Random Musings on Markets

This holiday-shortened week had no shortage of financial news. Here is an attempt to round up a few for your Friday reading pleasure.

Implementation Day

It seems no one can pen a financial news column these days without discussing something about tariffs. So here is your obligatory tariff discussion for today: $34 billion in Chinese imports are now subject to new US tariffs—and an equivalent amount of US goods are subject to new Chinese tariffs in response. In the run up, media treated tariff implementation like it was make-or-break for markets. Huge news. But, in my view, that misunderstands how markets work.

Markets typically pre-price widely known information. They are efficient! Not perfectly so, but darn close. So when a story dominates headlines for the better part of four months—as tariffs have—you can be fairly sure stocks aren’t hanging around, waiting for them to become reality to react. Hence, implementation was largely a non-event for markets, a point echoed by rising Chinese and US stocks Friday. The general media reaction to that rise seems to be that either a) a nice US jobs report overshadowed tariff implementation or b) markets are speculating the tariffs will end here. Whatever. It is virtually impossible to know what drove markets on any given day. But I’d humbly suggest the theory “Implementation Day” was such a red-letter day was wrong to begin with.

BoE Speculation

While we Americans were watching Joey Chestnut majestically gorge himself on 74 hot dogs on Independence Day, most economists in our mother country were reacting to a stronger-than-expected jump in the services industry. The IHS Markit / CIPS UK Services Purchasing Managers’ Index (PMI)—a survey tallying the breadth of growth in an industry comprising 80% of UK GDP—hit 55.1 in June, up from 54.0 a month earlier. (Readings above 50 indicate expansion.) It’s the latest data suggesting the UK’s Q1 slowdown may have been fleeting.

Huzzah! Growth! But along with that growth came something curious—folks speculating this meant an August BoE rate hike was much more likely, considering growth seems on sound footing. “Curious” not because it’s unusual—media and pundits often try to see data releases through the eyes of central bankers and divine what it means for policy. Curious because central bank forecasting is a bizarre practice, considering no one can forecast what central bankers will do. They aren’t gameable. They are people! And people are wacky and weird. Biased. Irrational. While some central bankers claim a scientific devotion to “data” in making their decisions, there is little evidence this is true in practice. We just saw this in Britain, too! Last week, BoE Chief Economist (and potential future head) Andy Haldane admitted he voted to raise rates at June’s meeting because England’s strong performance in the World Cup had increased economic and consumer confidence according to his “smile count.” Which, if it isn’t clear, isn’t an actual thing. He saw more people smiling on the street and voted to raise rates as a result. Hey! Maybe instead of watching data, central bank forecasters can just watch Saturday’s England vs. Sweden match and interpret that!

The Fed and the Yield Curve

MarketWatch writer Caroline Baum is a great read. One of the internet’s best. Particularly her rightly skeptical analysis of the Fed, which is quite uncommon these days when most folks seem to presume central bankers carry awe-inspiring economic insight and power. Her latest post on the yield curve—and whether the Fed can get away with inverting it—was a pleasure. For one, she correctly noted that the most important spread to watch is the 10-year Treasury minus overnight rates because overnight rates are a good proxy for banks funding costs. (3-month yields are also useful in this regard.) Her depiction cuts against most media, which cites the 10-year minus 2-year spread without explaining why. (My inner skeptic says the only reason most media does that is because it is flatter presently, which fits fearful headlines better.) Another great thing about Baum’s work: It isn’t subscription-gated. So feel free to go and read “To Invert or Not Invert, That Is the Fed’s Question.”

Jobs and Tweets

Jobs day! Today is the first Friday of July, which means the US Bureau of Labor Statistics publishes its Employment Situation Report, more colloquially known as the unemployment report. In the run up to this, many harkened back to May, when President Donald Trump tweeted that he was, “Looking forward to seeing the employment numbers at 8:30 this morning” an hour before they were released.

That doesn’t seem like a big deal. However, media claimed it was, because the President sees the numbers—which are otherwise kept secret—before they are presented to a media pool (which sees them 30 minutes before the press release hits). Many saw this as the President tipping off the public that jobs data would be better than most economists estimated, which could lead traders to try and front run the data. So this month, they wondered if he would do it again—and, if not, if that meant jobs would miss estimates. He didn’t tweet. Jobs data beat, with employers adding 213,000 jobs versus estimates of 195,000 - 200,000. But ultimately, for longer-term investors, this seems like a tempest in a teapot. Jobs data are late-lagging economic indicators. Stocks look forward. While maybe there is a very fleeting sentiment impact from how the data relate to expectations, it is here and gone rapidly.

Enjoy your weekend!