The S&P 500, a Better-Than-Expected Inflation Report, and the Biggest Short Squeeze in Market History

In an especially volatile year, the S&P 500 (Index: SPX) continues to provide excitement! The index closed the trading week at 3,992.93, ending Friday, 11 November 2022 up 222.38 points (+5.9%) from the close of the previous trading week.

Getting there involved the thirteenth Lévy flight event of 2022 by our rough count, prompted by a better-than-expected Consumer Price Inflation report, and fueled by what ZeroHedge described as the “biggest short-squeeze on record, based on Goldman’s ‘Most Shorted’ basket”.

For the dividend futures-based model‘s alternative futures chart, we see the new Lévy flight event as a shift in the forward-looking time horizon for investors from 2023-Q1 back toward the current quarter of 2022-Q4.

That shift occurred because with inflation being reported lower than expected, the message the Federal Reserve’s interest-rate setting Federal Open Market Committee will send at its upcoming 13-14 December 2022 meetings will carry especial weight for what investors should expect going into 2023.

Going back to the alternative futures chart, we see the level of the S&P 500 is elevated with respect to the trajectory for investors focusing their attention on 2022-Q4. It’s running at the high end of the range the model projects over the next several weeks, which may be the result of noise from the short-squeeze rally.

Given that investors are focusing on 2022-Q4, we need to point out there will be at least one more Lévy flight event before the end of 2022. If that happens during the next several weeks, that means stock prices would fall by a significant percentage. There’s also the wild card factor of the additional noise that has been injected into the market from the short squeeze event. Noise always dissipates, it’s only ever a question of when. In this case, that dissipation will also mean falling stock prices.

Here’s a recap of the week’s market moving headlines:

Monday, 7 November 2022

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

• Oil stable below $100/bbl as market balances Chinese data

Fed minions say they’re strangling economy even harder than data says:

• U.S. monetary policy tighter than benchmark rate suggests: Fed research

Bigger stimulus developing in China:

• China to create appropriate monetary environment to keep supply chain stable – PBOC vice governor

Bigger trouble developing everywhere:

• China’s trade unexpectedly shrinks as COVID curbs, global slowdown jolt demand

• China’s Oct exports seen cooling further as global demand weakens: Reuters Poll

Weakening global demand hurts Vietnam’s garment makers – industry official

Euro zone grapples with coordinating energy support plans as recession looms

Germany told to pay for Eurozone energy crisis:

• Germany should hike taxes on rich to finance relief packages, advisers say – report

Central bank minions stuck on rate hikes:

• Polish central bank seen hiking rates by 25 bps despite slowdown fears – Reuters poll

ECB minions thought about it, can’t stop, won’t stop rate hikes as they prep for Eurozone recession:

• ECB must not stop rate hikes before core inflation peak, Villeroy says
• ECB scrutinises banks’ payout plans as outlook sours

U.S. stocks end higher, Meta jumps as investors eye midterms

• Meta Platforms shares rise with big layoffs expected this week

Tuesday, 8 November 2022

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

• Oil prices slide $2 on China demand worries, U.S. midterm elections
• Consumers turn to credit cards, loans as costs soar – report

BOJ minions briefly consider ending never-ending stimulus, JapanGov minions okay more fiscal stimulus:

• BOJ debated impact of future exit from easy policy in Oct meeting

• Japan foreign reserves fall for third month after intervention

Japan’s cabinet OKs extra budget spending, adding to debt

ECB minions excited about hiking rates, embrace their “dark side” as they deal with developing cracks in financial system:

• ECB to continue raising rates even as economy suffers
• ECB supervisors show dark side of higher rates for banks

• EU eases bank capital rules as ECB warns of ‘cracking’ stability
• Euro zone bonds wobble as central banks zero in on inflation

Wall Street ends higher as investors eye U.S. midterms

Wednesday, 9 November 2022

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

• Oil prices plunge 3% on U.S. inventory build, China COVID worries
• U.S. wholesale inventories revised lower in September
• Potentially divided U.S. government tees up tough economic debates for 2023

Fed minions admitting rate hikes will cause recession, markets betting Federal Funds Rate will top out at 5%:

• Richmond Fed’s Barkin: Inflation fight “may lead to a downturn”

• Barkin: U.S. likely on “back end” of inflation surge
• Fed’s Williams flags relative stability of longer run inflation expectations

Fed terminal rate to reach just under 5%, said bond strategists – Reuters poll

Bigger trouble developing in China:

• China’s Oct new yuan loans seen sliding as demand weakens – Reuters poll
• China’s factory gate prices suffer first drop since Dec 2020 as COVID curbs take toll

ECB minions say higher inflation is still coming to Eurozone despite their rate hikes:

• Euro zone consumers see higher inflation ahead, ECB says

Wall Street drops after midterm election, CPI in focus

Thursday, 10 November 2022

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

• U.S. inflation turning the corner as consumer prices rise below expectations
• Oil prices settle 1% higher on tepid U.S. inflation data

Fed seen slowing rate hike pace as inflation eases

• Fed’s George calls for ‘more measured’ pace of rate hikes
• Fed’s Daly: would rather do too much on rates than too little
• Fed’s Mester cheered by CPI, but says big risks remain on inflation
• Fed’s Harker says time coming where Fed can slow rate hikes

• Fed’s Harker says favors possible rate hike pause when funds rate hits around 4.5%

Fed’s Logan: Inflation data a ‘welcome relief,’ still long way to go

Bigger trouble developing in China:

• China new bank lending stumbles as COVID flare-ups hit demand
• China year-end export bounce in doubt as global demand falters

Central banks thinking they can should start backing off rate hikes:

• Australia’s central bank says nearer to point when it can wait on rates

BOJ minions thinking about ending never-ending stimulus:

• BOJ’s Kuroda lays out framework for future exit from easy policy

ECB minions want more rate hikes, starting to worry about Eurozone bank’s potentially failing:

• ECB hawks call for growth-curbing rate hikes to tame inflation

• ECB’s Nagel calls for letting long-term rates rise too
• ECB’s Schnabel flags inflation risk from wages, expectations

ECB’s Enria calls time on era of big bank buybacks

ECB to lend out more of its bonds to ease market squeeze

Wall Street soars on sign of cooling inflation

Friday, 11 November 2022

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

• Oil settles higher, posts weekly loss as China eases COVID curbs
• U.S. consumer sentiment slumps; inflation expectations edge up

Fed minion says more rake hikes coming despite worry about overtightening sending economy into recession:

• Fed’s Collins Says Risk of Policy Overtightening Has Increased

Bigger trouble developing in the Eurozone:

• Euro zone bond market flashes recession signal
• Energy crisis dims festive sparkle in Europe’s shops
• German harmonised inflation +11.6% y/y in October

Bigger trouble developing in China:

• No easy fix for China as economy slows more than expected
• Hong Kong’s economy shrinks for third straight quarter, outlook dims

BOJ, JapanGov minions thinking about ending never-ending stimulus in face of inflation:

• BOJ must phase out yield cap, negative rate – govt panel member Okina
• Japan Oct consumer inflation likely to hit four-decade high – Reuters poll

• Japan’s Oct wholesale prices rise 9.1% yr/yr
• Inflation brings end to beloved 114-year-old Japanese candy

ECB minions thinking next rate hike may be smaller, Eurozone inflation may be higher:

• ECB not pre-committed to raise rates by 75 bps again, De Cos says
• ECB’s de Guindos says market might be underestimating inflation
• ECB’s Holzmann says he doesn’t know how he’ll vote at December meeting

Nasdaq, S&P 500 end sharply higher, fueled by inflation optimism

With the lower-than-expected Consumer Price Inflation report, the CME Group’s FedWatch Tool still has a half point rate hike on tap for 14 December (2022-Q4). But in 2023, the FedWatch tool now projects two quarter point rate hikes, in February and March (2023-Q1), with the Federal Funds Rate reaching a peak target range of 4.75-5.00%. Looking further forward, the FedWatch tool anticipates two quarter point rate cuts in 2023-Q4 (November and December) as developing recessionary conditions take hold in the U.S. economy.

Meanwhile, the Atlanta Fed’s GDPNow tool‘s projection for real GDP growth in 2022-Q4 rose to +4.0% from last week’s +3.6% estimate. There continues to be a big gap between its current projection and the so-called “Blue Chip consensus” that anticipates near zero growth in 2022-Q4.