Market Suffers From Too Much Information

On Monday he came out as a hawk just when the markets thought he'd take on a dovish stance given softness in recent economic reports.

Friday's nonfarm payrolls report capped off a week filled with data the markets read as pointing to a slowing economy -- slow enough that the Fed had room to pause. The odds of a fed funds rate hike dropped to below 50% after the jobs report Friday, after spiking to over 70% after the FOMC minutes last week.

Indeed, the slowing economy became the nexus of anxiety in the markets last week as the Treasury market telegraphed an "enough is enough" message to the Fed. The 10-year Treasury yield dipped below the fed funds rate of 5%. It closed Monday yielding 5.02%. The short end of the yield curve steepened, however, pricing in a June fed funds rate hike.

But Monday's stock market reaction was not exactly predictable. Stocks have been unsure which way is up lately when it comes to the Fed. They rallied when the hawkish FOMC minutes came out last week, but that was when the markets wanted to see credibility from the Fed. And yes, the market sold off early last month when Bernanke told CNBC's Maria Bartiromo that he's more hawkish than he seemed at his Joint Economic Committee testimony. But that was when the market wanted the Fed to pause.

It seems stock investors don't know if they want tough love and full disclosure or some soothing tones and a little mystery. Sometimes too much information is a burden.

The fed funds futures market flip-flopped immediately Monday, sending the likelihood of a June rate hike soaring from below 50% to 76%. Prior to Bernanke's speech, there was little reaction to the Institute for Supply Management services index report for May. The index dropped to 60.1, in line with estimates, but the prices-paid component surged to 77.5.

Market participants should brace themselves for further volatility this week and, indeed, until the Fed's next policy meeting.

With several of the Fed speakers on tap and another round of key economic reports between now and June 28-29, Wall Street could invent a futures market for the fed funds futures market. One could set their bets that Monday, Wednesday and Friday, odds will top 60% that the Fed will hike the fed funds rate for the 17th consecutive time at the end of June. On Tuesday and Thursday, odds will drop to 40%.

Bouncing Bernanke: A brief history of the new Fed chairman's communication efforts
Event	Key Comment(s)	Perceived as Hawk or Dove
Nov. 16: Confirmation Hearing, Senate Banking Committee	"In 2003, there was an episode where there was clearly miscommunication between the Federal Reserve and the bond markets [regarding deflation risks], and it caused a significant fluctuation in the bond markets. Clearly there was a misunderstanding about that risk."	Hawk, or at least attempt to dispel dovish perception.
Feb. 15-16: Semiannual report to Congress	"A leveling out or a modest softening of housing activity seems more likely than a sharp contraction." Not worried about the inverted yield curve -- low long-term rates will keep the economy moving. The policy response to inflation need not be as great as in the '70s, even with the move in energy prices. Not worried about the current account deficit, but would be concerned if it changed too rapidly.	Mixed
March 20: Speech, Economic Club of New York	"I would not interpret the currently very flat yield curve as indicating a significant economic slowdown to come, for several reasons." "To the extent that the recent behavior of long-term rates reflects a declining term premium, the policy rate associated with a given degree of financial stimulus will be higher than usual. But to the extent that long-term rates have been influenced by macroeconomic conditions, including such factors as trends in global saving and investment, the required policy rate will be lower."	Mixed, but interpreted as somewhat hawkish.
March 28: FOMC Statement	"Possible increases in resource utilization, in combination with the elevated prices of energy and other commodities, have the potential to add to inflation pressures."	Hawkish
April 18: Minutes of March FOMC meeting.	"Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy."	Dovish
April 27: Testimony, Joint Economic Committee	"At some point in the future the Committee may decide to take no action at one or more meetings in the interest of allowing more time to receive information relevant to the outlook." "Significant uncertainty attends the outlook for housing, and the risk exists that a slowdown more pronounced than we currently expect could prove a drag on growth this year and next."	Dovish
April 29: White House Correspondence Dinner	Tells CNBC reporter markets were "wrong" to react to his congressional testimony as necessarily telegraphing a pause. Bernanke says it's "worrisome" people don't see him as an "aggressive inflation fighter."	(Chicken) Hawk
May 10: FOMC meeting	"The Committee judges that some further policy firming may yet be needed to address inflation risks but emphasizes that the extent and timing of any such firming will depend importantly on the evolution of the economic outlook as implied by incoming information."	Not as dovish as traders hoped.
May 23: Q&A, Senate Banking Committee	CNBC episode was "a lapse in judgment on my part."	Maria Culpa
May 31: Minutes May FOMC Meeting	"...a number of factors augmenting the upside risks to inflation." Plus, FOMC considers 50 basis points.	Hawkish
June 5:	"core inflation...has reached a level that, if sustained, would be at or above the upper end of the range that many economists, including myself, would consider consistent with price stability and the promotion of maximum long-run growth." "Some survey-based measures of longer-term inflation expectations have edged up, on net, in recent months, as has the compensation for inflation and inflation risk implied by yields on nominal and inflation-indexed government debt."	(Super) Hawk
Source: FOMC Web site; TheStreet.com