Stocks and Bonds React Differently to ISM, Payrolls, and CPI Data
Bond yields typically increase following major data releases such as payrolls, ISM, and CPI, but in recent years, they have shown a more pronounced rise after payroll reports. Stock movements, however, tend to be less influenced by these releases, except for the ISM data, which consistently has a positive impact on the equity market.
Economic data releases provide an opportunity for Bayesian analysis, allowing continuous updates as new information becomes available, unlike the quarterly release of company data. Despite this, market reactions to major economic data often exhibit a skew rather than randomness, even when accounting for long-term trends.
To analyze the behavior of stocks and bonds after the release of ISM (both services and manufacturing), payrolls, and CPI, I calculated their average performance on the release day and for the subsequent 20 days, accumulating these returns.
The results, illustrated in the chart below, show that stocks consistently outperform the baseline in the days following the monthly release of manufacturing ISM data, dating back to 1997. The blue line in the chart represents the baseline S&P return, calculated by selecting random days each month, computing their mean returns, and averaging across multiple Monte Carlo simulations.
This persistent positive skew is not observed after the release of services ISM, payrolls, or CPI data. The compound average S&P returns for these data points oscillate around the baseline, lacking the consistent positive bias seen with the manufacturing ISM.
The ISM's release near the start of each month raises the possibility of bias due to new money and rebalancing flows. However, the average one-month S&P return starting on the first day of the month is not the highest, suggesting this is not the cause. The effect appears to be significant and likely due to several factors.
Firstly, the ISM is usually the first major economic indicator each month, setting the growth tone, which is generally positive for stocks. Despite often disappointing expectations, the ISM has been above 50 (indicating expansion) more than two-thirds of the time since 1997. Additionally, it shows a longer right-tail for positive outcomes, meaning it surprises to the upside more significantly than to the downside.
This is in contrast to payrolls data, where positive and negative surprises are more evenly distributed.
Secondly, bond yields tend to rise consistently after ISM releases, with cumulative yield moves higher than the baseline. This baseline, based on a random start day each month, aligns with lower yields over the past 25 years. Historically, rising yields, indicative of a strengthening economy, have been positive for stocks.
However, since 2020, this pattern has shifted. Yields have generally increased for all types of data, but the largest positive bias is seen after payroll reports rather than ISM or CPI releases. The market's focus on rate hikes in response to inflation and stronger growth post-2020, coupled with robust payroll data, explains this change. Stocks have diverged from their historical trend following the latest ISM release, with declines seen alongside rising yields.
Economic data plays a crucial role in asset price movements, especially at turning points, where markets often fail to anticipate changes. The ISM, as an early-released and minimally revised indicator, is more likely to capture these turning points, surprising the market more than payroll data, which shows less skew in positive surprises.