  This paper examines the effect of macroeconomic news announcements (MNA) on
the stock market. Stocks exhibit a strong positive response to major MNA: 1
standard deviation of MNA surprise causes 11-25 bps higher returns. This
response is highly time-varying and is weaker during periods of high monetary
uncertainty. I decompose this response into cash flow and risk-free rate
channels. 1 standard deviation of good MNA surprise leads to plus 30 bps
returns from the cash flow channel and minus 23 bps per 1\% of monetary
uncertainty from the risk-free rate channel. Risk-free rate channel is
time-varying and is stronger when monetary uncertainty is high. High levels of
monetary uncertainty mask the strong positive response of stocks to MNA, which
explains why past research failed to detect this relation.
