Stock Markets Reaction to Employment News: Bad News is Not Good Anymore
Beginning mid of 2001 stock prices react positively to employment surprises which is a shift from the negative relationship prior to 2001. I tie this shift to the lower level of expected inflation in recent times. When inflation expectations are reined in the Federal funds rate does not increase with employment. Therefore stock price (volatility) increases (decreases) with good employment news. Furthermore risk premium is the dominant channel for stock reaction in recent times as compared to the interest rate channel previously. The results are consistent with the negative stock and bond return correlation in recent times.
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macroeconomic announcements monetary policy employment news price discovery stock and bond return correlation macro news event study asset pricing