Bond market rally - further pushing Fed action into future

The bond and stock markets have been moving in tandem at the end of the week with both rallying. The key driver is a further change in expectations concerning Fed action. Expected Fed action is being pushed further into the future. No Fed interest rate increase and stocks have room to move higher and bonds will not sell-off. The market shrugged off the earlier comments by Fed chairman Yellen that the stock market may be overvalued and bonds do not provide attractive returns. It is all about the potential for policy action. Follow the data not the comments.

The non-farm payroll number reinforced the view that the data dependent Fed will continue to delay while they wait for the perfect set of numbers. The headline of 223,000 was a good number which was back in line with the 12 month average of over 200,000 jobs. However, the last month number was revised downward. The revision placed the total number of jobs created below the lower end of the consensus. Hence, the total number was not as attractive as expected and caused bonds to rally. 

An alternative view is that equity investors thought it was a good number and bought while the bonds investors thought it was a bad number and bought. That inconsistency across asset classes does not make sense. The consistent story is a Fed delay. This was further reinforced with the gains to new highs for the week in the front end of the Treasury curve and more muted increases on the long-end. Of course, a real concern is that wages have not really increased and labor force participation has not improved. There are limits to what the Fed can do and there is little help form fiscal policy. 

The data dependency by the Fed looking for the perfect set of numbers is causing expectations for a delay.