Data - dependency? What does that even mean these days?

Friday 8th July 2016

Data - dependency? What does that even mean these days?

ref :- "Dollar Rises as Jobs Report Bolsters Case for Fed Rate Increase", Bloomberg Markets

We know what it means literally, we were just wondering what the alternative to being data-dependent would be when it comes to making central bank policy.... data indifferent? Surely every central bank's monetary decisions in large part respond to the prevailing conditions. Running too hot? Currency needs a boost? We'll tighten...... Stimulus required? Exporters struggling? Let's relax it a little bit. Of course policymakers all have their ideal scenario, but they can't act in a vacuum. At the moment every banker and his dog would like to see rates higher , but can't set policy accordingly until there's evidence of growth in performance and inflation and a significant reduction in global uncertainty. In other words, policy is being dictated by conditions and not the other way around. Central bank policy may influence markets but that's a different thing entirely, and arguably not  always a good one.

Anyway, the point is that policy is ALWAYS highly data-dependent but the powers that be haven't always felt the need to keep pointing it out  --  if you like, it was taken as read. Is it a bit cynical to think that to characterise policy in such a way can be a handy get-out if adjustments have to be made to previously declared and highly desired plans when things don't pan out as one had hoped. Ironically, it was today's US June Non-Farm Payrolls number that got us cogitating upon the subject and they came in at a level that must have been very much to the liking of the Fed's Open Market Committee.

Payrolls climbed 287,000, which exceeded the upper end of estimates and was very significantly ahead of the average forecast of a gain of 180,000. Amazingly, the Brexit-battered markets have talking for two weeks about how Fed Funds were suggesting that the odds were marginally against a rate hike before 2018, but now all of a sudden chances of one THIS year have jumped from 12% to 24%. Some of the market heavyweights, who in fairness have always been more bullish on rates than  Fed Funds have been suggesting, can be expected to emphasize their case over the coming days.

All this over just one number.... and despite the fact that the Unemployment rate was marked up to 4.9% and Average Hourly Earnings came in under expectations  --  no great wage inflation to worry about in these figures, then. Last month's desperately weak number of +38,000 is already forgotten, at least by some. Payrolls were certainly very strong (the strongest for eight months)  but one swallow doesn't make a summer, as they say, and whilst we're at it what about Brexit, Italian banks, the Italian Refendum, China?

We're overstating things of course, the numbers have only been out an hour or so. But that's the problem with stressing this data-dependent thing..... it encourages people to view pieces of data in isolation, and to read far too much into one item. Conclusions are drawn that may easily be rendered redundant by the time the market gets to see the next set of data. The market nearly always over-reacts and that's fine for short-term traders, and as for those with funds controlled by computer-driven algorithms, snippets of fundamental information would be the last thing on their minds. But longer-term investors, and more to the point central bankers, they'll need to take a broader view. They'll still be data-dependent of course, why wouldn't they be? They'll just have to resist the knee-jerk mentality that for some has come to epitomize the term .