S&P 500 Jumps as Fed Signals Rate Hikes to Shrink, End Sooner

The S&P 500 (Index: SPX underwent its eleventh Lévy flight event of 2022, jumping to close out the third week of October 2022 at 3,752.75, up 159.99 points (+4.4%) from the previous week’s close.

That’s an exciting development, because while previous swings in recent weeks have come close, they weren’t quite large enough to qualify as a full Lévy flight event where investors shift their forward looking focus from one point of time in the future to another. For this latest event, it appears investors shifted their attention from 2023-Q3 inward to the nearer term future of the current quarter of 2022-Q4.

That change coincides with signals members of the Federal Reserve sent, mainly on Friday, 21 October 2022, that they were looking to reduce the size of their expected rate hike in December 2022. Previously, investors were anticipating another three-quarter point rate hike in December, but were focusing on 2022-Q2 because that period coincided with when they expected the Fed’s current series of rate hikes would peak.

We don’t know how long investors might hold their attention on 2022-Q4. If investors become more concerned about the timing of when the Fed’s rate hikes will top out, it would make sense for them to shift their focus to the next future quarter of 2023-Q1. The alternative futures chart indicates the Lévy flight that would coincide with such a change would be a low energy event. Stock prices could simply move mostly sideways to achieve that result. Meanwhile, if investors shift their term horizon back to 2023-Q2, the S&P 500 would see a noteworthy decline.

The only thing we know for sure is that investors will shift their investment horizon away from the current quarter at some point, and will absolutely do so by the end of the third Friday in December 2022.

When that happens will be subject to the random onset of new information. Speaking of which, here are the market-moving headlines we noted during the week that was.

Monday, 17 October 2022

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

• Oil steady as recession woes counter positive Chinese signals

• OPEC+ members endorse output cut after U.S. coercion accusation

China economy rebounding from summer zero-COVID lockdowns:

• China’s economic recovery continues upward trend – state media cites Premier Li

• China showed ‘significant’ Q3 rebound but faces challenges – state planner

Bigger trouble, stimulus developing in China:

• China delays release of key economic data amid party congress
• Big Chinese banks pledge enhanced support for economy as Xi sounds call for growth
• Exclusive-China’s state banks seen acquiring dollars in swaps market to stabilise yuan – sources

Bigger trouble developing in Japan:

• Bank of Japan likely to raise inflation forecast to over 2.5% – Kyodo
• Japan keeps up warnings over rapid yen moves after G20
• Japan PM hints that decision on next BOJ chief still months off
• Japan not ruling out corporate, income tax hikes to boost military spending

Wall Street ends sharply higher, dollar dips on UK U-turn, strong earnings

Tuesday, 18 October 2022

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

• Oil prices settle lower on U.S. supply, lower China demand
• U.S. factory output solid in September; builder sentiment slumps further

Some Fed minions wanted bigger rate hikes this past summer; other minions growing concerned about U.S. labor market:

• Minneapolis Fed directors wanted 100 bp discount rate hike in September

• Fed may need to push policy rate above 4.75% -Kashkari

Fed’s Bostic: U.S. needs to work through labor market “shuffle and churn”

Central bank rate-hike-o-mania:

• Australia’s central bank says to hike rates more, can keep pace with global peers
• Bank Indonesia playing catch-up, to deliver another 50 bps rate hike on Thursday: Reuters poll
• India should pause rate hikes as growth fears loom – MPC’s Varma
• New Zealand Q3 inflation smashes expectations, boosts case for hawkish hikes
• BoC to dial down size of rate rises again but not done yet – Reuters poll

BOJ minions

• BOJ’s Kuroda says has no intention of resigning
• Japan will respond appropriately to excessive FX moves, Finance Minister says
• Japan repeats warnings on yen as market watches for intervention
• With weak yen, Japan aims to earn $34 billion from tourists next fiscal year

Goldman, Lockheed results buoy Wall Street

Wednesday, 19 October 2022

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

• Oil up in tight market as U.S. sets release of more reserves

• U.S. sells oil reserves as Biden tackles pump prices ahead of elections

U.S. single-family home starts fall to lowest level in more than two years

Fed minions starting to be concerned about potential for bad effects from bigger rate hikes:

• Fed says firms gloomier on outlook, but inflation pressures easing
• Fed’s Kashkari says labor shortages still a big issue for business
• Fed’s Evans: Keeping unemployment below 5% would be ‘good’ outcome in inflation fight

• Evans: Rates moving too high could have ‘nonlinear’ impact on US economy

BOJ minions more okay with falling yen than stopping never-ending stimulus:

• BOJ policymakers rule out countering weak yen with rate hike
• Japan imports surge on weaker yen, fanning inflation fears

ECB minions thinking about another big rate hike:

• ECB to go big again on Oct. 27 with 75 bps rate hike: Reuters poll

Wall St ends red, Treasury yields climb on dour guidance and looming recession fears

Thursday, 20 October 2022

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

• U.S. weekly jobless claims fall
• Oil near flat, inflation worries counter potential boost in China demand
• U.S. container imports tumble as supply stress gives way to slack
• U.S. existing home sales slide again in September; jobless claims fall

Fed minions want more rate hikes, worry about lockdown learning loss, and start thinking about keeping a lower profile:

• Fed’s Harker says high inflation calls for more rate hikes
• Fed’s Bowman says critical to address pandemic-related learning loss
• St. Louis Fed to ‘think differently’ about private events after Citi forum

Bigger trouble developing in Canada, India, Germany:

• Canada recession may be ‘necessary evil’ as central bank queues big hike
• India’s economic growth outlook stagnates, stuck in lower gear: Reuters Poll
• German producer prices rise more than expected in September

BOJ, JapanGov minions working to keep value of yen from collapsing and never-ending stimulus alive:

• Yen softens past 150 per dollar for first time since 1990
• Japan ramps up intervention threats after yen slides past key 150 level
• BOJ conducts emergency bond buying to underpin debt market, but yields keep rising

Wall Street ends lower as Fed worries outweigh earnings

• Wall St loses ground on fears of prolonged Fed hawkishness

Friday, 21 October 2022

• Fed minions start signaling they want to slow down rate hikes:

• Fed’s rate debate shifts to how, and when, to slow down
• Fed’s Daly says it’s time to start talking about slowing rate hikes
• Fed’s Evans: need to get policy rate to a bit above 4.5%, then hold

BOJ minions in hot seat as bigger trouble developing in Japan:

• BOJ: Japan’s banking system stable but rising global rates a risk

Wall Street ends higher as hopes for less aggressive Fed grow

The CME Group’s FedWatch Tool continues to project a three-quarter point rate hike when the FOMC next meets on 2 November 2022, but pulled back to project just a half point rate hike on 14 December (2022-Q4) following Friday’s signals from the Fed. In 2023, the FedWatch tool now projects just a single half point rate hike in February (2023-Q1), setting the top for the Federal Funds Rate’s target range at 4.75-5.00% and holding at that level for much of the rest of the year. Looking further forward, the FedWatch tool anticipates a quarter point rate cut in December (2023-Q4).

The Atlanta Fed’s GDPNow tool‘s projection for real GDP growth in the recently ended calendar quarter of 2022-Q3 is +2.9%. The Bureau of Economic Analysis will provide its first official estimate of real GDP growth in 2022-Q3 on 27 October 2022, so the GDPNow tool should soon start forecasting real GDP for 2022-Q4.