The S&P 500 Rises With Signs Bank Contagion Seems Contained

The S&P 500 (Index: SPX) climbed 1.4% from the previous week’s close to wrap up the trading week ending Friday, 24 March 2023 at 3970.99.

During the week, dividend futures rebounded from the previous week’s low for the quarter. However, the bigger story is that expectations took hold the Federal Reserve is done with rate hikes after hiking them by a quarter point on Wednesday, 22 March 2023 and will be swinging to cut rates instead in the weeks ahead.

The latest update to the alternative futures chart shows the S&P 500′s trajectory continued persistently tracking below the redzone forecast range we established almost three months ago, which has now reached its end.

With the increased focus on how the Fed will adapt its monetary policies during 2023-Q2, the Fed’s rate hike provides a valuable calibration point we can use to quantify the shift in the value of dividend futures-based model‘s multiplier. The model requires the multiplier’s value be set according to empirical observations, where a first pass suggests it has shifted from 0.0 to +1.5 as a result of the interest rate hike-induced distress in the U.S. banking system. That new shift follows the multiplier having recently shifted from +2.0 to +0.0 in early January 2022.

The next chart sets up the new hypothesis test utilizing a multiplier of about +1.5 starting from 9 March 2023, coinciding with the development of the then-impending failure of Silicon Valley Bank.

With this shift in multiplier, we see the redzone forecast range adjust accordingly, as if we has made the assumption the multiplier, m, would shift from +0.0 to +1.5 on 9 March 2023 from the very beginning. This visual adjustment is an artifact of how we set up redzone forecast ranges, where we anchor one point in the past and the other in the future to allow them to dynamically adapt along with changes in future expectations.

Going forward, we’re starting with the assumption that m = +1.5 and that investors are focusing on 2023-Q2 in setting their forward-looking focus. Ideally, we should see the trajectory of the S&P 500 track along within a few percent of the alternative future projection associated with 2023-Q2. In reality, we anticipate a higher level of volatility driven by the onset of new information.

Speaking of which, here are the past trading week’s market moving headlines:

Monday, 20 March 2023

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

• Oil prices rebound after hitting lowest since 2021 on banking fears

Investors uncertain of Fed minions’ next steps following bank failures, bailouts:

• Uncertainty reigns as Fed considers interest rate hike
• Factbox-Banking turmoil may prompt Fed to go slow on interest rate hikes
• Marketmind: Fed halt being priced as bank blaze smoulders
• The canary is alive and chirping a year into Fed’s rate hiking cycle

Failing bank Credit Suisse bought by UBS in forced sale:

• UBS to take over Credit Suisse, assume up to 5 billion Swiss francs in losses
• Bank shares rise after Credit Suisse rescue eases crisis
• Explainer-Why markets are in uproar over a risky bank bond known as AT1

BOJ minions claim Japan’s banks are stable, worry about side effects of never-ending stimulus:

• Japan says banking system stable, plays down risk of contagion
• BOJ debated side effects of easy policy at March meeting

Bigger trouble as Chinese, global economy not growing as quickly as expected:

• Taiwan Feb export orders miss forecast, China a big drag

Bigger trouble developing in the Eurozone:

• German economy heading for contraction in Q1, Bundesbank says
• German producer prices rise more than expected in February

ECB minions looking to exploit bank system crisis to achieve inflation target, claim risk of Eurozone bank failures is small:

• Market turmoil may do ECB’s work in dampening demand – Lagarde
• ECB’s Centeno sees some build-up of inflationary tensions
• ECB’s Stournaras: Chance of contagion to EU banks “very small”
• Factbox-What can the ECB do to stop the banking crisis?

Wall St ends higher as bank contagion fears ease, Fed eyed

• Credit Suisse rescue eases crisis fears, First Republic shares dive

Tuesday, 21 March 2023

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

• Oil rises 2% in retreat from 15-mth low as banking fears subside
• US officials study ways to expand FDIC coverage to all deposits -Bloomberg News

• Yellen vows to safeguard deposits at smaller U.S. banks, intervene if needed

Lower mortgage rates boost US home sales in February

ECB minions having second thoughts about more rate hikes:

• ECB’s Holzmann waters down call for three more rate hikes

Wall Street ends green on bank bounce as Fed takes focus

• Shares jump but investor fears about bank ‘whack-a-mole’ linger
• First Republic leads surge in bank stocks as Fed comes into focus

Wednesday, 22 March 2023

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

• Oil up 2% as dollar weakens on small US Fed rate hike
• Falling US gasoline stockpiles signal a repeat of last summer’s high prices

Investors on edge before the Fed minions’ meeting:

• As Fed meeting looms, economists see central bank balance sheet in new light
• Fed’s Powell faces political storm, policy minefield over SVB oversight

Fed minions deliver quarter point rate hike, hint at pause in rate hikes to focus on failing banks:

• U.S. Fed delivers small rate hike amid global banking turmoil
• Fed sees credit drawdown looming, shifts towards pause on rate hikes
• Bank deposits have stabilized in last week, Powell says

Yellen, caught between financial markets and US Congress, pleases neither

• Yellen Pulls Rug Out From Powell’s Dovish Promises: Gold Gains As Banks Bust
• “We Are Headed For Another Train Wreck”: Bill Ackman Blames Janet Yellen For Restarting The Bank Run
• Yellen says US banks shoring up liquidity to guard against runs
• Explainer-How safe is my money in a U.S. bank and what is insured?

Bigger stimulus developing in China:

• China to boost support for high-end manufacturing – Premier Li

Mixed economic signals in Japan:

• Japan’s land prices up at fastest pace since 2008 on gradual econ recovery
• Japan cuts view on industrial output, vigilant on market volatility

ECB minions thinking about their carbon footprint while German officials worry about inflation picking up if bank failures stop ECB from focusing on fighting inflation:

• ECB to publish first detailed carbon footprint
• German ‘wise ones’ see inflation uptick if banking woes halt rate rises
• Stubborn inflation may require more ECB rate hikes: Nagel

Wall St ends sharply lower as Powell warns inflation fight continues

• Analysis-Investors cautious on U.S. stocks, even though Fed hikes may soon end

Thursday, 23 March 2023

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

• U.S. new home sales post third straight monthly gain in February
• Oil drops 1% as US in no rush to refill strategic reserve

Biden administration Treasury Secretary forced to backtrack:

• Yellen tries to assuage investor fears as bank stocks slide
• Yellen, caught between markets and US Congress, tweaks bank safety message

Fed minions seen on verge of policy change for setting interest rates:

• The sure-footed Fed of the past year now in doubt about next policy move

More central bank minions putting rate hikes on hold, addressing potential for bank failures:

• Brazil central bank holds rates, flags increased inflation expectations
• Bank of Korea says non-bank financial firms face stress from property market
• New Zealand central bank says economy slowing, still not sure if rates high enough
• Analysis-End of central bank rate hikes now firmly on the horizon

Other central bank minions continue rate hike mania:

• Hong Kong central bank raises policy rate after Fed hike
• Philippines central bank stays in inflation-fighting mode, hikes rates by 25 bps
• Taiwan central bank unexpectedly raises rates on inflation concerns
• Bank of England raises interest rates again, sees inflation falling
• Swiss National Bank raises rates, says Credit Suisse takeover prevented larger crisis

ECB minions still singing from rate hike hymnal:

• ECB could hike rates again in May to tame stubborn inflation: Knot

Wall St ends higher as Yellen vows actions to safeguard deposits

Friday, 24 March 2023

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

• How the 2023 banking crisis unfolded
• US business investment appears weak in first quarter as orders rise moderately

• U.S. business activity accelerates in March – S&P Global survey

End of central bank rate hikes now firmly on the horizon

Oil settles down on worries over European banks, U.S. crude reserve

• Oil slides as U.S. holds off refilling strategic reserve

Fed minions try putting on brave face despite bank crisis, credit crunch, risks to commercial real estate market:

• Fed officials say sense of financial stability cleared path for rate hike

• Fed’s policy rate will need to rise as bank stress eases, Bullard says

The Fed sees a looming credit crunch. What’s that?

Real estate leader on NY Fed board warns on commercial real estate risks

Bigger trouble developing in Japan:

• Japan’s factory activity contracts for fifth month – PMI

• BOJ tankan to show Q1 factory mood hitting lowest since late 2020: Reuters poll
• Japan’s consumer inflation off 41-year high but cost pressure persists

Bigger trouble developing in Asia, all over:

• Asian company earnings cut on China, global slowdown worries

ECB minions committing to rate hikes despite banking sector turmoil, say no problems with Eurozone banks:

• ECB rates must rise; bank share volatility unsurprising, ECB’s Nagel says

• European banks default-risk indicator jumps, AT1 bonds fall

ECB, EU leaders say European banks well capitalised, liquid

• Marketmind: Bank angst persists, unnerves Europe

Euro zone services firms enjoy buoyant March but factories struggle -flash PMI

Wall Street ends volatile week higher as Fed officials ease bank fears

• World stocks gyrate as bank contagion fears bite
• Explainer-Why markets are in uproar over a risky bank bond known as AT1

After the Federal Reserve’s quarter point rate hike on 22 March 2023, the CME Group’s FedWatch Tool now anticipates the Fed has finished the series of rate hikes it began a year earlier. From the current Federal Funds Rate target range of 4.75-5.00%, the FedWatch tool predicts the Fed will be forced initiate a series of quarter point rate cuts at six weeks intervals starting after the FOMC meets on 26 July (2023-Q3) and continuing through December (2023-Q4). In 2024, the FedWatch tool projects at least one quarter point rate cut per quarter through September (2024-Q3), when the Federal Funds Rate target range will have fallen to 2.75-3.00%.

The Atlanta Fed’s GDPNow tool‘s projection for real GDP growth in the first quarter of 2023 held steady at +3.2%. With the first calendar quarter of 2023 nearly over, the GDPNow indicator continues transitioning to look backward instead of forward. The Bureau of Economic Analysis’ initial estimate of GDP in 2023-Q1 is scheduled to be released on 27 April 2023.

Image credit: WikiMedia Commons. Creative Commons: CC0 1.0 Universal (CC0 1.0) Public Domain Dedication.