You may have noticed in the last several months that the value of the S&P 500 (Index: SPX) has become really sensitive to things Fed officials say and do. And you wouldn't be wrong.
Last week, we noted investors seemed to be pricing in the expectation the Fed would adopt a more expansionary monetary policy than they had previously been anticipated. This week, they appear to have ramped up that expectation even further on the basis of things Fed officials said on Tuesday, 14 July 2020, which was followed by evidence later in the week of what they've done in the past week to boost their balance sheet for the first time in several weeks, reversing what had been a downward trend.
The overall effect on the S&P 500 was to send its level higher on the week.
That change in the expections of investors lowers the value of the amplification factor in the dividend futures-based model, where we now think its returned to a value around zero. As we've observed in the past several months, that kind of change is associated with investors betting on the Fed adopting a more expansionary monetary policy, of which, boosting the assets in holds on its balance sheet has been evidence of that policy in action.
We mentioned events in the news, so here's our summary of the past week's major market moving headlines, complete with some additional notes.
- Monday, 13 July 2020
- Daily signs and portents for the U.S. economy:
- Oil slips on surge in COVID-19 infections, U.S.-China tension
- U.S. consumers more secure about jobs but earnings expectations drop: New York Fed survey
- Bigger trouble arising from bigger stimulus:
- Fed minion indicates desire to take punch bowl away:
- Stocks Slide After Fed's Kaplan Says Emergency Facilities To Be Pulled Back As Economy Improves
- Want more jobs? Wear a mask, says Fed's Kaplan
- Eurozone, China showing signs of post-pandemic economic recovery:
- German economy is recovering from pandemic slump, Bundesbank data shows
- China's economy recovering but hard battle ahead: premier
- S&P 500 and Nasdaq end lower after sharp drop in tech titans
- Tuesday, 14 July 2020
- Daily signs and portents for the U.S. economy:
- Oil rises slightly as OPEC+ complies with production cuts
- Gasoline powers U.S. inflation; rising COVID-19 cases seen tamping down demand
- China books record U.S. corn purchase, also buys soybeans
- Fed minions see "lots of overcapacity", "thick fog", and "stubbornly long lasting" downturn:
- Fed's Kaplan says there is 'lots of overcapacity' in U.S. economy: CNBC
- "Thick fog" over U.S. economy and Fed will need to provide sustained accommodation: Brainard
- Fed's Harker says U.S. economic downturn is painful and 'stubbornly long-lasting'
- Bigger trouble developing in Singapore, Eurozone:
- Pandemic knocks Singapore into recession as GDP plummets 41% in second quarter
- Euro zone industry output recovers less than expected
- Euro zone banks expect to tighten access to credit in third quarter, ECB says
- Bigger stimulus slow to deliver results in China:
- China's economy seen growing 2.5% in second quarter as lockdowns end, stimulus kicks in: Reuters poll
- https://www.reuters.com/article/us-china-economy-trade-june/china-june-exports-unexpectedly-rise-0-5-year-on-year-imports-up-2-7-idUSKCN24F0AZ
- Wall Street ends higher, led by energy and materials
- Wednesday, 15 July 2020
- Daily signs and portents for the U.S. economy:
- Oil climbs 2% on U.S. stock draw but gains capped as OPEC+ set to ease cuts
- U.S. manufacturing output surges in June, but production still below pre-pandemic level
- Bigger trouble developing throughout Latin America, Eurozone, world:
- Coronavirus to ravage economy of Latin America, output to contract 9.1%: U.N. agency
- German retailers set for worst downturn since World War Two
- Coronavirus cost jobs at a third of small firms open in May: global Facebook survey
- Bigger stimulus not developing in the Eurozone:
- Fed minions say U.S. markets are functioning just fine. Also that the coronavirus is creating more uncertainty:
- NY Fed's Logan says market functioning has improved but officials remain vigilant
- Fed's Harker says failure to control virus creating more economic uncertainty
- Wall Street rallies on vaccine bets, Goldman results
- Thursday, 16 July 2020
- Daily signs and portents for the U.S. economy:
- Oil falls as OPEC+ plans to raise output while virus cases increase
- Virus surges. Work hours plateau. U.S. may be flattening the wrong curve
- China says will stick with U.S. trade deal, but respond to 'bullying'
- China buys more U.S. soybeans
- China's economy rebounds after steep slump, weak demand, U.S. tensions raise risks
- U.S. mortgage rates reach historic depths below 3%: Freddie Mac
- Bigger stimulus developing all over, bigger trouble developing in Brazil:
- China's central bank chief urges IMF to open cash floodgate to fight pandemic
- Coronavirus lockdowns shutter 522,700 Brazil businesses in two weeks
- Fed minions expand balance sheet for first time in weeks, are okay with higher inflation, want less inequality, see some success, but think U.S. economy will take time to dig out from deep hole:
- Fed balance sheet rises to $7.01 trillion, weekly data shows
- This reverses a trend over the last several weeks, and would also communicate a greater willingess at the Fed to engage in a more expansionary monetary policy. The dividend futures-based model incorporates this change in expectation as a reduction in the model's amplification factor.
- Negative U.S. rate bets persist, but seen unlikely to happen
- Fed's Evans sees no reason to hike rates unless inflation soars
- Amid national debate on race, Fed's Bostic sees central bank role on inequality
- NY Fed's Williams says low take-up of emergency lending facilities a sign of success
- NY Fed's Williams says it could take time to dig economy out of 'very deep hole'
- ECB minions go on standby, prefer money give-aways:
- ECB to go all the way on stimulus even as economy recovers, Lagarde says
- Lagarde says ECB expects more grants than loans in EU recovery fund
- ECB keeps ultra-easy policy on hold
- Wall Street ends lower on COVID-19 worries, tech weighs
- Friday, 17 July 2020
- Daily signs and portents for the U.S. economy:
- Oil prices slip as coronavirus cases surge
- Fed opens 'Main Street' loan program to nonprofits, eases terms
- Bigger trouble still developing in Japan:
- Japan June exports seen tumbling again, CPI drop to keep deflation fears alive: Reuters poll
- Japanese banks see record demand for corporate loans during pandemic: BOJ survey
- Bigger stimulus under negotiation in the U.S., Eurozone:
- U.S. Senate Republicans seek liability protections for coronavirus bill
- Treasury's Mnuchin open to blanket forgiveness for smaller business relief loans
- Austria's Kurz says rejects current EU recovery plan, expects new proposals
- The EU recovery fund's feast for the East
- ECB's de Guindos sees EU agreement on recovery fund by end-July
- S&P 500 ends higher as traders weigh stimulus and virus worries
Elsewhere, Barry Ritholtz has summarized the positives and negatives he found in the week's economy and markets news.
The next interesting question to ask: Will the amplification factor fall back into negative territory? And if so, what new information would prompt investors to bet on the Fed's monetary policies becoming even more expansionary?