Investor Focus Shifts Fully to 2022-Q2 for S&P 500

Investors expectations that the U.S. Federal Reserve will start hiking short term interest rates beginning in 2022-Q2 spiked upward during the past week, fueled by the outcome of the FOMC’s December 2021 meetings.

According to the CME Group’s FedWatch tool, investors are now giving greater than 60% odds of that first hike happening as early as early May 2022, and a nearly 85% probability of a quarter point rate hike in the Federal Funds Rate by mid-June 2022 as the Fed begins belatedly addressing the outbreak of inflation its “run-the-economy-hot” policy combined with excessive spending fueled by the Biden administration’s March 2021 stimulus package caused.

Consequently, the S&P 500 changed during the week to align with the trajectory of associated with investors focusing nearly all their forward-looking attention on 2022-Q2. Given the record high level at which it ended the previous week, that meant a downward movement in the value of the index.

The market-moving news headlines of the week that was point to how much central bank action there was during the week that was.

Monday, 13 December 2021

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

• Oil settles lower on oversupply concerns, strong dollar
• U.S. producer prices soar as supply bottlenecks persist
• U.S. Senate debt limit bill would cover federal borrowing into 2023 – Schumer

Bigger trouble developing in China, mixed signs in Eurozone:

• COVID-19 rattles major Chinese manufacturing province
• Euro zone production rises in Oct on capital, consumer goods

• Germany facing winter of stagflation as COVID, bottlenecks bite

Wall Street ends down, investors eye inflation and Omicron

• Investors brace for faster Fed taper, rate hikes next year

Tuesday, 14 December 2021

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

• Shortages, inflation curb U.S. retail sales in November
• U.S. business inventories increase strongly in October

Fed minions set expectation for faster taper of stimulus bond buys and three rate hikes in 2022:

• Fed signals three rate hikes for 2022 as inflation fight begins

• Fed funds futures price in interest rate hike by May 2022

FOMC speeds up taper and opens door to rate lift off in 2022

• Fed’s Powell: Economy no longer needs increasing support from asset purchases

Bigger trouble, stimulus developing in COVID-stricken countries:

• New Zealand GDP shrinks 3.7% in Q3 due to Delta lockdowns
• Japan lower house passes record extra budget to prop COVID-hit economy
• China’s factories speed up but new COVID pain hits retailers

• China central bank partially rolls over medium-term loans to boost liquidity

Central bank minions hinting they will hike rates:

• In rate hike signal, Bank of Canada says economic slack has substantially diminished
• UK inflation jumps above 5% as BoE considers rate rise

Wall Street ends higher; Fed to end bond purchases in March

Wednesday, 15 December 2021

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

• Shortages, inflation curb U.S. retail sales in November
• U.S. business inventories increase strongly in October

Fed minions set expectation for faster taper of stimulus bond buys and three rate hikes in 2022:

• Fed signals three rate hikes for 2022 as inflation fight begins

• Fed funds futures price in interest rate hike by May 2022

FOMC speeds up taper and opens door to rate lift off in 2022

• Fed’s Powell: Economy no longer needs increasing support from asset purchases

Bigger trouble, stimulus developing in COVID-stricken countries:

• New Zealand GDP shrinks 3.7% in Q3 due to Delta lockdowns
• Japan lower house passes record extra budget to prop COVID-hit economy
• China’s factories speed up but new COVID pain hits retailers

• China central bank partially rolls over medium-term loans to boost liquidity

Central bank minions hinting they will hike rates:

• In rate hike signal, Bank of Canada says economic slack has substantially diminished
• UK inflation jumps above 5% as BoE considers rate rise

Wall Street ends higher; Fed to end bond purchases in March

Thursday, 16 December 2021

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

• Oil rises around 2% on strong U.S. demand, upbeat Fed outlook
• U.S. manufacturing production near three-year high in November

• U.S. manufacturing activity slows; factory supply constraints easing – IHS Markit survey

Fed minions discover data that says inflation isn’t transitory:

• Analysis: The three data reports that persuaded Powell to speed up Fed’s taper

Bigger trouble developing in the Eurozone:

• Euro zone business growth slipped in December as Omicron rose

• German wages barely grew in 2021 despite skyrocketing inflation
• COVID curbs freeze Germany’s private sector growth in December – PMI
• French recovery slows down in December as Omicron weighs – PMI

Central bank minions start taking away COVID stimulus punch bowls:

• Bank of England raises interest rate to 0.25%
• Norway hikes interest rates, with more expected
• BOJ may scale back emergency funding as pandemic strains ease

ECB minions buck desire to keep stimulus flowing to synchronize policies with other central banks:

• ECB dials back stimulus in tense meeting

• TEXT-Statement from the ECB following policy meeting
• ECB hawks disagreed with bond largesse, inflation outlook
• ECB dials back some stimulus, ups inflation forecast

Lagarde comments at ECB press conference

• TEXT-Lagarde’s statement after ECB policy meeting

Nasdaq ends sharply lower as investors dump growth stocks

Friday, 17 December 2021

• Fed minion seems to think stimulus bond buy taper has to happen before rate hikes, bond markets think Fed minions will chicken out on rate hikes, another Fed minion wants rate hikes to start in 2022-Q1:

• Analysis-Fed’s hawkish pivot includes historically bullish view of U.S. job market

• NY Fed’s Williams says faster taper creates possibility of rate increases next year
• Waller: Rate hikes likely warranted at March meeting, balance sheet drawdown should follow on fast

Bond markets don’t buy hawkish Fed’s view on how high U.S. rates can go

Bigger trouble developing in China, Eurozone:

• China govt land sales down for fifth month amid cash crunch
• Ifo economist says virus, bottlenecks hit German economy

Bigger inflation developing in Japan, Eurozone:

• Japan core consumer inflation seen hitting 20-month high as price pass-through spread: Reuters poll
• Euro zone inflation confirmed at record high in November

Central banks responding to inflation they helped create:

• Central banks step up pace of their great stimulus retreat

• Marketmind: Pulling away the punch bowl

Despite Omicron, Bank of Canada likely to signal earlier rate hikes possible

BOJ dials back pandemic funding as global central banks eye post-COVID era

ECB ‘increasingly likely’ to hit 2% inflation goal, Kazaks says

• ECB policymakers warn against inflation complacency
• ECB’s Villeroy sees new inflation regime after current rise

Wall Street ends down after mostly negative week

• Narrowing market breadth may be worrying signal for stocks

This is the final edition of the S&P 500 chaos series in 2021. We’ll be back with a two-week catchup edition to close out 2021 on 4 January 2022.