Why have markets grown more captivated by data releases?
Especially when the quality of statistics is deteriorating
EIGHT-THIRTY in the morning on the first Friday of every month is a special time for bond traders: it’s when America’s Bureau of Labour Statistics usually releases its monthly jobs data.
Despite the vast sums that some hedge funds spend on alternative data, landmark releases like the employment report or the consumer-price index (CPI) can still convulse markets.
When the September payrolls numbers, released on October 4th, blew past expectations, bond yields jumped by eight basis points (0.08 percentage points).
Stocks spiked, too, though the move was short-lived.
News has always driven markets, but curiously the importance of big data releases has grown substantially in recent years.
Analysis by The Economist finds that, over the past year, bond-market moves in America have been twice as large on days with major data releases or Federal Reserve decisions as on other days, while equity-market moves have been two-thirds larger (see chart).
In both cases, these were substantially above the historical norm.
Why, then, have markets decided to take hard facts much more seriously?
Part of the story is probably that the global economy has been so bizarre in recent years: a pandemic, vast fiscal stimulus, a war-fuelled spike in commodity prices.
When events are so far outside the historical norm, the impulse to latch on to the certainty of new data is understandable.
Another spur has been higher inflation.
Inflation is easy to ignore when it is bouncing around 2% or so, as it was for most of the 2010s.
Doing so is harder when it has only just come down from a 40-year high.
That puts more attention on data directly related to inflation, such as CPI releases or wage numbers, but also changes how all other data is interpreted.
Over the past few years markets have see-sawed between seeing strong jobs and growth numbers as reassuring indicators of a strengthening economy, or as troubling signs of an overheating and inflation-prone one.
Another, more recent shift has been growing recession angst.
Over the summer America triggered two well-known indicators of recession: the Sahm Rule (a sharp rise in unemployment) and the un-inversion of the yield curve (when the interest rate on short-term bonds falls back below the rate on long-term bonds).
The differences between decent and underwhelming economic news, often fine, start to matter a lot more to those looking closely for early signs of a crash.
Those fears have abated slightly as some firmer growth numbers in America have come through more recently.
One irony is that markets have decided to lean harder on economic data just as the quality of statistics has started to fall.
Response rates to many government surveys have been plummeting since the pandemic.
In America, high and disputed rates of illegal migration have messed with the quality of some jobs numbers.
Britain’s data problems may be even worse.
Some of its central bankers, in more candid moments, admit to largely ignoring the unemployment data; it’s now simply too choppy to be helpful.
If Buttonwood had to guess, markets’ current obsession with totemic data releases probably won’t last.
The most plausible route for the American economy over the next year or so is a gradual normalisation to a dull, slow but still-growing baseline.
That’s the sort of environment in which fine gradations in economic news tend to matter less.
Third-party data is often already nearly as good as the official stuff, and released much faster.
There are a few exceptions—the jobs numbers from ADP, a payrolls manager, have tended to be a pretty poor guide to the real thing—but the quality of alternative data is generally getting better.
For the moment, though, traders are stuck waiting at their Bloomberg terminals for the 8.30am news.
Late risers in America can at least take solace that they don’t live in Britain, which puts out economic data at 7am.
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