"Good News Is Bad News", BofA Says "Reduce Risky Assets" Because Jobs Are Improving So Fast

Tyler Durden's picture

Authored by Hans Mikkelsen of BofAML,

Jobs uncertainty

Today’s market reaction to Fed chair Janet Yellen’s Humphrey Hawkins testimony – which was initially perceived as hawkish – provided another highlight of just how nervous investors have become about the risk of tighter monetary policy, post the very strong June payrolls report. Thus, as 10-year interest rates rose 4bps during the first hour after the release of the testimony, stocks declined about 0.4% (Figure 1).

Clearly weighing on stocks was also commentary in the Fed’s Monetary Policy Report that certain sectors – specifically smaller social media and biotech companies - appear richly valued in the market. However, these sectors account for a very small share of the market and the Fed argued that the general stock market is not trading far from historical norms. Today’s initial market reaction mirrored almost exactly the initial reaction on July 3rd to the June jobs report itself, as in the first seven minutes or so 10-year Treasury yields rose 5bps while stocks declined roughly 0.3% (Figure 2).

We argued that the current pace of jobs creation mirrors what forced the Fed’s hand in the 1994 rate hiking cycle, which led to lower stocks and wider credit spreads. This is not to suggest that we are forecasting a repeat of 1994 – only that we, as statisticians, have insufficient information yet to reject decisively that this is 994. Hence the initial reaction today when - after strong readings on Empire Manufacturing and Retail Sales –chair Yellen sounded more upbeat in her assessment of the economy and repeated that “If the labor market continues to improve more quickly than anticipated by the Committee, resulting in faster convergence toward our dual objectives, then increases in the federal funds rate target likely would occur sooner and be more rapid than currently envisioned”. Again, this scenario may not actually play out - but clearly the likelihood of such development increases with good economic data.

Again, we think this means that hedges should be set and long positions in risky assets reduced. We also think that this most likely explains the weak markets during the early part of last week, in a vacuum of little economic data, following the strong jobs report issued just before the Independence Day holiday weekend (Good news, flight to quality). For example declining stocks led by higher beta small caps, and widening credit spreads (Figure 3). With rallying Treasuries this indeed suggests rational risk reduction in reaction to the jobs report (Figure 4).

Apart from buying vol in credit we think that a particularly attractive hedge against interest rate risk in credit right now is the 10s/30s spread curve flattener.

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It's official - whether you believe the reality of the headline jobs data or not - the Fed does and will act and "good news is bad news" for risk assets according to BofA

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Haha fuck you and your circus

lotsoffun's picture

the circus goes on.  there is no real good news.  but now - they are going to close up shop and head south. circus is ready to move on to the next town.

 the trumping of 'jobs' growth will continue - and since 'jobs' growth is good news, they can 'tighten'.   they will 'tighten' until the retail suckers get bent over and screaming.

suckers.  end the fed suckers, or just keep screaming.


buzzsaw99's picture

nothingburger with nothing on the side

Temerity Trader's picture

ZH is all perma-bears. I too was once a bear. I endured Ben’s relentless abuse, but being of modest means, was forced to capitulate early on. You are no doubt reeling and awestruck by the power of the omnipotent Fed.  About $4.5 TRILLION so far, they could double that if they saw the need.  Let’s see, that would mean stocks might double again too in the next five or so years? Embrace the new normal, stocks do not go down anymore, they cannot be allowed to.  Too big to fail.  Janet likely will push the Dow up to 20k, then allow a “huge” 10% selloff down to say 18k, then coyly announce the Fed Bank sees some possible weakness and may need to adjust their buying…Bam, Dow 20k again within hours.  You are really going to take the other side of the bet?  She sits there laughing, do you have $4.5 T? 

Helicopter Ben did his homework; he was 100% right about the effect of loose money.  Auto loans to anyone (again), stock mega-buybacks, no place else to park money, implicit and explicit market backing. Things looking a bit weak, loan forgiveness talk gets going. They want the housing bubble back and want those granite countertops sales to take off. Job creation is soaring; it doesn’t matter if they are part-time and pay nothing. That is what EBT cards are for. If they get desperate…another war.

Using their complex models they are managing it all and balancing everything perfectly on the head of a pin.  It is all inherently unstable, like a marble sitting motionless at the top of an inverted bowl. The slightest air current (read black swan event) can put it into motion.  This is about psychology and ‘The Fed is in their head’ right now.  So, unless and until, you see a major loss of faith in Fed, prudence dictates you come here and bitch a lot but don’t make any short bets.

MountainsRoam's picture

I am still firing away with my puts bets every month now.. The big one is near, any day now, some derivatives bets are close to blowing up.. So i say fuck the fed, I am gonna go down swinging, and watch the casino crumble..

game theory's picture

the fed just offset china mostly. but whatevah...most peeps don't understand economic control theory.

bilbert's picture

Dunno about the "don't make any short bets" bit. 

The highly shorted PM mining stocks continue to buck the "trend"................

luna_man's picture



Temerity Trader, just don't know "jack" about the "short"!


parrot much?

Colonel Klink's picture

Bankruptcy of America Muppet Looting, go fuck yourself.  Hope you finally go under.  Lying sacks of shit.

noname's picture

People give BofA creditability WOW you just got snookered.

dondonsurvelo's picture

No wage inflation so no rate increase. 

Sandy15's picture

BofAzzholes, the one that just anounced layoffs themselves are talking about job creation everywhere???????


Geezzzzzzzz, these people who've sold their souls to the gubment will say anything....... Feb pump more cuz Obummer just sanctioned Russia so we gotta let the sheeple know the econ is a OK...... just sayin'