In another week of mixed economic signals, Wall Street traders continue to struggle with the Federal Reserve's data-dependent approach. The S&P 500 and Treasuries registered their first concurrent weekly gain in a month, causing pain for bearish investors who had withdrawn money from credit and cryptocurrencies due to inflation concerns. This unexpected uptick was fueled by positive comments from Federal Reserve Chair Jerome Powell and softer employment data. However, the conflicting economic reports have once again proven costly for traders trying to anticipate the Fed's next move on interest rates, which largely depends on the economic data.

One of the major sources of confusion has been the divergent economic reports. On Tuesday, labor costs in the US rose by the largest margin in a year, leading to yields on two-year Treasuries exceeding 5%. However, three days later, a Labor Department report indicated the smallest increase in wages since 2021, causing yields to drop again. Furthermore, recent reports show that retail sales are surging while gross domestic product growth is slowing. Industrial production is on the rise, but manufacturing is easing. Jobless claims remain steady, but hiring has ticked down. The constant fluctuations in economic indicators have created a recipe for confusion among traders, resulting in high intraday stock volatility.

Mohamed El-Erian, the president of Queens' College, Cambridge, and a Bloomberg Opinion columnist, expressed concerns that the Fed's heavy reliance on data amplifies market volatility, leading to increased uncertainty. The bulls, however, seem to have the upper hand in the short term, thanks to Friday's positive employment data, which also prompted day traders to cash out some of their winnings.

The S&P 500 gained 0.6% this week, and the Bloomberg index tracking US Treasury returns experienced a surge, ending a four-week streak of losses. However, day-to-day turbulence intensified, with average 20-day price swings in the stock benchmark reaching the highest level since November.

Despite the recent rally, there are signs of fatigue among investors. Retail traders, who made a strong comeback in the first quarter, have reduced their demand for bullish call options, reaching the lowest level this year. Economists are also struggling to predict the direction of economic data, constantly revising their interest-rate targets every few months.

Traders and economists alike find themselves at the mercy of conflicting data, with the Federal Reserve sticking to its data-dependent approach in setting monetary policy. However, for many investors focused on income-oriented assets, the short-term gyrations are merely a sideshow. High-quality bonds continue to offer attractive yields, providing a favorable environment for income-driven investment strategies.

UBS Global Wealth Management economist Brian Rose anticipates better inflation numbers in the coming months, creating conditions for the Federal Reserve to start cutting rates in September. As a result, their investment strategy maintains a preference for quality bonds.

As the Fed's data dependence continues to puzzle Wall Street, traders and investors must navigate the volatile market landscape, hoping for clearer economic signals to guide their strategies in the future.