Stocks and bonds have always responded to the latest economic data releases. But with the Federal Reserve potentially set to hike rates as early as June, the markets' data dependency could degenerate into a full-out data addiction.
It's not that investors have suddenly taken a greater interest in the growth rate of the economy. Rather, since the general trend of growth puts the Fed on pace to hike raise, each individual data point is starting to take on a greater import.
Some even suggest that this is by design. That is, the Fed may be creating a deliberate show of tying policy to data, in order to slowly reacquaint the market with volatility after years of quiescent gains.
With the Fed "deemphasizing forward guidance, we believe that the market finally is truly data dependent," Bank of America Merrill Lynch (BofAML) rates strategists wrote in a recent note. "The sensitivity to data surprises is much greater today compared with the last few years, and we expect it to continue into the first hike."
The strategists point out that the frequency of massive daily moves in interest rates (and bond prices, which move inversely to rates) have increased dramatically.
In fact, rate volatility is about as high as in the mid-2013 "taper tantrum," when the Fed weighed pulling back on quantitative easing. And many of the recent moves are in reaction to important economic data releases such as the jobs report—the BofAML team points out that rates on 2-year and 10-year Treasury instruments "have moved twice as much on payroll days since October compared to the 10 months prior."