In closing at 4136.25 in the trading week ending on Friday, 5 May 2023, the S&P 500 (Index: SPX) ended the week down just 0.8%. But that number doesn't quite express the extent to which volatility affected the index during the week that was.

The biggest market-moving news of the week was the Federal Reserve's quarter point rate hike, which its Federal Open Market Committee accompanied with a statement indicating they are considering changing direction. Despite being the biggest news covered in the media, because this move was well anticipated, it had very little effect on stock prices when it was officially announced at 2:00 PM EDT. That calm lasted for all of an hour, as stock prices began falling sharply after 3:05 PM.

What sent stock prices falling was new information that emerged during Federal Reserve Chair Jerome Powell's press conference, which had begun at 2:30 PM. We know from long observational experience that stock prices will begin reacting to news it wasn't expecting within 2-4 minutes after it arrives.

The new information that sent stock prices tumbling came in response to a question by Bloomberg Radio and Television's Michael McKee. Here's the full exchange:

MICHAEL MCKEE. Michael McKee for Bloomberg Radio and Television. Can you tell us something about what your policy reaction function is, your policy framework is going forward? When you look at the economy at the next meeting, are you looking at incoming data, which is, by definition, backward looking? Are you going to be forecasting what you think is going to happen? Are you ruling out the rate cuts that the market has priced in?

CHAIR POWELL. I didn't catch the last part. Rolling.

MICHAEL MCKEE. Markets have priced in rate cuts by the end of the year. Do you rule that out?

CHAIR POWELL. Yes. I'm sorry. Okay. I got it. So what are we looking at? I mean, we look at a combination of data and forecasts. Of course, the whole idea is to create a good forecast based on what you see in the data. So we're always, always looking at both. You know, and it will -- of course it'll be the obvious things. It'll be readings on inflation. It'll be readings on wages, on economic growth, on the labor market, and all of those many things. I think a particular focus for us going now over the past six, seven weeks now and going forward is going to be what's happening with credit tightening, are small- and medium-sized banks tightening credit standards, and is that having an effect on loans, on lending? And, you know, so we can begin to assess how that fits in with monetary policy. That'll be an important thing. I just -- you know, we'll be looking at everything. It's -- again, I would just point out we've raised rates by five percentage points. We are shrinking the balance sheet. And now we have credit conditions tightening, not just in the normal way but perhaps a little bit more due to what's happened. And we have to factor all of that in and make our assessment of -- you know, of whether our policy stance is sufficiently restrictive. And we have to do that in a world where policy works with long and variable legs. So this is challenging. But, you know, we will make our best assessment, and that's what we think.

MICHAEL MCKEE. What about the idea of rate cuts?

CHAIR POWELL. Yeah. So we -- on the Committee, have a view that inflation is going to come down, not so quickly, but it'll take some time. And in that world, if that forecast is broadly right, it would not be appropriate to cut rates, and we won't cut rates. If you have a different forecast and, you know, markets -- or have been from time to time pricing in, you know, quite rapid reductions in inflation, you know, we'd factor that in. But that's not our forecast. And, of course, the history of the last two years has been very much that inflation moves down. Particularly now, if you look at non-housing services, it really, really hasn't moved much. And it's quite stable. And, you know, so we think we'll have to -- demand will have to weaken a little bit, and labor market conditions -- conditions may have to soften a bit more to begin to see progress there. And, again, in that world, it wouldn't be -- it wouldn't be appropriate for us to cut rates.

Powell's indication the Fed would hold rates higher for longer than investors' previous expectations sent stocks much lower very quickly, as investors adapted their expectations of the Fed's next monetary policy steps. The S&P 500 went from being up half a point from where it opened to close the day down 0.7%, all in less than an hour. It then fell further the next day, only recovering on Friday, 6 May 2023 on the strength of Apple's positive earnings news and the stabilization of expections for when the Fed would begin cutting interest rates.

More on that later. The combined effect of all this activity was to put the S&P 500's trajectory onto a volatile ride, only to end the week just a bit below the mid-point of the redzone forecast range on our alternative futures chart:

We've already covered the week's biggest market-moving news, but other stuff happened that also affected the forward-looking outlook for investors during the week that was. Here's our summary of those headlines:

Monday, 1 May 2023

• Signs and portents for the U.S. economy:
• The road to First Republic Bank's collapse
• US construction spending rebounds in March on nonresidential structures
• US manufacturing contracts again in April, but pace slows
• Bigger trouble developing in China, South Korea, Japan:
• China factory activity unexpectedly shrinks in April
• China non-manufacturing activity expands more slowly in April - official PMI
• South Korea factory activity shrinks in April, marks longest downturn in 6 years - PMI
• S.Korea exports suffer longest losing streak in 3 years, China sales tumble
• Japan's factory activity contracts at slower pace in April - PMI
• Wall Street near flat after First Republic news, awaiting Fed

Tuesday, 2 May 2023

• Signs and portents for the U.S. economy:
• US labor market softens as job openings drop, layoffs at highest level in over 2 years
• US factory orders rebound on aircraft in March
• White House blames Fed minions' rate hikes for bank failures, Fed minions say they want to lower rates after inflation is low again:
• Exclusive: White House's Boushey - Fed interest rates having negative effect on banking sector
• Fed in stride to pole-vault 5% policy rate, then perhaps catch its breath
• Key Fed officials see low-rate world as likely to return one day
• Bigger trouble developing in the Eurozone:
• Euro zone factory downturn deepened in April - PMI
• German manufacturing contracts in April but output ticks up -PMI
• French manufacturing contracts further in April - final PMI
• Italy's manufacturing sector contracts sharply in April - PMI
• Euro zone inflation picks up but core unexpectedly slows
• Central banks may not be done with rate hikes:
• Australia central bank stuns with 25-bps hike, warns more might be needed
• U.S. banking woes a major factor behind Bank of Korea rate freeze
• ECB minions expected to deliver smaller rate hike:
• Soft lending and inflation data pave way for smaller ECB hike
• Indexes fall 1% as regional banks tumble, investors fret before Fed
• Quotes: US regional banks fall as FRC failure shakes faith in banking sector recovery

Wednesday, 3 May 2023

• Signs and portents for the U.S. economy:
• Oil falls 4%, extending losses after Fed rate hike
• US services sector still growing; inflation remains sticky
• Fed minions hike rates one last time, cuts expected to start in September 2023:
• Fed raises rates, opens door to pause in tightening cycle
• Instant View: Fed hikes another 25 basis points, hints it may be the last increase
• Column-Quadruple whammy whips June Fed rate hike off the table: McGeever
• US rate futures price in Fed pause in June, July; see September cut
• ECB minions see green light to hike rates higher:
• ECB to raise interest rates for a seventh time in inflation fight
• Euro zone unemployment falls to 6.5% in March
• Pandemic-sized euro surge now a boon for ECB: Mike Dolan
• Wall Street ends down on nagging uncertainty about Fed rate path
• S&P cuts First Republic's credit rating, says default a 'virtual certainty'

Thursday, 4 May 2023

• Signs and portents for the U.S. economy:
• Oil stable after smaller ECB hike, demand woes linger
• U.S. weekly jobless claims rise as higher borrowing costs cool demand
• US productivity drops in first quarter; labor costs jump
• Fed minions done for now with rate hikes:
• Fed pause baked in after "dovish" hike
• Mixed economic signs developing in China:
• China's skidding factory sector taps brakes on economic recovery
• Australia's exports to China hit record highs as barriers ease
• Mixed economic signs in the Eurozone:
• German exports fall significantly more than expected in March
• Euro zone April business activity grows on strong services demand - PMI
• Upturn in German services sector activity continues in April
• Euro zone producer prices fall m/m in March
• ECB minions goes small with new rate hike, will start shrinking its balance sheet:
• ECB raises rates by 25 bps in inflation fight
• ECB slows rate hikes and keeps options open
• Analysis-Markets bet ECB will pause hikes soon as economy feels rate pinch
• ECB to stop reinvesting cash in largest bond scheme
• Euro zone bond yields and euro fall after ECB hikes rates
• Analysis-Fed up with shrinking savings, Europeans drain billions from banks
• Wall Street ends down as PacWest fuels fears of deeper bank crisis
• FDIC plans to hit big banks with fees to refill deposit insurance fund - Bloomberg News
• Fed data shows failed bank First Republic was key central bank borrower

Friday, 5 May 2023

• Signs and portents for the U.S. economy:
• US job growth beats expectations in April; unemployment rate falls to 3.4%
• US restaurants finally get labor relief with more workers seeking jobs
• Fed minions hint they're pausing interest rate hikes:
• Fed's Goolsbee: 'way too premature' to expect June rate hike
• Fed's Bullard: 'Open mind' on June meeting, though rates still may need to rise
• St. Louis Fed's Bullard says rate increase this week was good 'next step'
• Bigger trouble developing in the Eurozone:
• German industrial orders slump unexpectedly in March
• Euro zone inflation could hold above target -ECB survey
• ECB minions getting results but not what they wanted, promise to keep doing what they're doing:
• ECB policymakers promise more hikes to beat inflation
• UBS raises expectations for ECB's terminal rate; SocGen sees it peaking at 4%
• Euro zone companies are slowing price hikes - ECB poll
• Euro zone inflation could hold above target -ECB survey
• Euro zone retail sales fall more than expected in March
• Dow has best day since Jan. 6 after Apple rally, jobs data
• Apple's results send shares surging to nine-month high
• Republic First Bancorp cuts jobs in preparation to exit mortgage business

After the Fed’s quarter point rate hike on 3 May 2023, the target range for the Federal Funds Rate stands at 5.00-5.25%. The CME Group's FedWatch Tool anticipates the Fed will switch gears, with this target range marking the top for the series of rate hikes it initiated in March 2022 to combat President Biden’s inflation. The FedWatch Tool projects the Fed will hold the Federal Funds Rate at this level until its 20 September (2023-Q3) meeting, at which time the Fed will initiate a series of quarter point rate cuts at six-to-twelve-week intervals to address building recessionary conditions in the U.S. As of 5 May 2023, those cuts are expected to reduce the Federal Funds Rate’s target range to 2.75-3.00% by 6 November 2024 (2024-Q4), which is the most distant forecast currently available.

The Atlanta Fed's GDPNow tool projects a real GDP growth rate of +2.5% in 2023-Q2, up from the +1.7% growth rate it forecast a week earlier. The so-called "Blue-Chip" consensus forecast of real GDP growth in the current quarter of 2023-Q2 is more pessimistic with estimates ranging between -1.1% and +1.3%. The central estimate of the Blue-Chip forecast is for +0.2% annualized growth.

Image credit: Photo by Tim Gouw on Unsplash.