The S&P 500 Turns Down After Fed's Last Rate Hike of 2022

After a week that saw it rise as high as 4,019.65, the S&P 500 (Index: SPX) ultimately dropped 2.8% from where it ended the previous week to close at 3,852.36 on Friday, 16 December 2022.

Here’s the latest update to the dividend futures-based model‘s alternature futures chart:

Before we go any further, let’s recap a short bit of our analysis from last week, which will help explain what’s going on in the updated portion of the alternative futures chart:

If investors focus predominantly on 2023-Q1, the trajectory of the S&P 500 will remain within the redzone forecast range. If investors shift a larger portion of their attention further forward in time to 2023-Q2, the trajectory will drop below this indicated range.

On Wednesday, 14 December 2022, the trajectory of the S&P 500 has risen to the middle portion of the redzone forecast range, corresponding with investors mostly focusing their forward-looking attention on 2023-Q1. But that focus was very short-lived, as investors quickly shifted their forward-looking attention beyond the first quarter of 2023.

Here’s what changed to prompt that shift in how far forward investors are looking. After the Fed’s expected half point rate hike on 14 December 2022, news indicating developing weakness for the U.S. economy reshaped investors expectations of how the Fed will be changing interest rates in 2023. Those changes are captured by the CME Group’s FedWatch Tool, which dialed back its forecast for the Fed’s next rate hike from a half point to just a quarter point at its 1 February (2023-Q1) meeting. The FedWatch tool then sees just one more quarter point rate hike in March (2023-Q1), where the Federal Funds Rate would top out in the 4.75-5.00% range, below what they expected just a week earlier. Looking further forward, developing expectations for a recession in 2023 have the FedWatch tool projecting two quarter point rate cuts, the first in September (2023-Q3) and the second in December (2023-Q4).

Based on this information, through Friday, 16 December 2022, we would describe the level of the S&P 500 as consistent with investors splitting their attention between 2023-Q1 and 2023-Q3. That level is coincidentally near the middle of where we might sketch a new redzone forecast range on the chart to indicate where the S&P 500 would be if investors were closely focused on 2023-Q2.

Here are the week’s market-moving headlines:

Monday, 12 December 2022

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

• Oil up $2/bbl on supply risks amid ongoing Keystone outage
• Americans expected waning inflation pressures, rising incomes in November

Investors don’t have high opinion of Fed minions’ abilities:

• Analysis-Investors on alert for policy error after cheering slower rate hikes

Wall St climbs with inflation, Fed on deck

Tuesday, 13 December 2022

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

• Nov U.S. CPI cools down, spelling relief for markets

• U.S. consumer prices increase moderately in November
• Food inflation: Tight grain, oilseed supplies to keep prices elevated

U.S. existing-home sales to slide to 11-year low in 2023, NAR says

Fed seen slowing rate hikes, likely ending them below 5%

• Traders boost bets on Fed rate-hike slowdown early next year

Bigger stimulus developing in China:

• Chinese leaders to signal more stimulus for 2023 as COVID clouds outlook

Wall St rises after CPI data but Fed concerns persist

• Wall St cautiously optimistic as easing inflation lifts hopes of smaller rate hike

Wednesday, 14 December 2022

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

• U.S. consumer loan delinquencies seen surging to 13-year high in 2023 – study

• Column-Liquidity risks flash private debt warning: McGeever

U.S. import prices drop further; inflation pressures easing

Fed raises rates by half percentage point, sees economy nearing stall speed

• Fed hikes rates by 50 bp, as expected, keeps hawkish tone
• Fed policymakers see interest rates higher, for longer
• Fed’s Powell says inflation data received in Oct and Nov shows ‘welcome reduction’

Bigger trouble developing in Japan, Brazil:

• Japan manufacturers’ mood sour as cost pressures bite, service sector upbeat
• Brazil’s economic activity shrinks in October on rate hike impact

Smaller trouble developing in the Eurozone?

• German recession will be milder than expected: Ifo

Even bigger stimulus developing in China:

• China plans to expand domestic demand to spur economy – state media

Central bank rate hikes to continue through end of 2022:

• South Africa set to end tightening cycle in Q1 with 50 bps more

ECB minions say elevated inflation to stay in Eurozone for another three years:

• Exclusive-ECB sees inflation above target through 2025, source says

Wall Street ends lower after latest Fed rate hike

Thursday, 15 December 2022

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

• U.S. retail sales post biggest drop in 11 months; labor market tight
• U.S. manufacturing output dragged down by motor vehicle weakness

Bigger trouble developing in China, Eurozone:

• China’s factory, retail sectors skid as COVID hits growth
• China property slumps further in Nov, policies support gradual recovery
• French economy forecast to contract before recovering next year

BOJ minions say they can’t stop, won’t stop never-ending stimulus:

• BOJ to keep ultra-low rates, hold fire until global outlook clearer

Central bank minions signal more rate hikes are comint, start to signal rate hikes will slow, end in 2023:

• Bank of England raises rates to 3.5%, sees more hikes ahead
• Norway central bank hikes rate by quarter point, likely to act again
• Swiss National Bank says inflation battle not yet won
• Taiwan central bank signals end to rate hikes next year
• Bank of Mexico hikes rate to 10.50%, signals another increase coming

ECB minions delivers half point rate hike into developing Eurozone recession:

• ECB raises rates again, outlines balance sheet run off
• ECB slows rate hikes but pledges more to keep up inflation fight
• ECB’s Lagarde offers back-to-back rate hikes to woo dissenters
• ECB to start offloading bond holdings in March
• ECB raises inflation, cuts 2023 growth projection

Wall Street slumps as Fed heightens recession fears

Friday, 16 December 2022

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

• U.S. business activity slumps in December; price pressures ease – S&P Global survey

Fed minions claim they won’t start rate cuts until after 2023 recession is well underway:

• Fed could push rates higher, keep them there longer, policymakers say

• Fed could hold rates at peak into 2024, Daly signals

Bigger stimulus developing in China:

• China’s economy picking up but “arduous efforts” needed to sustain momentum – state planner
• China says it will step up support for economy in 2023 amid COVID pains

Bigger trouble developing in Japan:

• Japan Dec factory activity contracts at fastest pace in 26 months
• Japan Nov consumer inflation likely to hit fresh four-decade high – Reuters poll

BOJ minions thinking about ending never-ending stimulus:

• As Kuroda bows out, Bank of Japan’s rising hawks eye end to unloved yield cap

Bigger trouble in the Eurozone not as bad as expected:

• Euro zone business activity falls at slower rate in Dec, inflation eases -PMI

ECB minions say they won’t stop fighting inflation, say their jawboning is just like a rate hike, say they won’t have more big rate hikes:

• ECB’s Villeroy: Match against inflation is not over
• Strong ECB statement equivalent to a bigger rate hike, Holzmann says
• ECB’s Centeno sees very low probability of more 75 bps rate hikes
• ECB’s Knot says Fed is closer to end of rate hikes than ECB

Wall Street’s slump continues as recession fears mount

• S&P 500’s consumer discretionary stocks are hammered for 2nd week as recession fears rear up

The Atlanta Fed’s GDPNow tool‘s projection for real GDP growth in the current quarter of 2022-Q4 dropped back to +2.8% from last week’s +3.2% estimate. The “Blue Chip consensus” still projects over 1% real economic growth for the current quarter of 2022-Q4.

This is the last post in our S&P 500 chaos series for 2022. We’ll be back in the first week of Janaury 2023 to recap the final two trading weeks of 2022, where the big question we have going into those final weeks is whether there will be one or two more Lévy flight events to end the volatile year of trading.