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Hot PPI initially spooked markets (yields and dollar up, stocks down) but that faded fast (on lower revisions) - but the stag-flation trend continues this week...

Source: Bloomberg

Powell did briefly spook stocks around 1030ET with the following comment:

"it's a possibility - but I dont think it will be the case - that the next action we take will be a rate hike... most likely we will stay the course...."

Between that comment (basically jawboning away any rate hikes) and the CPI-related components within PPI actually looking positive (well actually not positive and thus implying CPI may come softer), we actually saw rate-cut expectations rise today. 2024 now pricing in almost two cuts and 2025 now pricing in just over three cuts...

Source: Bloomberg

Goldman's John Flood noted that trading volumes finally tracking higher +31% vs the 20dma, with ETF’s capturing 25% of the overall tape.

Floor skews +106bps better to buy with HFs +100bps better to buy (squeezes in consumer discretionary + ETF buying driving this) while LOs -300bps better for sale (selling tech + industrials), but overall flows here feel muted.

Another big day for the 'meme stocks'...

Source: Bloomberg

...with AMC and SunPower (among others) joining GameStop

Source: Bloomberg

All of which means that 'indicative' hedge funds were clubbed like a baby seal for the second straight day - down a stunning 15% at the lows of the day...

And that meant several crowded longs (ABDE, V, SHOP) were hit as the squeeze in shorts forced de-grossing overall...

Source: Bloomberg

Small Caps were the winners today (and Dow was the laggard) but all the majors ended higher on the day. The Nasdaq closed at a record high...

The basket of MAG7 stocks broke out to new record highs today...

Source: Bloomberg

Treasury yields kneejerked higher on the PPI print then swiftly reversed to all end lower on the day by 3-4bps...

Source: Bloomberg

The dollar drifted back to the week's lows - after a brief spike higher on PPI...

Source: Bloomberg

The dollar's loss was gold's gain...

Source: Bloomberg

Bitcoin erased yesterday's gains which erased Friday's losses...

Source: Bloomberg

The roller-coaster in crude prices continues - today was back down again, with WTI finding support at $78...

Source: Bloomberg

Copper closed at a record high today...

Source: Bloomberg

Finally, spot the odd one out - Nasdaq at record highs while US macro data at its weakest in two years...

Source: Bloomberg

Financial Conditions are as easy as they've been in years...and Fed Funds are at 23 year highs...

Source: Bloomberg

...will you be the greater fool?

It looks as though Elon Musk may have slightly overshot the mark with cost cutting at Tesla.

The company, which saw layoffs number in the tens of thousands so far this year, is now hiring back some of the 500 workers from its Supercharger team it let go, according to Autoblog/Bloomberg. 

Max de Zegher, the director of charging for North America, has returned to his role, according the report. This move follows the termination of Rebecca Tinucci, the senior director, and most of the charging team by Elon Musk last month.

The electric vehicle industry was shaken by Musk's abrupt dissolution of the charging team, as Tesla’s Superchargers have been considered one of the company's most strategic assets.

Since the introduction of its first Superchargers in September 2012, Tesla has expanded its network to include over 6,200 stations and 57,000 connectors globally. The extent of rehiring laid-off workers remains unclear, and both Musk and de Zegher have not commented on the matter.

As we have written about extensively, over the past year, Tesla has successfully persuaded competitors to adopt its charging plugs as a standard and has formed partnerships with major global manufacturers to allow access to its charging network.

Musk committed last week to invest more than $500 million this year to expand Tesla's charging network. Prior to this commitment, he had indicated a plan to slow down the addition of new chargers, focusing instead on the maintenance and efficiency of existing sites.

On May 10, the @TeslaCharging account on X — a social media platform owned by Musk — posted a message expressing gratitude to charging site hosts and suppliers for their patience during the company’s restructuring. De Zegher echoed this sentiment by reposting the message.

As Bloomberg notes, this isn't the first time Musk has "overdone it" with layoffs. In 2019, he reversed a decision to close most of Tesla's retail stores and move sales online after facing resistance from landlords, subsequently raising vehicle prices. A similar reversal occurred at Twitter in late 2022 when, after laying off about half of the workforce, Musk asked dozens of employees to return.

Recall, Tesla announced in April it was cutting over 10% of its 140,000-strong global workforce to prepare for a new phase of growth, according to CNBC.

Details on the layoffs were sparse, but in a company memo, Elon Musk said the move was part of a strategic shift towards robotaxi development, stepping away from plans for a more affordable electric vehicle.

Authored by Eric Lundrum via American Greatness,

A new report reveals that over half of the population of illegal aliens that have come into the United States under Joe Biden’s watch are unemployed, thus creating an even greater strain on the country.

As reported by Breitbart, the report from the Center for Immigration Studies (CIS) released on Monday revealed that only 46% of illegals who came to the U.S. “in 2022 or later” were employed at the start of 2024.

“Immigration clearly adds workers to the country, but it just as clearly adds non-workers who need to be supported by the labor of others,” said CIS researchers Steven Camarota and Karen Zeigler in the report.

“This was the case in the past, it is true today, and it will surely be the case for immigrants who arrive in the future. Those who simply see immigration as a source of labor need to understand it is also a source of school children, retirees, and many other non-workers.”

The numbers in CIS’s report appear to debunk one of the most common arguments used by advocates of mass migration and open borders, who claim that illegals must be brought into the country to fill jobs that American citizens will not do.

Furthermore, CIS reported that the population of illegals in the U.S. has risen by at least 6.6 million since Joe Biden first took power in January of 2021. As of March of this year, there are over 51.6 million foreign-born illegals in the country, an increase of approximately 5.1 million since 2022. This accounts for at least 15.6% of the entire population of the United States.

“Many advocates for the unauthorized argue they should be given work permits so they can support themselves while they await a court date,” the report noted.

“Of course, others worry that this would only incentivize more illegal immigration. In 2024, a larger share of new arrivals were unauthorized relative to prior years due to the ongoing border crisis.”

CIS previously released a study debunking the Biden Administration’s attempts at claiming that it has overseen job growth in recent years, as many of the new jobs created were filled by illegals rather than American citizens; the number of employed Americans has actually decreased under Biden’s watch, falling even below pre-COVID levels.

After a weekend of the strongest solar storms to rock the planet in years, producing aurora across Europe, the United States, and as far as New Zealand, there is news the sun just burped its largest solar flare of Solar Cycle 25, according to space weather website Solarham. 

"The largest solar flare of the current solar cycle 25, and largest since 2017 was just observed around deparing AR 3664 off the west limb. The X8.7 event peaked at 16:51 UTC (May 14) causing a strong R3 level radio blackout directly over North America," Solarham wrote.

Solarham continued: "A filament located in the northeast quadrant erupted earlier today and produced a light bulb shaped CME. So far the blast appears to be headed mostly north of the Sun-Earth line. A further update will be provided whenever necessary."

NOAA's Space Weather Prediction Center wrote this solar flare was the largest of the cycle cycle (and the 17th most intense solar flare ever recorded). They said the flare was a "behemoth X8.7-class flare let loose from the very infamous parting Active Region 3664. It is the most intense flare seen since 2017."

The largest solar flare of the current solar cycle (and the 17th most intense solar flare ever recorded!) occurred momentarily ago as a behemoth X8.7-class flare let loose from the very infamous parting Active Region 3664. It is the most intense flare seen since 2017. #spacewx pic.twitter.com/WBp5DvQooB

SWPC highlighted some good news: the solar flare was not directly facing Earth.

No, and that’s the interesting thing—it may have been even more intense if it wasn’t partially eclipsed. Storms launched from this region aren’t very likely to get Earth but the radiational / X-ray piece still is

One X user responded to SWPC:

"If this happened when this group was earth-facing, during all the other craziness, this could have been remarkably bad." 

If this happened when this group was earth facing, during all the other craziness, this could have been remarkably bad

About one year ago, solar physicist Alex James at the University of College London warned that the sun's increase in solar activity was a sign that the solar maximum could arrive much sooner than anticipated. 

All this evidence suggests that Solar Cycle 25 is "going to peak earlier, and it's going to peak higher than expected," James said. 

Here is a graph of Solar Cycle 25.

In 2016, the federal government became increasingly serious about potential grid-down events produced by solar storms with an executive order signed by the Obama Administration titled "Coordinating Efforts to Prepare the Nation for Space Weather Events."

While the nation's power grid, SpaceX's Starlink satellite constellation, and other communication networks involving space-based transmission all survived the weekend solar blast, some disruptions were reported, including GPS and short-wave radio. 

Sigh... 

Via SchiffGold.com,

Last week, Peter appeared on This Week in Mining with Jay Martin. Jay and Peter discuss the state of the economy, the government’s assault on sound money, and why the mining sector constitutes a good investment.

Early on in the interview, Peter lays out the dilemma the Federal Reserve will face in the near future:

“Inflation is going to get much stronger as the economy weakens and enters recession... Then the Fed has to choose, and it’s going to be at the point where it’s damned if it does and damned if it doesn’t. But it’s going to have to make a choice, a very unpopular choice. Does it fight inflation, which means much higher rates than the rates we have now (the rates we have now are not high enough)?

Does the Fed hike rates even though there’s a recession and even though the hikes will make this recession worse and potentially cause a massive financial crisis?

...Or will the Fed ignore the inflation problem and try to rescue the economy by creating more inflation?”

As the government continues to grow and encroach on individual liberty, Peter explains what would happen if gold is ever outlawed, as it was in the 1930s:

“There always will be a market. If it’s illegal, then there’s a black market. People sell all kinds of drugs in this country, and they’re not legal. But there are plenty of buyers. It just means the market is underground, and of course, even if it’s illegal in America, that doesn’t mean it’s going to be illegal in every country, so there will be plenty of legal gold markets. If they ever make it illegal to own gold, the one thing you want to own is gold. They’re not going to make it illegal because nobody wants it and the price is really low, right? They’re going to make it illegal because everybody is buying gold and it’s really expensive.”

They also discuss central bank digital currencies, the latest fad in authoritarianism:

“The more power you give to the government to interfere with the economy, the worse the economy is going to be, because you don’t want the government to interfere at all. The smaller the government, the better. But central bank digital currencies are just a way to make government a lot bigger and a lot more powerful and a lot more intrusive and a lot more oppressive, and so I don’t want it! Actually, ideally, I don’t want the government involved in money at all. I think it should just be created by the private sector.”

It’s important that citizens recognize the true cause of inflation:

“People don’t realize that the government is the source of inflation. And Wall Street and academia helped fool the public by talking about inflation as if it were rising prices. And they talk about ‘food price inflation,’ ‘healthcare inflation,’ ‘housing inflation,’ right? All this stuff is designed to push the blame for inflation onto the farmer, onto businesses, onto labor unions. All inflation has only one source, and that’s government.”

Both Jay and Peter see opportunity in the mining sector, especially if gold stays on its current trajectory:

“If all of a sudden a lot of gold that is unprofitable to mine at, let’s say even $2300 an ounce, when gold is $5000, $10000, wherever it’s going to be, even though the costs of mining will have gone up, they’re not going to go up anywhere near that proportion. So I think [gold] reserves that may be valued at zero are going to be worth billions of dollars on the books of these companies. So I think that’s a huge call option that’s free in these gold mining stocks.”

Royalty companies like Franco-Nevada offer investors additional protection from rising costs in the mining sector at the expense of reduced exposure to the price of gold:

“Look at the leader, Franco-Nevada. I mean look at where Franco-Nevada was 10 years ago, and look at where it’s at today. It’s a huge gain! But then look at Barrick and Newmont and all these other stocks— they’re lower than they were 10 years ago. Why? Because they got killed by rising costs. But Franco-Nevada didn’t have to deal with the costs. They just got the benefit of the rising price.”

Listeners interested in the mining sector will especially enjoy this interview, so make sure to watch the entire program at VRIC Media.

By Ahmed Bin Sulayem

Since its establishment in 2005, the Dubai Commodities Clearing Corporation (DCCC) has been the central counterparty for clearing and settlement services to the Dubai Gold & Commodities Exchange (DGCX). Emerging as the largest clearing house in the MENA region by volume, DCCC is now poised to play a far more multinational role in line with the transition of economic power from west to east, while providing a broader range of products and services.

Why the DCCC?

As a wholly owned subsidiary of DGCX, which in turn is a wholly owned subsidiary of Dubai Multi Commodities Centre, DCCC’s success may have started out of functionality, but has since expanded to provide a streamlined mechanism for its members with numerous competitive advantages. Outside of providing guaranteed settlement and reduced counterparty risk, DCCC also offers the advantages of transacting and clearing business within the UAE, thus benefiting from a strong and safe business and regulatory environment. For greater transparency and predictability, DCCC also operates a simplified fee structure that applies to all clearing members, including identical margins regardless of commercial or non-commercial status. Overlapping across Asian, European and U.S. trading hours, DCCC’s robust regulation, under the Securities & Commodities Authority (SCA), recognition by the Monetary Authority of Singapore (MAS), the Bank of England, and Abu Dhabi Global Market (ADGM) and membership of CCP Global have further minimised systemic risk, while enhancing efficiency for its clients. Providing clearing and settlement services for derivative contracts across four asset classes, namely base and precious metals, hydrocarbons, currencies, and equities, DCCC’s consistent investment in state-of-the-art risk management systems, such as ActiveRisk, have enhanced its regulatory compliance in line with the Principles for Financial Markets Infrastructure (PFMI) and technical standards under European Market Infrastructure Regulation (EMIR). As a result, DCCC has achieved several notable milestones since its launch, including clearing 175,690,385 contracts between 2005 – 2023, while becoming one of the most prominent offshore exchanges for INR Futures and the first Shari’ah-compliant spot gold contract exchange. By working with a list of approved clearing banks, DCCC trades an extensive list of currency pairs that require physical delivery on all open positions, with most currencies being settled in USDs. As an additional transparency measure, delivery of the Shari’ah Spot Gold contract takes place through DMCC’s Tradeflow, a dedicated online platform for registering ownership of commodities and their subsequent transfers.

A Change In Economic Supply and Demand

As the world’s reserve currency for almost eighty years, DCCC’s historic default for settling contracts in U.S. dollars has always made sense. As a functional currency in most economies, even heavily sanctioned ones such as Russia, the U.S. dollar remains a stalwart for trade and commerce, however, in recent years its influence has waned through a culmination of geopolitical and geostrategic shifts, particularly in the currency and oil & gas markets.

According to Meera Chandan, Co-Head of the Global FX Strategy research team at J.P. Morgan, “Overall dollar usage has declined, but it remains within long-run ranges and its share remains elevated compared to other currencies. The dollar’s transactional dominance remains top-of-class despite secular declines in U.S. trade shares. On the other hand, de-dollarization is evident in FX reserves, where the dollar’s share has declined to a record low of 58%.”

Twilight of the Petrodollar

Where oil & gas is concerned, J.P. Morgan’s Head of Global Commodities Strategy, Natasha Kaneva commented, “The U.S. dollar, one of the key drivers of global oil prices, appears to be losing its once powerful influence.” Highlighting how oil & gas has continued to follow the path of least resistance, Kaneva went on to say, “Crucially, Russian oil is now either sold in the local currencies of the buyers or in the currencies of countries that Russia perceives as friendly.” Supporting Kaneva’s position, a J.P Morgan de-dollarisation report went on to say, “Major Russian commodity producers have started issuing bonds in yuan. In September 2022, state-owned oil company Rosneft made a public offering of 10 billion yuan in bonds, followed by a second tranche of 15 billion yuan in March 2023.”

As a movement that is by no means limited to Russia, other countries appear to be following suit. As illustrated in the same report: “Some Indian refiners have begun paying for Russian oil purchased via Dubai-based traders in dirhams, while others are considering doing so in yuan. Saudi Arabia is reportedly exploring the acceptance of payments in other currencies.”

While some may identify de-dollarisation as a recurrent, post-war theme, there is growing sentiment that the carrot of seizing some measure of inflationary control and the stick of sanctions means a complete incentivisation for nations to follow through for an alternative. Not only are there widespread concerns about the United States’ reckless domestic policies on printing money, but its treatment of Russia as a cautionary tale of the sort of disruption less resource-rich, dollar dependent nations could face. As highlighted by Thomas Fazi, the freezing of Russia’s foreign exchange reserves, “violated an almost sacred principle: the neutrality of international reserves”. Even more indicatively, many countries didn’t follow suit in applying sanctions, but instead “quietly started strengthening their ties with Russia and China in an effort to reduce their dependence on the dollar-centric system”. Good examples include Bolivia, Brazil, and Argentina, which since July 2023, have been paying for imports and exports using Chinese renminbi, or Indian Oil’s rupee payment for a million barrels from Abu Dhabi National Oil Company in the same month.

Return of the Gold Rush

As a further indicator of global sentiment, the en masse gold rush of the world’s central banks, particularly in the face of a strong dollar and falling inflation expectations, would suggest many macroeconomies believe now is a good time to hedge. Led by China, which has been stockpiling gold for 17 consecutive months, other nations including Singapore and Poland have also been buying in large quantities, propelling the price to USD 2,430 per ounce, with many gold bugs anticipating highs beyond USD 3,000 before the next business cycle shift. Amid the global uncertainty, those buying gold are also cautious about where it should be kept. Again, driven by the U.S.-led sanctions against Russia, “an increasing number of countries are repatriating gold reserves as protection against the sort of sanctions imposed by the West on Russia”, according to an Invesco survey of central bank and sovereign wealth funds published in July last year. As a result, the survey showed a “substantial share” of central banks were concerned by the precedent that had been set with 68 per cent of respondents stating they will be keeping their reserves at home, compared to 50 per cent in 2020.

A Centralised, Trustworthy, Apolitical Ecosystem

With the global economies in a state of transition, the UAE has emerged as a centralised destination for people and businesses. Whether through companies establishing trading hubs, or HNWIs hedging their assets and or liabilities in a transparent jurisdiction, the UAE has achieved a state of global neutrality, while offering considerable advantages for its residents and investors. As illustrated by H.E Abdulla bin Touq, the UAE’s Minister of Economy, "The UAE has established itself as a leading global financial hub that offers all enablers for success for the business sector, investors, and start-ups from around the world. This was made possible by a resilient economic legislative ecosystem, a competitive, attractive, and stable business environment and the further development of infrastructure to be among the best globally." Commenting on the back of the announcement that UAE business licenses linked to creative activities alone had reached 932,000 registrations by the end of H1 2023, similar figures were echoed throughout the UAE’s free zone communities. DMCC achieved record growth with 2,692 new companies joining its community, accounting for 11 per cent of Dubai’s total FDI inflows in 2023, while DCCC cleared a total value of more than USD 115bn.

A Catalyst for Change

As a result, DCCC finds itself in the unique position of being the only regional institution that can transparently handle the clearing and settlement services for bullion, oil & gas, and currency pairs, while retaining the ability to create new products in line with both local and international demand. A great example of this being the recent launch of the GCC’s first Shari’ah compliant Silver Spot Contract. With many different global banks and brokerage houses already listed as clients, DCCC’s highly regulated environment also means significant advantages and or opportunities for its members, specifically across the asset classes mentioned. Most importantly, however, DCCC has no restrictions when it comes to creating any number or types of product for any market, providing the necessary localised permissions are granted. As a result, it offers a significant advantage over its peers when it comes to creating versatile, market-led products that may fall into high demand in the short to mid-term. 

For gold, DCCC not only provides the clearing and settlements services, but by extension a secure and accessible destination in which to keep it. Home to the MENA region’s largest vault and several of the world’s largest refiners, DMCC also works closely with logistical operators such as Brinks and Transguard, while Dubai’s two international airports mean fast and direct access either for import or export purposes. Supported by its Tradeflow system, Dubai is already home to 25 per cent of the world’s gold trade, while the volume of gold contracts cleared through DCCC exceeded USD 4.97bn in 2023.

For currencies, as mentioned, DCCC has zero restrictions in creating new currency products, meaning its ability to launch new pairings, with the express permission of each sovereign state and the necessary, regulatory approvals. This could further extend to provide investment opportunities for either gold-backed currencies in the future or even a basket of currencies made of the BRICS+ nations, which could be priced in accordance with GDP.

For oil & gas, as already illustrated through India’s accelerating CEPA-based relationship with the UAE, DCCC is also ready for countries to purchase hydrocarbon products to be settled in their domestic currencies, thereby cutting transaction costs by eliminating dollar conversions.

A Business-First Environment

While much of the world has continued towards greater uncertainty, the UAE has worked on creating greater security through a highly regulated, safe, and secure destination that upholds the traditional requirements of transparent business under the rule of international law. Since departing FATF’s grey list earlier this year, business has continued to surge, while its international ranking for safety and trustworthiness continues to rise. This includes its recognition as one of the most trusted countries in the world according to the 2023 Edelman Trust Barometer Global Report.

With 2024 tipped not just as an election year, but “perhaps the election year” according to Time, the fact that 64 nations, plus the European Union all head to the polls will indisputably lead to greater volatility. This, coupled with the ongoing conflicts in Ukraine and Gaza, has already resulted in more countries and institutional investors seeking not just a place to weather the storm but prepare for what lies ahead. In this capacity, DCCC and its parent companies represent one of the last safe harbours that are prepared for business-as-usual, no matter the outcome.  

Cocoa futures in New York crashed for the second time in just days as liquidity evaporated, and a new weather forecast points to improved weather conditions for top producers of the bean in West Africa.

The most active cocoa contract in New York plunged 19% on Monday, recovering some losses on Tuesday, up about 5%. This followed the cocoa crash on May 1 of 18%. 

Cocoa prices are retracing at the 61.8% Fibo level from this year's record surge from $4,000 a ton to $12,000. The rollercoaster price action continues to propel 60-day historical volatility higher.

Bloomberg said the driver in the latest cocoa crash was due to a weather forecast of increased "rainfall boosting the outlook for crops" and "low open interest in cocoa markets." 

Donald Keeney, senior meteorologist at Maxar Technologies, said rains "should improve conditions quite a bit" across Ghana, the world's second-biggest grower, and Indonesia. He said the top producer, Ivory Coast, will also receive rainfall, adding that more precipitation is needed to reverse arid conditions across the world's top-producing cocoa farms. 

More from Bloomberg: 

A lack of moisture in top West African cocoa producers has weighed on supply in a market already hit by aging trees and disease. Prices saw a 9% recovery last week, with money managers boosting their net-bullish bets to a three-week high. Still, some expect that a record price set in mid-April will mark the peak of the historic rally.

Producers in Ivory Coast are worried that thunderstorms may pluck off the few flowers on trees and hamper plant growth. The mid-crop harvest is small in southeast Ivory coast compared with last year. Rains are making it difficult to transport beans to Ivorian cities, while smuggling is still taking place across the border to take advantage of better prices. In Cameroon, bean theft is an increasing problem. That's prompting farmers to dry beans for a shorter period, which may impact quality. In southeast Nigeria, the rains have ensured that the soil is getting its moisture back. In the southwest, trees are yet to respond to the rains. The delay in flowering is the result of the use of the wrong anti-fungal chemicals by farmers in previous years, one grower in Ondo state said.

Days ago, Rabobank analyst Paul Joules said cocoa prices have likely peaked: 

"A combination of weakening global demand and production responses, particularly from countries without a fixed farmgate price, will help alleviate the pronounced uncertainty baked into current futures pricing," Joules said. 

Still, "it's likely that inflated cocoa prices will stick around for the next few years," he noted, adding prices are unlikely to return to "normal" levels quickly but have passed their peak. 

Remember what Bloomberg's Javier Blas warned about last month:

Liquidity in cocoa markets is quickly evaporating.

The number of outstanding contracts (open interest) in New York and London combined has tumbled 40% since mid-January. NY open interest is at a 12-year low.#cocoa #chocflation

Meanwhile, commodity trader Pierre Andurand stands by his $20,000 price target for later this year. 

Authored by Simon White, Bloomberg macro strategist,

We’re back in a “bad news is good news” regime for stocks, where weak economic data prompts higher prices. That’s typically a supportive backdrop for equities, but investors should be alert for when stocks fail to rally on good news as this signals the economy is potentially in or about to be in a recession, with the stock market poised to see its worst returns.

“Bad news sells best. ’Cause good news is no news,” says Kirk Douglas’s journalist in Billy Wilder’s Ace in the Hole. But bad news isn’t just a boon for newspapers; stocks also frequently rally on news that intuitively should see them selling off.

Blame central banks for this perverse state of affairs, with their implicit backstop for markets.

Stocks have recently been rallying on the back of weaker economic data points, such as payrolls and the ISM.

But the “bad news is good news” shorthand used by the market needs a more rigorous foundation.

• First, define exactly that we mean by statements like “bad news is good news”;

• second, define the different regimes based on our definition;

• and third, look at how the market has performed through the regimes.

Claude Shannon - the father of information theory which forms the basis of modern communication - invented the idea that information is surprise. The utility in information comes not from what is expected, but what is unexpected. That’s typically how markets behave with economic data, reacting not to the information itself, but by how much it surprises to the upside or downside.

Economic surprise indexes capture the number of surprises on a cumulative basis. When they are positive, economic data is on net beating expectations, and vice-versa when they are negative. Therefore we can define four regimes based on how stocks are changing in relation to economic surprises:

• Good news is good news (stocks and eco surprises rising together)

• Bad news is good news (stocks rise when eco surprises fall)

• Good news is bad news (stocks fall when eco surprises rise)

• Bad news is bad news (stocks fall when eco surprises fall)

I have used the Bloomberg surprise indexes, which are separated out by economic type, such as survey data and labor data. I took the median of these indexes, excepting those that have a negative relationship with the S&P over the whole sample period (we would expect a positive relationship overall, e.g. positive surprises causing the market to rally).

The chart above shows the S&P color-coded for the different regimes. As we can see, the market not long ago went back into a bad news is good news regime. Most of the S&P’s advance since October 2022 has either been in that regime, or the good news is good news regime. These two are typically dominant when the market is in a strong bullish trend – no wonder when stocks go up on good or bad news!

There’s no significant difference if we restrict the sample to the post-GFC period when Federal Reserve support for markets became more explicit, with the percentage of the time when bad news was good for stocks only rising marginally to 26% from 23%.

The market rallying on any news is what you would expect to see more often, given that the market generally rises over time. But if there were no Fed it’s a strong bet that stocks would rise less of the time overall as they would not be as insulated from bad news.

This is all quite interesting, but what does it tell us about stock performance? The table below shows the one, three, six and 12-month average forward returns of the S&P when in each regime, along with the whole-sample average returns for the same time periods.

We can see when stocks are rallying on good or bad news (top two rows in table), forward returns on all time horizons are above average. Thus the current regime is historically consistent with the S&P returning a little above its average over the coming months.

When stocks are selling off on bad news, that’s not great for forward returns, but when stocks can’t even rally when the news is good is when investors need to be most wary (bottom row in table).

It is in this regime that stocks consistently come in below average, performing poorly over the next one, three, six and 12 months.

By what avenue does disappointing data cause stock prices to rise? One way is bad data triggering a flight-to-safety bid in bonds, or a lowering in Fed rate expectations, and the resulting lower yields boosting stock prices. We find that this “bad news is good news” regime is more likely when the stock-bond correlation is positive (on a rolling one-year basis) versus when it is negative.

But that’s not the only way. Positioning can mean stocks can rally as investors sell the rumor of weaker-than-expected data, and then buy the fact when the data comes in.

Nonetheless, in the current environment there are more days when stocks and bonds are positively correlated versus when they are not, increasing the likelihood the bad news is good news dynamic can persist for now.

That will help stocks as they face potential headwinds from an economy that may soon begin to look more recessionary. Unsurprisingly, during recessions even good news is bad for stocks, and it’s best to be out of the market altogether.