Source: Bloomberg

Asset markets turned up after digesting the 8:30 am US payrolls release. The Fed focuses on wage pressures as the source of future inflation (wrongly so, but that’s another story), so the market looks at the wage data for clues about future Fed policy. After the downward revision of the March hourly earnings number, the market shifted its view of future Fed action, and equity markets responded instantly.

The Euro Stoxx 50 climbed into positive territory, led by Italy’s Intesa Sanpaolo and other European periphery banks. The price action underscores how nervous the market is about the prospect of withdrawal of central bank stimulus.

Right now the next move by central banks in the US, Europe and China will be to reduce accommodation. If all three act together and act too quickly the outcome could be a slaughter. A gradual shift away from ultra-loose monetary policy would be bearable, though.

The data-dependent Fed is likely to be cautious. The European central bank will look at headline inflation, and lower oil prices portend lower headline inflation in Germany. So markets are not likely to blow up over monetary policy in the near term. It’s important to know what they are nervous about.