In the first seven months of 2014, Goldman notes that equity, fixed income, and FX markets were most intently focused on the labor market with a number of the largest moves occurring due to employment reports and jobless claims. The equity market responded to a mix of economic, monetary policy, and geopolitical news. The fixed income market focused on employment reports, although other factors also resulted in large one-day moves. The dollar, although less volatile than usual, did move on both US economic developments and news out of Europe.
The primary drivers were Fed communication and economic releases. The FOMC's focus on labor market indicators gave employment reports heightened importance, with nine of the 30 moves directly related to a labor market data release.
In the equity market (represented by the S&P 500) the top moves in the past seven months were driven by a mix of economic data, monetary policy announcements, and geopolitical developments. The largest decline occurred on February 3 after the ISM manufacturing survey came in well below consensus. Weaker-than-expected auto sales added to the day-long equity sell off, with the S&P 500 down 2.3% at the end of the day. The next major decline–January 13–did not appear to be connected to any major economic release. The decline on January 24 came a day after a weaker-than-expected HSBC China flash PMI, reflecting concerns about emerging market growth.
On February 6, the ECB announced its decision to not cut rates, although President Mario Draghi hinted at the possibility for other stimulus measures as soon as March. Equities rose on the announcement. The next day's January employment report featured a strong household survey but a weak establishment survey. The market focused on the household survey, and equity prices rose as a result. On March 4, equities rose after Russian President Vladimir Putin announced the stoppage of military exercises along the Ukrainian border. The March employment report was weaker than expected, and equities fell as investors pulled out of growth stocks. Another sudden move away from stocks with stretched valuations came on April 10, when the S&P 500 fell 2.1%. Concern about international tensions re-emerged on July 17 when equities fell sharply after a Malaysian Air flight with 298 passengers and crew was shot down over Eastern Ukraine. Finally, on July 31 a significantly weaker-than-expected Chicago PMI report sparked a day-long decline in equities.
Fixed Income Market
The fixed income market (represented by the 5-year Treasury yield) focused on labor market data, although several other factors also caused large moves. The largest rise in yields came in response to the March 19 FOMC statement and Summary of Economic Projections (SEP). FOMC members’ forecasts for future fed funds rates were more hawkish than expected, leading to a 19bp rise in the 5-year Treasury. The next largest moves came from employment news in early January. A positive surprise on the December ADP employment report sent the 5-year yield up 8bp, but a couple of days later a negative surprise on the BLS employment report sent it back down 11bp.
The weaker-than-expected HSBC Chinese PMI Index printed on January 23 stoked concern about emerging market growth driving down yields. On February 13, the retail sales print came out below consensus and, coupled with weak earnings, resulted in a day-long decline in Treasury yields. On March 4, a softening of tensions along the Ukrainian border caused Treasury yields to rise. Employment news dominated the next couple of months, with a stronger-than-expected February employment report pushing Treasury yields up on March 7, and a weaker-than-expected March employment report pushing them back down on April 4. On April 17, better-than-expected jobless claims and a strong Philadelphia Fed survey resulted in improved sentiment and an 8bp rise in the 5-year yield. On July 30, the Q2 GDP report printed above expectations and showed an upward revision to Q1, pushing yields upwards.
Foreign Exchange Market
The foreign exchange market experienced few large intra-day moves, with two of the largest daily moves occurring on days with no major events. The dollar registered its biggest one-day gain of 0.6% on March 20 on the release of a stronger-than-expected Philadelphia Fed release. Several of the largest declines in the trade-weighted dollar were due to news out of Europe. On February 6, the ECB's decision not to cut rates caused the euro to appreciate against the dollar. A month later (March 6), a similar ECB announcement caused the euro to appreciate and resulted in the largest one-day decline by the trade-weighted dollar of 0.5%. Positive reports out of peripheral Europe on April 8 also resulted in the dollar’s depreciation against the euro.
The December employment report, released January 10, included a significant downside surprise on nonfarm payrolls, causing the dollar to depreciate. However, on January 15, the dollar appreciated on a better-than-expected Empire manufacturing survey coupled with concerns about emerging market economies. The dollar depreciated on April 4 with the release of the March employment report, largely due to a surprise increase in the labor force participation rate. Finally, on July 30, the stronger-than-expected Q2 GDP report caused the dollar to appreciate.
Source: Goldman Sachs