Fed Minion 'Accidentally' Signals Tighter Monetary Policy as S&P 500 Investors Shift Focus Toward 2021

The S&P 500 (Index: SPX) has come to revolve as much around the miscellaneous pronouncements of various minions of the Federal Reserve as it does about their expectations for the fundamental future business prospects of the 500 largest publicly-traded U.S. companies.

The latest sign of how deeply dependent investors have become on those pronouncements on Tuesday, 22 February 2020. Speaking to a virtual forum of Official Monetary and Financial Institutions, Chicago Fed President Charles Evans ‘accidentally’ set a new expectation the Fed’s future monetary policy would be less expansionary than it previously communicated it would be in announcing its new average inflation target policy.

For the dividend futures-based model we use to project the future potential levels of the S&P 500, that kind of change alters the model’s amplification factor, which we think shifted from +1.0 to +1.5 as a direct consequence of Evans’ statement. We’ve visually indicated that shift in the latest update of the alternative futures chart indicating the model’s future projections.

That change also occurs as investors would seem to have shifted their forward-looking focus from 2020-Q4 toward the more distant quarter of 2021-Q1, which began last week. We think that shift can be best understood as the market starting to pay much closer attention to the 2020 election, whose outcome will have considerable impact on the future for the U.S. government’s fiscal policies. We anticipate investors may switch their focus back and forth between 2020-Q4 and 2021-Q1 severval times before the end of the 2020 calendar year.

We’ve described Evans’ rate hike statement as ‘accidental’ since he attempted to walk it back on the next day, though the level of the S&P 500 indicates his effort, combined with the statements of other Fed officials, was unsuccessful.

Speaking of which, there was quite a lot of noise coming from the Fed’s minions in the trading week ending on 25 September 2020, mostly calling for the U.S. government to step up its fiscal stimulus efforts. There was other stuff too, but that’s what stood out to us in reviewing what we consider to be market-moving headlines from the week’s newstream.

Monday, 21 September 2020

• Daily signs and portents for the U.S. economy:

• Oil falls 5% as economic outlook dims with rising virus cases
• Oil refiners worldwide struggle with weak demand, inventory glut
• Government aid, stock gains push U.S. wealth to pre-pandemic levels, Fed says

Bigger trouble developing in Eurozone:

• Europe lockdown fears trigger worst stocks sell-off in three months
• S&P Global warns of new European sovereign-bank ‘doom loop’

• ECB wants to cut reporting burden for banks
• Analyst View: Bank stocks knocked as Suspicious Activity Reports come to light

Bigger stimulus still developing in China:

• China’s cabinet unveils steps to spur new forms of consumption
• China’s property developers seek to dodge new rules with shift of debt off balance sheets

Fed minions see rates at near-zero for years:

• Fed’s Powell says central bank committed to using all tools to help recovery
• Fed’s Kaplan says low rates may be needed for two-and-a-half to three years

• Fed’s new zero-rate vow has Kaplan worried on market excesses

Wall St ends lower on lockdown fears, likely delay of stimulus

Tuesday, 22 September 2020

• Daily signs and portents for the U.S. economy:

• Oil edges up a day after selloff; rangebound ahead of U.S. crude stocks data
• U.S. existing home sales approach 14-year high; prices scale record peak
• Surge in U.S. pork exports to China led by Brazil’s JBS, China’s WH Group

Bigger trouble continuing in China, growing in Brazil and Argentina, as ‘clouds gather’ in Eurozone:

• China’s consumption will take time to return to normal growth: Premier Li
• Brazil’s rates curve a ‘warning’ spending must be tamed: treasury secretary
• Argentina economy plunges record 19.1% in second quarter on pandemic impact
• Euro zone rebounds from recession but clouds gather

Bigger stimulus expected in Eurozone:

• ECB should err in doing too much rather than too little: Panetta
• EU may allow more state aid to boost green projects

• In green shift, ECB to accept and buy sustainable bonds

Fed minions want U.S. government to spend more to ‘stimulate’ U.S. economy:

• Fed’s Evans sees ‘recessionary dynamics’ without fiscal aid
• Fed’s Barkin says recent labor market improvements will slow
• Fed, Treasury chiefs back more aid for small business but leave details fuzzy

Wall Street closes higher on Amazon boost, despite economic worries

Wednesday, 23 September 2020

• Daily signs and portents for the U.S. economy:

• Oil edges higher after U.S. crude, fuel stockpiles draw down
• U.S. oil inventories fall across the board last week: EIA
• U.S. business activity slows, house price inflation accelerates
• U.S. House passes stopgap funding bill to avoid government shutdown

Bigger trouble developing in Japan, Germany, United Kingdom, global trade hub Singapore:

• Nearly 36,000 Japan firms shut down business due to COVID-19 – think tank

• Japan factory activity struggles to recover as output falls: PMI

German manufacturers benefit from foreign demand, but services lose steam: PMI

• Euro zone economic recovery in danger as services slide

UK’s post-lockdown recovery loses steam as household demand weakens

Singapore’s deflation extends to seventh month in core gauge

Fed policymakers vow to keep interest rates near zero, call for more fiscal help

• Fed not planning ‘major’ changes to Main Street program, Powell says
• Cleveland Fed’s Mester does not comment on U.S. economic, policy outlook

• Fed’s Mester says more stimulus needed to support fragile recovery

Fed’s Rosengren says increased COVID infections, lack of fiscal support could slow recovery

• Fed’s Rosengren says more targeted fiscal aid needed
• Fed’s Rosengren says U.S. could face a credit crunch by year end if virus worsens

Fed’s Evans says he doesn’t fear 2.5% inflation, or even above

Fed’s Daly says inflation will be guide on U.S. full employment

Fed’s Quarles sees long recovery, says he’ll be ‘more patient’ on inflation

Wall Street closes lower on fears of a slowing economy

Thursday, 24 September 2020

• Daily signs and portents for the U.S. economy:

• Crude steady as rising European COVID-19 cases offset U.S. oil stock draw
• U.S. new home sales vault to near 14-year high in August

Bigger trouble evident in China, Canada:

• China’s slow consumption recovery upset by wary low-income households

• China’s post-pandemic recovery has severe regional imbalances – survey

Trudeau says Canada is in second wave of pandemic, urges renewed caution

Bigger stimulus rolling out in Canada, signs of traction in China:

• Canada ‘bets the farm’ on big spending as second wave threatens economic recovery
• Global steel output edges up in August, buoyed by strong China

ECB minion demonstrates firm grasp of obvious, Fed minions step on soapboxes:

• ECB’s Lane says containing virus is priority
• Fed’s Williams says structural inequality stifles economic growth
• Fed’s Bullard: Not reasonable to make second virus wave a baseline outlook for U.S. economy
• Fed’s Evans says U.S. taking unnecessary risks with lack of more fiscal aid
• Fed’s Barkin sees low risk of inflation escalating in near future
• Fed’s Powell says Main Street may use up to $30 billion by year end

Wall Street closes up on tech rally despite mixed signs on economic rebound

Friday, 25 September 2020

• Daily signs and portents for the U.S. economy:

• Oil falls on mounting COVID-19 cases, supply concerns
• U.S. business spending digging out of deep hole; outlook uncertain
• U.S. imports surge as pandemic worries have retailers stockpiling
• Mnuchin, Powell say some $380 billion in unused aid could help U.S. economy

Bigger stimulus in the Eurozone comes with a price:

• Euro zone firms continue to load up on credit as economy reopens: ECB data
• Rise of the zombies? Europe faces insolvency balancing act

Wall Street ends higher as tech rally squashes virus fears, but S&P down for week

Barry Ritholtz presents the positives and negatives he found in the past week’s economics and markets news over at The Big Picture.

Finally, for those looking for a primer of how the outcome of an election can alter the future expectations of investors, be sure to review the history of 2012′s Great Dividend Raid, which we had the pleasure of documenting in real time as it happened!