Volatility Increases for S&P 500 as Inflation Expectations Go into Flux

The S&P 500 (Index: SPX) may be entering a new regime for inflation expectations.

In the dividend futures-based model we use to project the future for the index, we see those kinds of changes play out through a changing value for the model’s amplification factor, m. Our estimate of its value was last reset on 22 September 2020, when we observed its value was approximately 1.5. Over the last month as expectations of future inflation have increased, we suspect it has increased in value as well, which shows up in the alternative futures chart with the trajectory of the S&P 500 running first to the low side, and now below, its forecast range.

That’s not unexpected, since we anticipated the actual trajectory of the S&P 500 would undershoot the model’s projections. Before we can estimate its new value to adjust the model’s projections however, we’ll need the market’s recent volatility to stabilize. Until then, we’ll be in a wait and watch mode.

Among the things we’ll be watching is the random onset of new, market-moving information. Here’s what we flagged as notable in trading week ending on 14 May 2021.

Monday, 10 May 2021

• Signs and portents for the U.S. economy:

• Market at odds with Fed as inflation expectations hit 10-year highs
• Biden says unemployed offered jobs must take them or lose benefits

Fed minions split on worrying about inflation, whether to keep stimulating economy, don’t believe jobs data:

• Fed’s Evans: Accommodative monetary policy will continue to be appropriate

• Fed’s Evans: April’s slow job creation likely a “one month thing” – CNBC

Fed’s Kaplan sees strong job gains ahead, wants taper talk

Fed’s Daly says we are in ‘transition,’ no taper talk yet

Bigger inflation developing all over:

• Pandemic surge in European house prices raises fears of new bubble

Bigger trouble developing in Japan:

• Japan’s first-quarter GDP likely slipped back into decline as new COVID curbs hit: Reuters poll

ECB minions thinking about buying more bonds:

• Raising pace of bond buys not off the table for ECB: Lane

Wall Street closes lower as inflation fears prompt tech sell-off

Tuesday, 11 May 2021

• Signs and portents for the U.S. economy:

• U.S. job openings hit record high in March
• White House says it takes possibility of inflation seriously

Fed minions blame school closures for bad jobs report; are okay with stock bubble from super easy money policies; say 3% inflation is okay:

• Fed officials sift through tea leaves of weak U.S. jobs report

• Fed’s Mester: childcare, healthcare concerns crimping labor supply

Brainard: Pulling back support due to high stocks may hurt efforts to boost jobs

Fed’s Harker says 3% inflation is the maximum he would like to see

Bigger inflation developing all over:

• China’s factory-gate prices surge, but CPI growth still modest

Bigger trouble developing in Japan after positive March 2021:

• Japan March household spending posts biggest monthly rise in 18 months
• BOJ policymakers warned of risks to recovery prospects at April meeting

ECB minions thinking about keeping stimulus going:

• ECB tapering talk is ‘purely speculative’ – Villeroy

Wall Street closes lower as inflation jitters spark broad sell-off

Wednesday, 12 May 2021

• Signs and portents for the U.S. economy:

• U.S. consumer prices post largest gain since 2009 as inflation ramps up

• U.S. April CPI points to inflation heating up more than expected
• Some U.S. car shoppers are paying $5,000 over a vehicle’s retail price – Cox Automotive

Eurodollar futures price in Fed hike by December 2022 after inflation spike

Fed minions thinking about digital currency, but not about changing monetary policy despite surprise of surging inflation:

• Fed’s Rosengren says important to understand trade-offs of digital currencies
• Jobs, inflation data surprises not changing Fed plans, Clarida says

Post-coronavirus pandemic recession recoveries gaining traction:

• China’s April auto sales rise 8.6%, up for 13th straight month
• UK economy, gearing up for recovery, grows more than expected in March
• IEA sees oil demand recovery outpacing growth in supply
• European banks: Q1 full house is no winning hand just yet

Bigger stimulus developing in Eurozone, less stimulus in Japan:

• Euro zone to rebound more strongly, borrowing curbs to stay on hold -EU
• BOJ likely in no mood yet to aid market with big ETF buying

Wall Street ends with broad sell-off on spiking inflation fears

Thursday, 13 May 2021

• Signs and portents for the U.S. economy:

• U.S. weekly jobless claims at 14-month low; inflation heating up

Fed minions think non-working Americans are clogging the economy, want to wait a few more months before considering changes to monetary policy to deal with inflation, and that the economy is great:

• Fed’s Barkin: Ability to “unclog” labor market critical to recovery
• Fed’s Waller wants ‘several more months’ of data before policy shift debate
• Fed’s Bullard: U.S. on verge of moving from recovery to expansion

BOJ minions to get back into stock ETF-buying business; ECB minion says Eurozone inflation is no worry:

• Kuroda says BOJ ready to buy ETFs ‘boldly,’ drops no hints on when
• ECB’s Stournaras says Europe not facing same inflation worries as U.S.

Wall Street gains as investors ‘buy the dip’ on upbeat jobs data

Friday, 14 May 2021

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

• U.S. retail sales pause, record savings seen supporting spending
• Some early U.S. data suggest May jobs report could echo April weakness

Fed minions

• Fed’s Kaplan sees risk of inflation gaining a foothold in U.S. economy

Bigger trouble

• Inflation re-cycling: Chinese exporters pass higher costs on to customers around the world
• Analysis: Japan Inc squeezed by surging costs and frugal consumer fears

BOJ minions thinking about stimulus policies:

• ECB sets stage for crucial June decision on emergency bond buys

Wall Street ends volatile week sharply higher

Want to know what the week’s positives and negatives were? Check out Barry Ritholtz succinct summary of the week’s markets and economics news!