The S&P 500 See-Saws With Lévy Flight Events

The S&P 500 (Index: SPX) continued to experience a series of small Lévy flight events as the index see-sawed back and forth during the first week of December 2021.

The alternative futures chart shows that heightened volatility, which came as the onset of new information prompted investors to shift their forward-looking focus back and forth between 2021-Q4/2022-Q1 and 2022-Q2.

During this week, upward movements were associated with investors shifting their attention toward 2022-Q2, while downward movements were associated with investors focusing on 2021-Q4/2022-Q1. The upward shifts toward the more distant future were prompted by news of government responses to the apparently fast-spreading Omicron variant of the SARS-CoV-2 coronavirus, which would coincide with the Fed holding off its newly plan to accelerate the tapering of its stimulus bond buys. The downward shifts toward the nearer term future was prompted by statements by Federal Reserve officials indicating they would accelerate their plan to slow their purchases of U.S. government-issued bonds to stimulate the economy and hike short term interest rates sooner to fight inflation. Here’s QTR’s Fringe Finance’s take on the resulting volatility:

It is astounding to me how much market commentary I have seen over the last 48 hours placing blame for the market “volatility” (read: 2% off all time highs) on the Omicron variant….

While there are definitely still some uncertainties about the new variant, early indications make it look as though it is not going to be meaningfully deadlier than other variants and that, one way or the other, we will be able to deal with Omicron and see our way through it – just as we did with the Delta variant. That is, unless the government implements more of what one trader calls a “criminal” response to Covid and issues more lockdowns and mandates.

While Omicron uncertainty has likely contributed slightly to market volatility, I don’t think it is the driving force behind it. Rather, I believe that current volatility is a result of Jerome Powell’s surprising, and so far unrelenting, hawkish stance that a taper and rate hikes look to be necessary.

In fact, several Fed governors have commented over the last 48 hours about potentially accelerating both rate hikes and tapering. This language, as I noted days ago, is an admission that the Fed has lost control of inflation.

In fact, it looks as though inflation has gotten so bad that the Fed is going to have to try and attempt to “stick the landing” of presenting hurried tapering and rate hike plans to the market. Of course, the Fed won’t really be able to stick the landing on either because politicians on the left and castrated on-air finance personalities will cry foul as soon as the market has a 10% pullback as a result of higher rates (just as they did on the Covid crash).

But for now, the company line is that we are going ahead with rate hikes and looking to accelerate the taper. This – not the Omicron variant – is what is moving markets.

We thought that was an interesting take on the market-moving news of the week that was. Here are the headlines that stood out to us:

Monday, 29 November 2021

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

• U.S. pending home sales surge in October
• U.S. Commerce chief says too soon to tell if Omicron will impact supply chains
• Oil gains more than 3% on speculation Omicron-related drop overdone
• Biden Promises US Will Develop Boosters Targeting Omicron Variant, Fauci Says New Lockdowns “Unlikely”

Fed minions say inflation will linger, want banks and financial services to get access to indigenous people’s wealth:

• Fed’s Powell sees inflation lingering, risks from COVID
• Fed’s Bowman says well-being of Indigenous people important for financial inclusion

Bigger inflation developing all over:

• S.Korea exports seen growing for 13th month; CPI rate near decade-peak: Reuters poll
• German inflation to jump beyond 5% in November, states data suggest
• Food and fuel costs drive Spanish inflation to 29-year high
• Colombia’s consumer price growth to have accelerated in November: analysts – Reuters poll

Bigger trouble developing in China, Eurozone, Australia:

• China’s Nov factory activity likely contracted at a slower pace – Reuters poll
• Bottlenecks tighten further across German industry – Ifo

• German car exports fall 17.2% in Q3 due to supply bottlenecks

Australia’s economy likely contracted in Q3 but recovery expected soon: Reuters poll

ECB minions do kabuki act, say inflation in Eurozone has peaked but feel pressure:

• ECB puts on brave face as new virus variant spreads
• Inflation reached its peak in November – ECB’s Schnabel
• German inflation hits highest in decades, increasing pressure on ECB

Wall Street rebounds after virus-related sell-off

Tuesday, 30 November 2021

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

• Rising inflation, relentless pandemic dampen U.S. consumer confidence

Fed minions say inflation is not transitory and not a policy success:

• Fed’s Powell says risk of higher inflation has increased

• Inflation part of Fed rate hike test likely met in coming meetings: Powell
• Powell places faster bond-buying taper on Fed’s Christmas table

Fed’s Clarida says high inflation seen this year is ‘not a success’

Supply chain issues driving national economies:

• South Korea factory output falls at fastest pace since May 2020 on auto chip shortage
• China factory activity unexpectedly grows as some bottlenecks ease

Gloomy signs in Eurozone:

• Omicron won’t tip Germany into recession but recovery slowing -top economists

• Germany’s incoming finance minister rings alarm bell on inflation

French inflation hits 13-year high in November

Spain’s GDP to be hit by inflation, bottlenecks in Q4, early 2022, De Cos says

ECB minions to keep stimulus going, despite Eurozone inflation:

• ECB likely to keep buying bonds through 2022; could resume PEPP – report
• Euro zone inflation hits record high in likely peak

Wall St sinks as taper acceleration worries pile onto virus angst

Wednesday, 1 December 2021

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

• U.S. manufacturing sector picks up in November – ISM
• U.S. firms battle higher inflation and worker shortages, Fed survey shows
• Oil prices sink again as traders use Omicron as an excuse to hit ‘sell’
• Fauci says first U.S. case of Omicron detected in California

Fed minions refuse to back down faster taper, worry about latest hyped COVID variant:

• Powell says Fed policy must address range of plausible outcomes
• Fed’s Williams says Omicron variant may prolong supply-demand imbalances

Bigger trouble developing in China, Mexico:

• China’s Nov factory activity slips back into contraction – Caixin PMI
• China’s property woes worsen as home prices slip in November-survey
• Mexican factories contract again as supply-side issues weigh, costs rise

Mixed, improving signs in the Eurozone, Canada:

• Euro zone factory growth picked up in Nov but inflationary pressures mounted
• Canadian factory sector defies supply constraints as output climbs

ECB minions looking for excuses to keep stimulus bond buys going:

• ECB governors mull delaying call on future bond buys as outlook murky

Wall Street closes lower as Omicron and inflation worry investors

Thursday, 2 December 2021

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

• U.S. labor market tightening; layoffs near three-decade lows
• OPEC+ agrees to go ahead with oil output rise, as U.S. pressure trumps virus scare

• Oil ends higher after a day of wild swings on OPEC, Omicron

Fed minions want to stop stimulating U.S. economy sooner:

• Unfazed by Omicron, Fed policymakers show greater consensus for faster taper
• Fed’s Barkin says he supports ‘normalizing’ monetary policy

Bigger trouble developing in China:

• China property market to keep cooling into H1 2022 on tight curbs: Reuters poll
• China advisers to recommend lower 2022 GDP target as headwinds grow – sources

Bigger inflation developing in Eurozone:

• Euro zone producer prices surge in Oct, unemployment eases

ECB minions claim inflation is transitory:

• ECB sticks with transitory description of inflation

Wall Street ends higher in robust rebound from Omicron-driven rout

• Investors flee U.S. corporate junk debt on inflation, Omicron concerns
• U.S. junk bond funds see biggest outflows in 8 months in November

Friday, 3 December 2021

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

• Instant view: US November payrolls rise falls far short

• The Reason Behind Today’s Massive Payrolls Miss: A Huge Seasonal Adjustment Flaw
• U.S. labor market tightening despite moderate November job gains

U.S. service sector activity gauge hits record high in November – ISM survey

U.S. factory orders rise more than expected in October

Oil edges up with OPEC+ poised to act if demand weakens

Fed minions say new Omicron variant coronavirus has mystical power to cause higher inflation, want to hike interest rates to fight it:

• Faster Fed taper, earlier rate hikes in sight despite slower job gains
• Fed’s Mester says Omicron threatens to stoke U.S. inflation – FT
• Fed’s Bullard wants faster policy tightening, citing ‘inflation shock’

Bigger trouble developing in China:

• China will cut reserve ratios in timely way, says premier

Bigger inflation developing in Japan:

• As global costs soar, Japan’s ‘shrinkflation’ gets harder to swallow

ECB minions think they might start rate hikes to fight inflation in 2023, don’t want to make any commitments:

• ECB’s Knot: high inflation could warrant rate hike in 2023
• ECB likely to avoid a long-term commitment in December -Lagarde

Wall St ends lower on Omicron worries, Fed taper angst

As of 3 December 2021, the CME Group’s FedWatch Tool is projecting three quarter point rate hikes in 2022, coinciding with the Federal Reserve’s Federal Open Market Committee’s meetings in June, September, and December.