In remarks to Bloomberg on the eve of the jobs report, one market participant said “even an increase in unemployment should be welcome to the extent it alleviates upward pressure on [consumer prices].” He quickly added a caveat: “Too much weakness could eventually prove to be an even greater threat to markets than inflation.”

That’s the balancing act. And as BMO’s US rates team wrote, it “becomes far more complicated in the event of a sharper deterioration of the labor market.”

O’Rourke was blunt, as is his wont. “We are at a point where the market should begin interpreting bad economic data as bad,” he said. “The inflation data… is notably worse than it was six months ago, and once the supertanker that is the US economy begins to turn, one does not know how far it will go and on what bearing.”