The bad news is winning
No telling where rising interest rates will take us
In the topsy-turvy world that’s been created by years of low, low interest rates, what used to be good news is now bad news. And vice versa. For central bankers like U.S. Federal Reserve Chair Janet Yellen and Bank of Canada Governor Stephen Poloz, this is a problem, as they try to figure out how to return to “normal” monetary policy without derailing the perennially fragile recovery from a recession that occurred more than five years ago.
For investors, meanwhile, it’s a problem, too. Sure, nobody ever knows what’s going to happen. But these days, nobody really knows what’s going to happen.
Despite the financial industry’s assurances that long-term trends are asserting or will assert themselves in equity markets, the truth is we haven’t been here before. We just don’t know what the impact of rising interest rates will be. We’re worried that maybe we’ve got too accustomed to cheap money. We worry that it’s addictive, and we fear the withdrawal symptoms.
A case in point was the market reaction to the extremely strong employment data in the United States and Canada last Friday.
It might best be summed up by the Sage of Springfield, Bart Simpson, who once famously exclaimed: “Crap-tacular!”
According to the U.S. Bureau of Labor Statistics, the U.S. economy added 280,000 jobs in May, beating forecasts. Even better (for, you know, working Americans), average hourly wages — which had been lagging job growth for a long time — finally showed strong signs of life, rising by 2.3 per cent on the year.
Great, right? Well, the trouble is, the news also had Fed-watchers scrambling to rethink their forecasts of when the central bank would hike rates, which some had pushed even into next year on the heels of crumby GDP data for the first quarter. Now it looks like September — a forecast that will no doubt prove resilient until the next round of economic data comes out.
Fixed income investors, at least, clearly interpreted the
These days, nobody really knows what’s going to happen
signs: they sold off U.S. Treasuries and pushed up yields. But the stock markets didn’t quite know what to make of it all. Markets in the States were initially down on Friday, then gained back some of their losses — probably a sign that investors couldn’t decide whether the bad news of rising rates was worse than the good news of job creation. For now, it looks like the bad news is winning.
It’s even more confusing for Canadian investors. A strong and growing U.S. economy is good for us. And Canadian job figures also released on Friday were even more surprising on the upside than the U.S. ones. The economy created a whop- ping 59,000 jobs in May, blowing away forecasts in a sharp reversal of the 19,000 job decline reported in April.
Awesome, eh? Surely those numbers are a sign that Poloz’s long-predicted second-quarter rebound — from an atrocious first quarter of negative GDP growth — is really getting going, right?
Well, maybe. The loonie rose on the back of the strong data, which is not good news for Canadian exports. Meanwhile, the U.S. dollar also rose, which depressed prices of greenback-denominated commodities, which is not good news for Canadian exports either. (It didn’t help that OPEC said it wouldn’t be limiting production anytime soon.) There might be some Greece jitters at work as well, as the whipping-boy of the eurozone skipped a payment to its bailout creditors. Oh, and the good jobs data suggested that Poloz might either not lower rates again this year or raise rates sometime sooner than thought. Or not.
And so, the S&P/TSX ended down on the day Friday, hitting a two-month low.
As Bart might say, “Craptacular.”
Maybe it’s just that investors have learned not to put too much faith in one-off economic indicators. The Canadian Labour Force Survey from StatsCan has long been criticized for being volatile, imprecise and subject to substantial later revision.
Or maybe it’s more that few really believe this recovery presents much upside for stock markets, even if it does happen. The current calculus so far seems to be this: The benefits of a growing economy will be offset by the impact of rising rates.
Again, we just don’t know. And we probably won’t know until the U.S. actually raises rates, maybe in September, maybe later. I suspect that markets will overreact in the short term, then figure it out. They always do.
But for now, the uncertainty will continue as conflicting data increase the noise around interest rates and whether we really are seeing a recovery. You can look for opportunities in the inevitable shifts — there will be volatility.
Or maybe you can follow, albeit belatedly, that old chestnut about selling in May and going away. You might miss all the fun. But at least it will keep you sane.