Another "flip-flop" week, with the US stock market watching the Federal Reserve, and the Federal Reserve watching the data

Wall Street News mentioned earlier that before the release of the heavyweight non-farm payrolls report, with no signs of slowing down in inflation, employment, and other data, Federal Reserve Chairman Powell sent a dovish signal at this month's FOMC meeting, stating that the next interest rate move "is unlikely to be a rate hike."

Powell's confidence may stem from his preview of the non-farm payroll data to be released on Friday, thus believing that interest rates have peaked, and even if inflation continues to be somewhat sticky, a rate cut may be possible.

As expected, the positive April non-farm payrolls data favored a rate cut, with US stocks rebounding strongly, US bonds surging, and the S&P 500 index and US bonds seeing their first simultaneous weekly rise in a month. However, investors who bet on the Fed delaying a rate cut paid a huge price, as the shorts were hung up and beaten.

All of this seems to be because Wall Street traders are trying to stay ahead of the data-dependent Fed, but the conflicting signals released by economic data have left them "caught in the middle," making everything they do wrong.

Taking the labor market as an example, data released this Tuesday showed that the employment cost index, which measures wages and benefits, saw the largest increase in a year in the first quarter, causing the 2-year US bond yield to rise above 5% on that day.

However, on Friday, three days later, the non-farm payrolls report showed that April wages saw the smallest increase since 2021, falling below expectations. The non-farm payrolls report exceeded expectations across the board, leading to a significant decline in the 2-year US bond yield.

Contradictory Data Leaves Traders and Analysts Dizzy

There are many more examples like this:

Retail sales soar, GDP growth slows down; industrial production keeps rising, but manufacturing is on a downward trend; initial jobless claims remain stable, but employment numbers are declining.

For traders who are convinced that every economic indicator could influence the Fed's monetary policy direction, this is undoubtedly confusing, leading to subsequent trading operations becoming fragmented. Nick Timiraos, a reporter for the New Fed Communications Agency and The Wall Street Journal, previously pointed out that the market currently believes that the Fed's inclination is no longer as important, but rather the economic and inflation data are crucial.

As a result, the stock market has experienced severe volatility, with an index measuring the daily volatility of US stocks jumping to its highest level since November last year.

In response to this, Mohamed El-Erian, Dean of Queen's College, Cambridge, stated in a media interview on Friday: "People are indeed worried that the Federal Reserve relies too much on data, which will increase market volatility.

It is worth mentioning that not only Wall Street traders, but analysts have also been left "dizzy" by the recently released economic data, having to revise rate expectations every few months.

Friday's non-farm payroll data was significantly below Wall Street's expectations. Out of 61 analysts surveyed by the media, only 5 predicted a 0.2% increase in average hourly wages. In contrast, the labor cost index released last Tuesday showed a 1.2% increase, higher than the estimates of all analysts surveyed by the media.

Uncertain Future, Caution Prevails

Despite the short-term bullish sentiment due to positive data on Friday and some profit-taking by traders, investors still have doubts about the future outlook.

Data compiled by the media shows that stock and bond ETFs saw a net inflow of $32 billion in April, the smallest inflow since August 2023.

Due to rising yields causing Wall Street to shy away from longer-duration assets, a large investment-grade credit ETF saw $3.6 billion outflows in April.

Citigroup's Levkovich Index measures market sentiment by tracking options trading, short selling, and fund flows. After weeks of frenzy, the index has now turned neutral.

Retail investors, who had once made a comeback, are now showing signs of fatigue. JPMorgan cited flow data from options traders holding fewer than 10 contracts, indicating that demand for bullish options has dropped to the lowest level this year.

Amy Wu Silverman, Head of Derivatives Strategy at Royal Bank of Canada Capital Markets, said:

There has been a major shift in options sentiment. The frenzy for bullish options peaked in early March, and the phenomenon of YOLO and FOMO (speculative behavior and fear of missing out typically seen in retail investors) we saw before has greatly diminished."