Bad news is good news.
It seems counter-intuitive at first.
But in a world where the Federal Reserve is on the verge of cutting interest rates? It becomes a way of life…
Because each disappointing data release, each spike in jobless claims or dip in economic growth — they all help build the case that interest rates should come down and cash should flow more freely (and that’s something that investors almost universally love).
But what happens when you flip the script? What happens when it’s no longer rate cuts but rate hikes looming in our future?
The answer might surprise you.
Hit today’s episode of Moneyball Economics for the full story:
Video transcript:
Welcome to Moneyball Economics, I’m Andrew Zatlin.
We are at the time of the month when economic data gets released and the markets respond.
Case in point, last week payrolls came out. They were super strong and the market’s response was equally strong, although somewhat negative.
What’s going on is the markets are trying to figure out where interest rates are going and we have gone through a very big transition in the narrative.
See, last year I was arguing that we can forget rate cuts and should be really focusing on rate hikes because I saw the economy growing. In my view, we were in a transitionary period. We were leaving the weak end stages of the post- COVID economy and entering a new Trump economic cycle where we would see bullish economic growth.
But during that transition period, the economic data isn’t clear.
It’s not consistent.
And so that creates confusion and no predictability.
And one thing we know is that markets like predictability. Is it going up or down? Does it matter as long as we know what’s coming down the pipeline? I was saying that by May and June, we would start to see the economic data converge and send out a uniform signal of economic expansion. And that’s exactly what’s happened. And the markets have come a long way, right?
I was a lonely voice talking about rate hikes in the early part of the year. Markets were still expecting rate cuts as recently as a month ago. Well, now the argument that the markets are having isn’t about will he or won’t he do a rate cut or rate hike? Now it’s firmly, we’re going to see a rate hike. Now the question is, are we going to see two rate hikes? And so all this focus on the economic data is going to be a situation where good news is bad news.
The better the economy looks, the hotter inflation comes in, the more likely the Fed’s not only going to raise rates, they’re going to do it sooner and they might do more than one.
And so the market is on kind of eggshells.
They’ve had to make a major sea change away from rate cuts to rate hikes. And now they’re concerned that good news is bad news. Let’s look at the economic data because I think that in fact, while we’ve got a consistent signal today that says growth, growth, growth, I think it changes again in a month.
I think things get muddy again and that means the markets are going to start to get a little bit volatile.
Let’s take a look at what’s going on today versus what I think might be coming down the pipeline tomorrow. Payrolls, we have had four out of five months payrolls coming out super strong, 150K plus minus.
That means the economy’s expanding. And that’s strongly in contrast to last year, the prior year when we found out that there was no payroll growth. Suddenly we are off to the races, almost a million jobs added this year to date. Pretty smart. We got other signs of economic growth. We’ve got ISM numbers showing an expanding manufacturing base.
Everywhere we look, the stock markets are up, retail spending staying strong. And this is despite the Iranian headwind. Everything looks great or does it. See, I think the Iranian blowback is just now starting to affect things. Yeah, gas prices are up.
And when we look at inflation, for example, this week, they’ll look at the core inflation, ignore gas prices, ignore higher food prices, and they’ll look at the core. Well, guess what? I think that we’re going to see inflation tick up again and that’s not what consensus wants to see.
See, fuel prices have a way of going into the economy in sort of different ways.
For example, airplane tickets go up. Shipping costs go up and those can’t be removed from the headline number. Suffice it to say I see inflation coming in a little bit hotter. Again, that’s a problem because that doesn’t justify one hike. It might justify a hike sooner or even two hikes.
The markets are not going to like the inflation numbers that come out is what I’m saying. You can expect some volatility there this week. Then in addition, I see companies having challenges navigating the higher costs and the only way they know how to do that is look at payrolls. You either don’t hire as many or you start to fire. Now this is where you should say, “Zotlan, what are you talking about? ” We’ve had this war going on March, April, May.
We’re three months into it.
If we were going to see the blowback, we’d have seen it by now. My point is we did see it. That payroll number on Friday was a fake number. Let me explain. Of that 170 odd thousand number, 50,000 was government. It wasn’t. All right, I’ll just tell you that right now. They’re going to revise that away. That means the actual number was 120. Again, a solid number, except even there we’ve got some shenanigans going on.
Last year, 2025 and the year before 2024 and this year, 2026 in May, the exact same number of people were hired at the raw number basis. But this year they took that raw number and they adjusted it upward and distorted it by 100,000.
What I’m trying to say is the payroll number was baked and it was baked high, which means there’s going to be a reversal next month or possibly a month after.
Bottom line, payrolls were actually low last month and they either revise that down when they come back or there’s going to be some payback.
Bottom line, what I’m trying to say is we’re already seeing economic blowback from Iran in various ways, but it’s going to take another month or so for it to get reported. Meanwhile, you’ve got the challenge of accelerating inflation, slowing economy. This is a problem. This is when stagflation fears start to enter the picture. This is when uncertainty comes in. Is the economy slowing down? Is that a features? Is that something that’s going to be permanent? Is that Iranian related? Oil prices goosing up inflation? Is that transitory?
All this uncertainty suddenly makes the Fed say, “Well, maybe we shouldn’t raise rates.” So the markets might like to see some of this muddying of the waters. As the economic data comes in, as it comes in light, signifying slight pause and expansion, guarantee you the bond markets are going to love it, the stock market’s going to love it.
Let’s see how it plays out.
What I’m talking about is June, strong economic signals, July not so strong.
We’re in it to win it.
Zatlin out.
Andrew Zatlin
Editor, Moneyball Economics