The S&P 500 Recovers Lost Ground

The S&P 500 (Index: SPX) recovered a large portion of the ground in lost in the trading week ending on 3 March 2023. Much of that gain however came on the final day of the trading week, as the index jumped 1.6% to close at 4045.64.

Before that, the index mostly treaded water, drifting within a narrow range with respect to where it closed the previous week.

As it did, the trajectory of the S&P 500 bounced off the bottom edge of the alternative futures chart‘s redzone forecast range. The index climbed back toward the middle of the range as investors’ attention remained locked on 2023-Q1 and 2023-Q2.

This latter move makes sense because these are the quarters they expect will contain the last of the Fed’s series of rate hikes that began in March 2022, which is why they’ve held the forward-looking focus of investors since the beginning of the year. That stability of investor focus, combined with the week’s action in stock prices, means our working hypothesis that a new market regime began on 6 January 2023 still holds after being tested in the past week.

Meanwhile, the flow of new information presented a mixed picture for the U.S. economy, while more positive signs are developing in China and in the Eurozone, both of whose previous pictures had been much more negative. Here are the week’s market moving headlines:

Monday, 27 February 2023

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

• Boom, bust or a bit of both: US, global economies are a confounding mix
• U.S. pending home sales post largest gain in 2-1/2 years in January
• Oil futures slip 1% on worries about more U.S. interest rate hikes

Fed minion buys into higher rates to fight inflation:

• Fed’s Jefferson: “No illusion” inflation fight will be quick

Positive growth signs developing in China after government lifts its failed zero-COVID lockdown policy:

• China’s factory activity likely continued to grow in February – Reuters poll

New BOJ minion politely suggests never-ending stimulus may need to end someday:

• Incoming BOJ head says he has ideas on exit from ultra-easy policy

Wall St gets respite from positive data, dollar pullback

• Some highly rated US companies take unusual funding route as rates rise

Tuesday, 28 February 2023

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

• Oil rebounds almost 2% on China growth hopes
• US retailers’ lure cash-strapped customers with products under $5
• U.S. consumer confidence ebbs; house price inflation slows further
• U.S. house price inflation cools further in December

Fed minions say government data and market reactions aren’t good enough for them to make decisions:

• Fed should not rely too much on market reaction to guide policy, Goolsbee says
• Factbox-Fed rate watch: Wall Street banks see longer hike cycle, higher rates

• Fed might raise policy rates to 6% – BofA

Bigger trouble developing in Canada?:

• Canada’s economy surprises with Q4 flat line, backing up rate pause

• Canada’s economy unexpectedly stalled in Q4; January rebound likely

BOJ minions want to keep never-ending stimulus alive longer as Japan’s factory output falls:

• Incoming BOJ deputy head brushes aside near-term tweak to easy policy

• BOJ shouldn’t modify easy policy to address costs, incoming deputy governor Uchida says

BOJ’s Wakatabe warns secular stagnation risk has yet to pass

Japan’s factory output posts biggest fall in 8 months on weak autos, chips sectors

ECB minions have higher inflation than they expected to worry about, claim their winning battle against it:

• Unexpected inflation jump adds to ECB headache
• ECB has started to win inflation fight, Lane says

Wall Street closes out weak February as Fed concerns remain

Wednesday, 1 March 2023

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

• U.S. mortgage interest rates remain at highest level since November – MBA
• U.S. construction spending falls in January
• US manufacturing sector still shrinking; raw material prices rebound
• Oil settled up as rising supplies face Chinese demand hopes

Fed minions expected to keep delivering rate hikes:

• Fed seen likely to raise policy rate above 5.5% by September
• Fed’s Kashkari: open to either 25 bps or 50 bps rate hike
• Fed officials debate higher vs. just longer after January inflation jump

Growth signs developing in China after government’s failed zero-COVID lockdowns lifted:

• China’s factory activity stuns with fastest growth in a decade
• China new home prices end seven-month drop; more cities post gains -survey

Eurozone sees growth signs… and inflation:

• Euro zone factory output returned to growth in February -PMI
• German inflation unexpectedly accelerates in February

BOJ minions really want to keep never-ending stimulus alive:

• BOJ policymaker calls for keeping ultra-low rates, sees risks balanced

ECB minions worried about Eurozone inflation, want more and bigger rates hikes:

• ECB may need big rates hikes beyond March, steeper QT from July, Nagel says
• ECB’s Villeroy sees inflation peak in first half of year, no risk of recession
• ECB’s top three shareholders chart different paths for rates

S&P, Nasdaq weak as manufacturing stokes Fed concerns

Thursday, 2 March 2023

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

• US fourth-quarter labor costs revised higher; productivity growth lowered

Fed minions looking forward to more, smaller rate hikes:

• Fed’s Waller: if data stays hot, policy rate should go above 5.1%-5.4%
• Bostic: Quarter-point US rate increases best to limit risk to economy
• Factbox-Fed rate watch: Wall Street banks see longer hike cycle, higher rates

Bigger trouble developing in Brazil:

• Brazil’s GDP drops in Q4, consolidating economic slowdown

Bigger stimulus, growth developing in China:

• Exclusive-China increasingly ambitious with 2023 growth target, may aim for up to 6%-sources
• China’s job market better than expected in Jan-Feb: minister

Central bank minions thinking they may not be done with rate hikes:

• Major central banks return to inflation fight in February

ECB minions fear sticky inflation:

• Sticky inflation fuels some of ECB’s worst fears
• ECB confronts a cold reality: companies are cashing in on inflation
• Euro zone core inflation surges in Feb, keeps euro near one-week highs

Stocks gain as Bostic backs quarter-point hike

Friday, 3 March 2023

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

• US services sector grows steadily; prices stubbornly high

Fed minions say they know what damage their letting inflation get out of hand is causing as they prep for more rate hikes and to deal with a bond market in stress:

• Fed “acutely aware” of trouble inflation is causing – report
• Fed Collins reiterates more rate rises need to squish inflation
• Fed should look at how to efficiently support markets in times of stress -Bowman

• U.S. financial system vulnerable to bond market stress, Fed’s Logan says

More growth signs developing in China, Eurozone:

• China Feb services activity jumps sharply as demand recovers- Caixin PMI

• China’s central bank says will adjust policy in a timely way as economy recovers

Euro zone recovery gathers pace, allays fears of recession-PMI

• Euro zone producer prices fall due to energy, as other goods rise
• German exports rise in January on robust U.S. demand

Wall Street closes sharply higher, notches weekly gains as Treasury yields ease

The CME Group’s FedWatch Tool continued to project three consecutive quarter point rate hikes at the Fed’s upcoming 22 March (2023-Q1), 3 May and 14 June (2023-Q2) meetings, with rates topping out in a target range from 5.25%-5.50%. After that, the FedWatch tool anticipates the Fed will hold rates steady through the end of 2023 but will begin cutting them in March 2024.

The Atlanta Fed’s GDPNow tool‘s projection for real GDP growth in the first quarter of 2023 dropped to +2.3% from its previous +2.7% estimate. The so-called average “Blue Chip” consensus forecast however rose to about +0.5%.

Image Credit: Wikimedia Commons. Attribution 2.5 Generic (CC BY 2.5).