The Fed Sets New Expectations for the S&P 500

We had two big Federal Reserve driven events during the third week of June 2021. The first was the Fed’s two-day meeting ending on 16 February 2021, when the Fed officially responded to increased expectations of inflation by moving up the projected timing for increasing U.S. short term interest rates.

The second event came on 18 February 2021, when influential Federal Reserve minion James Bullard indicated he saw the Fed having to act to hike rates even earlier, which led investors to suddenly shift their forward-looking attention to the upcoming 2021-Q3 in a new Lévy flight event.

The first Fed-related event played out as a change in the value of the amplification factor built into the dividend futures-based model we use to project the future potential trajectories of the S&P 500 (Index: SPX), where we showing that value as set at -2.5 from Wednesday, 16 June 2021. The second change shows the characteristic quantum-like shift to the trajectory associated with investors focusing on the future quarter of 2021-Q3 on Friday, 18 June 2021.

Those were the big events of the week that was, but there were other market-moving headlines for investors to absorb as well. Here’s our summary of those items:

Monday, 14 June 2021

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

• Oil steadies after hitting 2-yr high as demand hopes face supply growth
• U.S. consumers expect near-term boost in inflation, labor market, NY Fed survey finds

Fed minions still sending taper smoke signals despite pre-FOMC meeting blackout :

• Fed tiptoes towards the taper stage months before the curtain call

ECB minions to keep up stimulus bond buys despite strengthening economy, Eurozone investors counting on it:

• Euro zone at a turning point but too early to debate end of ECB help: Lagarde
• Euro zone production stronger than expected in April
• Economic recovery hopes power European shares to record high

S&P 500, Nasdaq set record closing highs as Fed meeting looms

Tuesday, 15 June 2021

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

• U.S. manufacturing output accelerates in May on autos
• U.S. retail sales take step back as spending pivots to services, trend remains strong
• U.S. business inventories fall in April; sales rise
• U.S. homebuilder confidence falls to 10-month low in June
• Sales of U.S. vacation homes rose twice as fast as other homes last year -study

Analysts identify issues Fed minions will weigh from now through 2021-Q3:

• Fed walks tightrope between big jobs gap and rising inflation
• Analysis: Transitory or here-to-stay? Investors try to read the inflation clues

Less big trouble developing in Japan:

• Japan to avoid recession, but Q2 growth forecasts cut sharply: Reuters poll

Former BOJ minion wants BOJ to think about stopping stock fund buys:

• After tapering, BOJ must weigh exit from ETF holdings: former central banker Sakurai

Wall Street slips as Fed mulls policy, economic data disappoints

Wednesday, 16 June 2021

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

• Fannie Mae cuts U.S. home sales forecast, points to supply constraints
• Exorbitant lumber, scarce materials hampering U.S. homebuilding
• U.S. import prices accelerate in May; export prices surge
• Oil settles near $75, at multi-year highs

Fed minions do nothing now, indicate they’ll start hiking U.S. interest rates in 2023:

• Fed signals rate hikes for 2023, start of bond-buying taper talks
• Powell Pummels Bonds & Bullion, Saves Stocks With “Grain Of Salt”

Bigger inflation developing all over:

• Roaring inflation compounds Cubans’ economic woes
• UK inflation hits 2.1%, vaults past Bank of England target

Big trouble developing in China:

• China’s factory output, retail sales miss expectations in May

BOJ minions warned they are at the end of the road for negative rate policies:

• Japan’s bank lobby urges BOJ caution on deepening negative rates

Wall Street drops as Fed officials mull U.S. rate hikes in 2023

Thursday, 17 June 2021

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

• U.S. leading indicator points to further economic recovery in May
• Oil tumbles 3% from multi-year highs on stronger dollar

Fed is about to shift gears, but this time it may be different

• Analysis: Economists eye surging money supply as inflation fears mount

BOJ, ECB minions thinking about stopping stimulus, but not anytime soon:

• BOJ may extend pandemic-relief scheme, keep stimulus intact

• BOJ may start debate on retreat from stimulus in 2023, says ex-central bank policymaker

ECB’s Lane says early to discuss end of emergency bond buys: Bloomberg TV

• ECB should not extend stimulus flexibility to older tools: Weidmann

Nasdaq closes up on tech stocks strength, as hawkish Fed limits S&P

• Analysis-As Fed taper inches closer, investors prepare for volatility ahead

Friday, 18 June 2021

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

• Oil gains on OPEC outlook that U.S. output growth will slow

Fed minions send split message, one roils Wall Street:

• Fed funds effective rate now highest since August 2020
• Fed’s Bullard looks to a bond-buying taper not on ‘automatic pilot’

• Hawkish Bullard comments roil Wall Street, indexes drop

Exclusive: Fed’s Kashkari opposed to rate hikes at least through 2023

Bigger inflation developing all over:

• Japan’s core consumer prices rise for first time in over a year

ECB minions to continue propping up Eurozone banks, will hang out in Frankfurt hotel to talk policy:

• ECB extends capital relief for banks as pandemic continues
• ECB strategy review meet: five things to watch

Dow, S&P post worst week in months after hawkish Fed spooks investors

Barry Ritholtz’ weekly succinct summary of the pluses and minuses he finds in the markets and economy news appears to be on summer hiatus. If you’re interested in a substitute news source, we’ll recommend Reuters Business News Headlines as a wide-ranging source.

We think the Fed’s actions will have investors mostly focused on what will happen at the Federal Reserve’s upcoming meeting near the end of 2021-Q3 throughout the quarter. As we’re coming up on another period where the past volatility of the historic stock prices affects the accuracy of the dividend futures-based model’s future projections, we have adapted the corresponding redzone forecast in the alternative futures spaghetti forecast chart to represent where the S&P 500 is likely to range as investors mostly focus their attention on 2021-Q3.