Wall Street says bad news is no longer good news. Here’s why.

New York (CNN) There has been a seismic shift in investor perspective: bad news is no longer good news.

For the past year, Wall Street has been hoping for quiet monthly economic data that would encourage the Fed to pause. Its sharp pace of raising interest rates to tame inflation.

But at the March meeting – only days later series of bank failures Raised concerns about the stability of the economy – the central bank pointed out It plans to stop raising interest rates sometime this year. As interest rate hikes come to an end, investors have stopped trying to guess the Fed’s next move and turned instead to the health of the economy.

this means that, Whereas weak economic data used to signal good news – that the Fed may stop raising interest rates – now, cold economic data simply indicates that the economy is weakening. This makes investors worried that the slowing economy may fall into recession.

What happened last week? Markets swung after a slew of economic reports indicating that the inflamed labor market was finally starting to cool (more on that later), flashed warning signs across Wall Street.

Accordingly, investors have dumped the large-cap, high-growth stocks that have jumped out recently to rush into defensive stocks in industries such as healthcare and consumer goods.

While technology stocks recovered somewhat by the end of the short trading week — the markets were closed in observance of Good Friday — the Nasdaq Composite was still down 1.1%. The broad-based S&P 500 fell 0.1% and the Dow Jones Industrial Average gained 0.6%.

What does this mean for the markets? Now that Wall Street is in the “bad news is bad news and good news is good news” mode, it will look for signs that the economy is still resilient.

What hasn’t changed is that investors still want to see quiet inflation data. While the central bank has indicated that it will stop raising interest rates this year, its actions so far have stalled Only fairly stable prices. The personal consumption expenditures price index, the Fed’s preferred measure of inflation, rose 5% for the 12 months ending in February — well above its 2% inflation target.

Moreover, Wall Street may be overly optimistic about how the Fed will behave in the future: some investors expect the central bank to cut rates several times this year, although the central bank indicated last month that it has no intention of doing so. so. lower rates in 2023.

It is unclear how the markets will react if the Fed does not cut interest rates this year. There likely won’t be a significant rally unless the central bank pivots or at least indicates that it plans soon, said George Cipollone, portfolio manager at Penn Mutual Asset Management.

He adds that comments that are hawkish or that reveal inflation fears could hurt the markets. “It keeps that boiling point and the temperature a little bit high.”

What then? The Fed holds its next meeting in early May. Before that, it will have to analyze several economic reports to get a sense of how the economy is doing, and what it will be able to handle. Markets currently expect the Fed to raise interest rates by a quarter point, accordingly to CME FedWatch tool.

Is the job market cold?

The job market appears to be slowing somewhat, at least according to the batch of data released last week. But it is still too early to assume that the labor market has lost steam.

President Joe Biden said in a statement Friday that the March data is “a good jobs report for hard-working Americans.”

The March jobs report revealed that US employers added a lower-than-expected reading 236,000 job opportunities Last month. Economists expected a net gain of 239,000 jobs in the month, according to Refinitiv.

The unemployment rate has fallen to 3.5%, according to the Bureau of Labor Statistics. This is lower than expectations for stability at 3.6%.

The jobs report was also the first in 12 months to fall short of expectations.

But this does not mean that the labor market is no longer strong.

“The labor market is showing signs of cooling, but it remains very tight,” Bank of America researchers wrote in a note on Friday.

However, other data released last week helps demonstrate that cracks are finally starting to form in the labor market. Employment Opportunities and Labor Turnover Survey for the month of February open Last week, the number of jobs available in the United States fell to its lowest level since May 2021. ADP’s private sector payroll report fell far short of expectations.

What this means for the Fed is that the slowdown in the latest jobs report likely won’t be enough for the central bank to halt interest rates at their next meeting.

“The Fed is likely to raise interest rates in May as the labor market continues to challenge the cumulative effects of rate hikes that began over a year ago,” said Quincy Crosby, chief global strategist at LPL Financial.

the next

Monday: wholesale inventory.

Tuesday: NFIB Small Business Optimism Index. earnings from carmax (KMX), Albertson (ACI) f First Republic Bank (FRC).

Wednesday: Consumer Price Index and FOMC Meeting Minutes.

Thursday: Monthly OPEC report and producer price index. earnings from Delta Airlines (DAL).

Friday: Retail Sales and Consumer Opinion Survey University of Michigan. earnings from c. B. Morgan Chase (JPM), Wells Fargo (WFC), Black stone (BLK), Citigroup (Atmosphere PNC Financial Services (PNC).