S&P 500 Adapts to Shifting Expectations for Rate Hikes

On Friday, 3 February 2023, an unexpectedly large upward adjustment to the number of employed Americans in the January 2023 employment situation report prompted investors to reset their expectations for how high the Fed’s rate hikes will go before peaking. Before the report was issued, investors were looking for the Fed’s rate hikes to top out in the 4.75%-5.00% range in March 2023. After the report, their expectations changed to anticipate a peak target rate range of 5.00%-5.25% being hit in May 2023.

In response, the trajectory of the S&P 500 (Index: SPX) shifted downward to close the week at 4,136.48, which was still up from the previous week’s close. That’s not unexpected, because the index has been running on the high side of the redzone forecast range in the dividend futures-based model‘s alternative futures chart:

The week also saw continued improvement in the expectations for the S&P 500′s quarterly dividends per share during 2023, which we’ll revisit separately in a couple of weeks since we just featured it in the previous edition of our running S&P 500 chaos series. For now, we’ll simply observe these positive changes in expectations are shifting the trajectory of the S&P 500′s alternative futures upward.

Here are the past week’s market-moving headlines:

Monday, 30 January 2023

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

• Oil falls 2% as rate hikes loom and Russian flows stay strong

Big bets being placed on Fed minions ending rate hikes in March 2023:

• Fed’s words in focus as markets bet rate hikes will soon end

Not really unexpected bigger trouble developing in the Eurozone:

• German economy unexpectedly shrinks in Q4, reviving spectre of recession

Better than expected news in China, more stimulus rolls out:

• China’s factory activity likely contracted more slowly in January: Reuters poll
• China central bank to roll over lending tools to spur growth

But still bigger trouble developing around China:

• South Korea Jan exports to extend falling streak to fourth month: Reuters poll
• Taiwan export orders seen contracting at faster pace in Dec: Reuters poll

Other central bank minions continue rate hikes as they face test:

• The 2% target: Central banks’ inflation touchstone faces post-pandemic reckoning
• RBI to hike repo rate by 25 bps in Feb, ending tightening cycle: Reuters poll
• Hungary cbank could start “cautious” rate cuts once CPI slows – minister
• Bank of England poised to raise interest rates for 10th time in a row

But not BOJ minions as they strive to keep never-ending stimulus alive:

• BOJ Kuroda stresses need to maintain ultra-easy policy

Nasdaq falls as megacaps drop ahead of earnings, Fed meet in focus

Tuesday, 31 January 2023

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

• Bond investors brace for recession as Fed expected to slow pace of tightening
• Oil prices settle steady on higher U.S. demand, weaker dollar
• U.S. consumer confidence ebbs in January; inflation expectations rise

Fed minions want to get debt assets off their balance sheet:

• Fed officials see lots of room to shed bonds from balance sheet

Bigger trouble developing in the Eurozone:

• German retail sales post surprise plunge in December amid rising prices
• Italy’s economy contracts by 0.1% in Q4, raising recession fears

Economic growth returns in China after Xi’s zero-COVID lockdowns lifted, but damage done:

• China economic activity swings back to growth in January – official PMI
• China’s industrial profits contract in 2022 on COVID woes

Central bank minions starting to think they’ve hiked interest rates enough:

• Bank of Korea board cautious on more rate hikes – Jan meeting minutes

ECB minions wondering how many more rate hikes they need:

• Euro zone banks tighten credit by most since debt crisis, ECB says

Wall St gains over 1% after encouraging inflation data with Fed next

Wednesday, 1 February 2023

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

• U.S. job openings unexpectedly increase in December
• Oil dives $3 after U.S. EIA reports big builds in U.S. crude, fuel stocks
• U.S. construction spending unexpectedly fall in December
• U.S. manufacturing sector sinks further in January – ISM

Fed delivers small rate hike, still expects ‘ongoing increases’

• Fed’s Powell: will need substantially more evidence to be confident inflation on downward path
• Fed’s Powell: No one should assume Fed can protect economy in debt default
• Instant View-Fed opts for small rate hikes, expects to deliver ‘ongoing increases’
• Sooner or later, Fed may need technical tweaks for rate control toolkit

Bigger trouble developing in Asia, centered on China:

• China’s Jan factory activity contracts at slower pace amid COVID infections – Caixin PMI
• South Korea slides toward recession as Jan exports plunge

• South Korea factory activity contracts in January at slightly milder pace – PMI

Japan factory activity shrinks for third month in January

Global factory activity contracted again in January, highlighting fragile recovery

Bigger stimulus developing in China:

• China’s Xi vows to help consumers spend ‘without worries’

BOJ minions have hands full keeping never-ending stimulus alive:

• BOJ’s record bond buying highlights challenge for yield control

ECB minions fear “sticky” inflation:

• Sticky underlying inflation set to keep ECB on its toes

Wall St rallies as Fed’s Powell nods to easing inflation after rate hike

Thursday, 2 February 2023

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

• Oil slumps on economic data, stronger U.S. dollar
• U.S. weekly jobless claims drop to nine-month low; productivity gains speed
• U.S. factory orders rebound in December

Fed minions happy to experience “disinflation”:

• Explainer-The Fed says disinflation is welcome. What is that, exactly?
• Fed’s Powell says no rate cuts this year, and markets hear it differently

• Analysis: Fed feeds Wall Street’s soft landing hopes, though recession fears still loom
• Marketmind: Markets go all in for disinflation

Central bankers thinking about slowing starling-like rate hikes, start to realize they may have a credibility problem:

• After a joint rate surge, central banks start to see the end in sight

• Bank of England raises rates, signals end to hikes
• Hong Kong’s cenbank raises interest rate after Fed hike, HSBC keeps rate unchanged
• Denmark’s central bank raises key rate to 2.1%

Markets to central bankers: we don’t believe you

• Central banks should stick to ‘higher for longer’ interest rate approach – IMF

ECB minions excitedly deliver another rate hike, still thinking about more as Eurozone economy slows:

• ECB hikes rates, promises another 50 bps more in March

• ECB raises rates, signals at least one more hike
• ECB governors see at least two more rate hikes, sources say

German exports drop 6.3% in Dec, suggesting slowing economy

Nasdaq, S&P 500 close higher on Meta bump, Fed lift

Friday, 3 February 2023

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

• U.S. reports blowout job growth; unemployment rate lowest since 1969
• Oil falls about 3% as strong U.S. jobs data prompt interest rate concerns
• U.S. service sector rebounds in January – ISM survey

Fed minions expected to keep hiking rates higher:

• Fed seen likely to lift rates above 5% after strong jobs report

• Morgan Stanley sees another 25-bps Fed hike in March after strong jobs report
• Fed’s Daly sees policy rate rising to least 5.1%, then a hold

Smaller stimulus than expected developing in China:

• Exclusive-China eyes help for shell-shocked consumers but big stimulus unlikely-sources

BOJ minions excited to see rising wages, not sure who their next boss will be:

• BOJ’s Kuroda sees wages rising ‘quite significantly’
• BOJ governor race gets a twist after top contender Nakaso take APEC role

Other central banks put rate hikes back on the table after U.S. jobs report:

• Major central banks rekindle rate hike push after dry January

ECB minions looking forward to next rate hikes, expect higher inflation for longer:

• ECB set to raise rates again in May, policymakers say

• Analysis-ECB policymakers converging on end-point for rate hikes
• ECB terminal rate could be above current market pricing: Wunsch

Euro zone inflation seen just above ECB’s target in 2025, poll shows

Wall Street ends down after stunning jobs growth raises Fed questions

• Jobs report jolts Wall Street bulls as inflation fears return
• Tech earnings hit pause button on market rally

After the Fed’s expected quarter point rate hike last week, the CME Group’s FedWatch Tool still projects another quarter point rate hike at the Fed’s upcoming 22 March (2023-Q1) meeting, followed by another at its 3 May (2023-Q2) meeting, with the latter representing the last for the Fed’s series of rate hikes that started back in March 2022. After that, the FedWatch tool anticipates the Fed will hold the Federal Funds Rate at a target range of 5.00-5.25% through September 2023. After which, developing expectations for a U.S. recession in 2023 have the FedWatch tool projecting two quarter point rate cuts, in November and December (2023-Q4).

The Atlanta Fed’s GDPNow tool‘s projection for real GDP growth in the first quarter of 2023 held steady at +0.7%. Meanwhile, the so-called “Blue Chip” consensus forecast is leaning toward negative GDP growth in the current quarter.