Asymmetric Responses of Nominal Rates, TIPS Rates, Break-Even Inflation Rates, and the Stock-Bond Correlation to Macroeconomic Announcements

Abstract

Utilizing daily instantaneous forward rates of nominal and inflation-indexed bonds as well as realizations of stock and bond index returns, I examine the informational content of a broad set of macroeconomic announcements. I find evidence that, with a few exceptions, price variables mainly move break-even inflation rates, while real variables move TIPS rates and/or break-even inflation rates. An analysis of movements in the stock-bond correlation finds that, with some exceptions, expected future interest rates are the important component of the informational content of expansionary announcements to production variables and employment variables. In recessions, I find evidence that expectations of future economic growth or an equity risk premium are the important news conveyed by shocks to some production and employment variables, again with some exceptions. Similarly, for price variables I find evidence that in expansions shocks either proxy for future economic activity or provide information about expected future nominal rates which investors mistakenly use to value equities rather than expected real rates. In recessions (at least for core PPI) some evidence points to the news content referencing future economic growth or the equity risk premium. Consistent with previous results in the literature, results on movements in the stock-bond correlation agree with rising correlations in expansions and falling correlations in recessions. Additionally, in looking at monetary policy shocks to the federal funds target rate I notice that expectations of growth or the equity risk premium are embedded in shocks that `go against the grain' of the expected path given an economic state (negative expansionary and positive recessionary shocks). Formal tests for state and sign asymmetries in the magnitudes of responses to macroeconomic shocks generally yield sparse significant results, though for production variables mainly indicate greater effects of expansionary over recessionary and negative over positive shocks, with some exceptions. Finally, state asymmetry in the response of TIPS rates to monetary policy announcements indicates long-run expansionary momentum and long-run recessionary reversal in monetary policy.