Negative sentiment crawled back into the capital markets approximately 2-week ago when FOMC chairman discussed monetary policy with member of congress during his bi-annual testimony. The chairman during the question and answer period discussed the potential tapering of the current bond purchase program which immediately took the rose off of the U.S. stock and bond markets.
Prior to his testimony sentiment within the capital markets was reaching extraordinary heights. The Nikkei has reached 15,000 while the S&P 500 was pressing up against 1,680. Good news was considered good news by market participants and bad news was considered even better for stock market bulls. Investors were happy to believe that the Federal Reserve would continue to pump 85 billion dollars a month into the system forever.
After Bernanke’s testimony everything changed. The Nikkei collapsed, losing more than 2,000 points, the S&P 500 lost 4% and the 10-year yield in the U.S. backed up above 2.10%. All of a sudden bad economic news not only created headwinds for equities but also pushed US interest rates higher. Investors were caught in a tug of war and comments such as the “June Swoon” were back in vogue describing market volatility.
On Friday, June 7, sentiment began to take a turn for the better. Investors were waiting for the Bureau of Labor Statistics to release its employment report, but were nervous given recent economic releases that were disappointing.
For example, on Monday the Institute of Supply Management released its manufacturing purchasing managers index which show that the US was contracting. The ISM overall index printed at 49, which was the first print below the 50 boom bust level since 2006. The ISM employment index remained above 50, but ticked down below April’s release. Wednesday’s worse than expected ADP private payroll report also but investors on the defensive. ADP reported that private payrolls increased by 135,000 jobs compared to the 170,000 expected by economists. These disappointing data point put investors on their heels prior to the release of the government’s employment report.
Sentiment quickly changed when the Department of Labor released non-farm payrolls. The 175,000 (as reported here) increase was just the right recipe for investors. The number fell right into the Goldie Locks scenario, which was not to hot or cold and would allow the Federal Reserve to continue to purchase bonds at the same clip without a strong argument to curtail the current program. Economists had been expecting job increases of 169,000 but many had reduced their forecasts based on the anemic results from ADP.
Almost immediately traders felt a sigh of relief. The number is not a feel good number but instead a relief number that could put stocks back on course to make new all-time highs. Bond yields continue to be the thorn in the side for equity traders. Economic data is not strong enough to justify increases above a 2 percent 10-year yield, but the bond vigilantes seem to be back, keeping sentiment in line and not irrational.
