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Kelly Evans: Here we go with "good news is bad news" again

Scott Mlyn | CNBC

You almost wonder if the simplest sign that the Fed is making a policy mistake is any time the phrase "good news is bad news" rears its head.  

And here we are with it making the rounds again, uttered by myself and everybody else watching markets lately. Yesterday was a case in point; we started the day in rally mode driven by better Covid news out of China, only to see the gains evaporate after the strong ISM services report hit. 

The services number overall jumped two points to 56.5 for November, with business activity hitting an 11-month high. That, especially after Friday's decent jobs number, sparked a selloff in bonds that pushed rates higher and stocks lower as the day wore on. The main "problem" with strong data is it makes the Fed less likely to pause its sharp rate hikes, sealing in a higher chance of recession next year, according to markets.  

I asked Michael Darda in our must-watch interview yesterday with Steve Liesman, why it will be so hard to avoid a Fed-tightening-driven recession. He said because the labor market is so strong. In other words, when the Fed overly stimulated the economy after the Covid shutdown, that set the course for them to have to slam on the brakes now as a result. If the labor market were weaker right now, the Fed could pause. Because it's not, they can't.  

So the real problem we face is that the policy mistake isn't the rate hikes right now per se, which could be more easily corrected, but rather the "too much" Fed stimulus from 2020 into early 2022. A decade ago we were in a similar quandary; arguably the policy response to the financial crisis was too small, and therefore for years markets were stuck in a "good news is bad news" environment while constantly pressing the Fed for more quantitative easing.  

Oddly the simplest way to resolve all this would be if the labor market slowed substantially. But nobody wants that. Also, it's not clear the labor market can ever really "slow"; you pretty much never see the unemployment rate rise by more than half a percent from its lows without a recession taking place. You're hoping to break the laws of physics, basically, if you're trying to slow the labor market without sparking one. 

So, recession now, or recession later? Little wonder so many investors/CEOs/billionaires have gotten bearish. As Carter Worth said on our show yesterday--we might well have a rally into year-end. But come January, look out below

See you at 1 p.m!

Kelly

Twitter: @KellyCNBC

Instagram: @realkellyevans