NVQ - The S&P 500 Rises As Inflation Data Fed Put End Of Rate Hikes In Sight

2023-07-17 15:56:00 ET

Summary

• Inflation came in lower than expected, which increased the likelihood the Federal Reserve's series of rate hikes that began in March 2022 is now much nearer its end.
• The CME Group's FedWatch Tool anticipates the Federal Reserve will hike the Federal Funds Rate by just a quarter point to a target range of 5.25-5.50% when it meets on 26 July.
• The FedWatch Tool goes on to indicate investors expect the Fed to pursue a series of quarter-point rate cuts at six- to twelve-week intervals during 2024.

A dovish inflation report lifted the S&P 500 (SPX) during the trading week ending on Friday, 14 July 2023. The index rose 2.4% from the previous week's close to end the week at 4505.42 .

Inflation came in lower than expected, which increased the likelihood the Federal Reserve's series of rate hikes that began in March 2022 is now much nearer its end.

That news, combined with improving expectations for future dividends, boosted the outlook for the S&P 500. The dividend futures-based model adapted to these changes by shifting the potential trajectories for the S&P 500 upward. The latest update to the alternative futures chart shows the result of these changes to the model's projected future.

It also shows the actual trajectory of the S&P 500 is coming to the end of the redzone forecast range we introduced three months ago. As it does, it appears set to track along with the alternative trajectories for either 2023-Q4 or 2024-Q1. Assuming it does, it will represent a shift in the forward-looking focus of investors away from the current quarter of 2023-Q3 toward a more distant time horizon.

Although there's little difference in the level of stock prices projected between the two more distant future quarters, we think it's more likely investors will focus on 2023-Q4 because it coincides with the decisions that will determine when the peak for the Fed's rate hikes will occur.

That can be seen in how those expectations changed during the past week. The CME Group's FedWatch Tool anticipates the Federal Reserve will hike the Federal Funds Rate by just a quarter point to a target range of 5.25-5.50% when it meets on 26 July (2023-Q3). After that, the FedWatch Tool now gives better than 50% odds the Fed's series of rate hikes that began in March 2022 will see just one more at its 1 November (2023-Q4) meeting, before potentially reversing to reduce the Federal Funds Rate as early as 13 December (2023-Q4). The FedWatch Tool goes on to indicate investors expect the Fed to pursue a series of quarter-point rate cuts at six- to twelve-week intervals during 2024.

There was more information that helped set investor expectations during the second week of July 2023. Here's our summary of the week's market-moving headlines.

Monday, 10 July 2023

• Signs and portents for the U.S. economy:
  • Oil dips 1% on US interest rate fears but OPEC+ cuts limit fall
• Bigger trouble, stimulus developing in China:
  • China's deflation pressure builds as consumer prices falter
  • China central bank extends policies for financial support of real estate market
    • China should shift stimulus to consumption, ease residency curbs -PBOC adviser
• BOJ officials excited to have inflation as a problem:
  • BOJ highlights broadening wage, price hikes in report on regional Japan
• Nasdaq, S&P, Dow snap three-day losing streaks ahead of CPI, bank earnings this week

Tuesday, 11 July 2023

• Signs and portents for the U.S. economy:
  • Oil settles up 2% at 10-week high on a weaker US dollar, rising demand forecasts
• Fed officials say they're excited to keep hiking rates:
  • Fed's Williams says central bank is not done with rate rises - FT
• Bigger stimulus slowly rolling out in China:
  • China June new bank loans jump more than expected on policy support
• Wall St ends up ahead of CPI; JPMorgan, financial shares gain

Wednesday, 12 July 2023

• Signs and portents for the U.S. economy:
  • US consumer prices rise modestly in June; core inflation slowing
    • Instant View: US June CPI a welcome disinflation signal for Fed
  • US 30-yr mortgage rate tops 7% for the first time since last fall
  • Oil prices settle up as mild US inflation data calms fear of Fed rate hike
    • Oil stuck between supply strains and economic doubt
• Fed officials have a new tool for handling bank runs, think their job in reducing inflation may or may not be getting easier:
  • Banks can manage outflow risk in Fed's new payment service system, Mester says
    • Fed's Kashkari: Inflation fight must be won, new stress tests could help
  • June inflation data may have pushed Fed over the mountaintop
    • SF Fed Paper warns key inflation measure may prove hard to tame
• Bigger trouble developing in China:
  • China's export slide to steepen in June, imports seen down: Reuters poll
• BOJ officials getting mixed signals about inflation:
  • Japan households' inflation expectations rise, keep pressure on BOJ
  • Japan's wholesale inflation slows for 6th straight month
• Nasdaq leads Wall St to higher close as CPI report lifts sentiment
  • Traders bet slowing inflation will let Fed pause after July hike
    • Slowing inflation is seen making Fed's July hike its last

Thursday, 13 July 2023

• Signs and portents for the U.S. economy:
  • Oil prices up, hit nearly 3-month high as US inflation eases
    • Brent oil hovers above $80 as US inflation eases
  • Small business distress index hits mid-2020 high
  • US producer prices barely rise in June; core PPI subsides
• Fed officials say they only want two more rate hikes, afraid of more bank failures:
  • Fed closing in on end of rate hiking cycle, central bank officials say
    • US Fed's Daly says rate hikes essential to bring down prices
    • Fed's Daly: two more rate hikes likely needed this year
    • Fed's Mester: More hikes needed to bring inflation back down to target
  • Fed plans to boost US banks' reserve requirements; industry gripes
• Bigger trouble developing in China:
  • China's exports fall the most in three years as global economy falters
  • China's Q2 GDP seen rising 7.3% y/y but on a low base, recovery fades: Reuters poll
• ECB officials can't hide their excitement for hiking rates:
  • ECB policymakers open to further rate hikes past July
• Wall St ends up, extends recent gains on cooling US inflation

Friday, 14 July 2023

• Signs and portents for the U.S. economy:
  • Oil prices fall on profit-taking, still record weekly gain
    • Brent oil hovers above $81 after supply disruptions
• Fed officials looking forward to planned rate hikes:
  • Fed's Waller eyes July rate rise, and another hike before year ends
• Bigger stimulus developing in China:
  • China central bank to use tools such as RRR to tackle economic woes
• BOJ officials to rethink what's in their toolbox:
  • BOJ unveils timetable of Ueda's flagship review of unconventional tools
    • Analysis-BOJ in a bind as price pressures heighten case for early policy tweak
• Nasdaq, S&P end in the red, Dow ekes out gains as market takes a breather
  • Marketmind: Banks lob earnings into giddy markets

The Atlanta Fed's GDPNow tool estimate of the real GDP growth rate for the current quarter of 2023-Q2 increased to +2.3% from the forecast +2.1% growth rate recorded a week earlier.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

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