The S&P 500 (Index: SPX) had a banner week. After falling on Wednesday, 18 September 2024 just hours after the U.S. Federal Reserve acted to cut interest rates by a surprising half percent, the index went on close at a new all-time high on Thursday, 19 September 2024, before sliding 11.09 points on Friday to close out the week at 5,702.55.

Something doesn't seem right about that description of what happened in the trading week that was, does it? Since a larger-than-expected rate cut should have been especially beneficial for interest-rate sensitive businesses, why did the S&P 500 fall on Wednesday when the Fed's delivered its "outsized rate cut"? Why did investors wait until the next day to send the S&P 500 to a new record high?

Let's start with the hypothesis of the announced rate cut being "larger-than-expected". The evidence suggests investors had more than fully absorbed the Fed would be cutting rates by that amount. That evidence can be seen in the form of how the stocks of the very interest rate-sensitive real estate sector of the U.S. economy traded during the week. Here's a chart showing how the Vanguard Real Estate Index Fund (ETF: VNQ) has been trading over the past month.

This ETF had been rising in anticipation of the Fed's September 2024 rate cuts in the three weeks leading up to the actual week of the rate cut. But in the week of the rate cut itself, it fell, even on the day the S&P 500 index hit closed at its new record high. That's not likely something that would have happened if the Fed's rate cut had been unexpectedly large because that new information would immediately signal an improved business outlook for the real estate sector. That this ETF composed of interest rate-sensitive real estate stocks fell by a small amount during the week confirms the Fed's "outsize" rate cut was more than well anticipated.

At this point, let's turn to how Thursday new record high close for the index was reported on the day it happened. Here's an example of that reporting:

Wall Street's reaction to Wednesday's developments was a bit of a rollercoaster. Immediately after the Fed's rate cut announcement, the S&P 500 (SP500) spiked to a record high. Later, it whipsawed in volatile trade but managed to hold on to gains during Powell's press conference. It then eventually closed out the session in the red.

But after a night to digest the Fed's actions and Powell's comments, market participants took reassurance from the central bank's willingness to be aggressive so as to guide monetary policy effectively. That in turn fueled hopes that the Fed would be able to successfully deliver a soft landing, and led to Wall Street ripping gains on Thursday.

That's an incredibly touchy-feely claim of how market participants are purported to have behaved. Especially at a time when most U.S. market participants, perhaps the people who pay the closest attention to the factors that affect U.S. markets, who had already judged the Fed's rate cut was in line with what they were expecting, were either winding down from the day's trading or sleeping.

Sounds pretty unlikely. So what really happened that night to alter the perspective of market participants? We can surmise it had to be new information not previously known to U.S. market participants, which probably arose outside the U.S.

To find out what that might be, we need to know when that new information arrived. We can use the trading for S&P 500 futures to identify when the previous perspective of investors was superseded. The next chart shows the past week's trading in the S&P 500's continuously traded futures (ETF: SPX):

On the chart, we've identified the approximate break point after which we can say the previous perspective for the index no longer held: 9:30 PM Eastern Time on Wednesday, 18 September 2024.

From there, we only needed to identify a potential market moving headline with the potential to alter what investors' perspective for the S&P 500's outlook, occurring within 2-4 minutes of that time.

That truly market moving news was published by Hong Kong's South China Morning Post at 9:34 AM in Hong Kong, which coincidentally is 9:34 PM in New York. Spoiler alert: it has nothing to the Fed's never-before-seen ability to deliver a "soft landing" and everything to do with how the Fed's action makes room for stimulus for China's economy:

As the US Federal Reserve officially kicked off a rate-cutting cycle, China and other Asian economies are likely to see more room to carry out easing policies and boost growth, analysts said.

That news was enough to boost China's stock prices and because the outlook of Chinese firms improved, it improved the outlook of U.S. firms that do substantial business with those firms, which in turn, boosted the S&P 500 index. That influence also answers the question of why U.S. real estate firms did not join the rest of the index in its rise to a new height on Thursday. As they say, real estate is all about location, location, location. This is an example of when the same can be said for the stocks of real estate firms in the U.S.

The SCMP has since followed up with another story explaining how the Fed's rate cut would benefit China's economy:

“The development of China’s economy and capital markets still depends on stable domestic demand, and the recovery of China’s internal growth momentum cannot be resolved by relying on Fed rate cuts or further domestic monetary policy easing,” said Wei Hongxu, a researcher at Anbound, a Beijing-based public policy consultancy.

“For China, the Fed’s shift to a rate-cutting cycle narrows the policy gap between the two countries and reduces the interest-rate differential, expanding room for domestic monetary policy,” Wei said, adding that the negative impact of a potential US economic growth slowdown on China’s foreign trade cannot be ignored.

Unfortunately, some of that momentum was lost on Friday when China's central bank declined to take quick advantage of the room it had been gifted by the Fed's large rate cut. The PBOC did not cut its own interest rates, although that doesn't rule out such an action in the future or other options for China's government to support its struggling economy.

And so, the S&P 500 closed down on the day. Meanwhile, the overall trajectory of the index continues to fall within the latest redzone forecast range for the dividend futures-based model's alternative futures chart.

While we've focused on the biggest market moving stories of the week, other stuff happened too. Here's a quick rundown:

Monday, 16 September 2024

• Signs and portents for the U.S. economy:
• As Fed cuts loom, health of US economy could determine markets' path
• Oil prices edge higher ahead of Fed interest rate decision
• Nearly 30% of US Gulf of Mexico oil output offline after storm
• World counting on Fed minions to cut U.S. interest rates, U.S. politicians want really big cut:
• Why Fed rate cuts matter to world markets
• Democratic Senators send letter to Powell advocating for a 75-basis point rate cut
• US interest rate futures see higher odds of super-sized Fed move
• Bigger trouble, stimulus developing in China:
• China opposes US tariff hikes, vows steps to defend its firms' interests
• Downbeat China factory output, retail sales add to urgency for stronger stimulus
• China new home prices fall at fastest pace in over 9 years in Aug
• JapanGov minions don't want BOJ minions to think about hiking interest rates:
• Japan's PM hopeful Takaichi warns BOJ against raising rates
• ECB minions getting excited to deliver another Eurozone rate cut, unsure of how big and when:
• ECB policymakers make case for rate cuts but differ on signals
• ECB should wait until Dec with next rate cut, Kazimir says
• ECB's Lagarde rejects 'political pressure' after Italy seeks bigger rate cuts
• ECB's Rehn says rate cuts support growth
• Nasdaq, S&P, Dow trade mixed with Fed rate decision looming

Tuesday, 17 September 2024

• Signs and portents for the U.S. economy:
• Oil prices set to snap two-day winning streak ahead of Fed decision
• Big oil companies defeat US consumer lawsuit over production, prices
• Exclusive: US to seek 6 million barrels of oil for reserve, amid low oil price
• Biden won't block potential strike at East Coast ports, administration official says
• Fed minions wondering how big their rate cut should be, and also about what to do with their balance sheet:
• With Fed's rate cut at hand, debate swirls over how big a move
• Most brokerages expect 25 bps rate cut from Fed on Wednesday
• Sahm rule creator sees 50-bps Fed rate cut on labor market worries
• Fed to go big on first rate cut, traders bet
• Fed rate cut uncertainties rattle balance sheet outlook
• Bigger trouble, stimulus developing in China:
• US and Japan near deal to curb chip technology exports to China, FT reports
• BOJ minions get data that will let them avoid more rate cuts:
• Japan's exports slow sharply, machinery orders shrink in blow to economic recovery
• Nasdaq, S&P 500, Dow end little changed a day ahead of pivotal Fed rate decision
• S&P 500 ends little changed as early gains fade before Fed decision

Wednesday, 18 September 2024

• Signs and portents for the U.S. economy:
• What does a Fed rate cut mean for the economy and consumers?
• Oil slips for first day in three ahead of Fed decision
• US single-family homebuilding surges, rising supply a near-term constraint
• US 30-year mortgage rate falls to two-year low of 6.15%
• Port strike on US East Coast would spark supply-chain glitches from outset, shipping firm exec says
• Fed minions deliver bigger rate cut, say they did it to keep U.S. economy "in a good place":
• Federal Reserve cuts benchmark rate by 50 basis points
• Fed delivers oversized rate cut as it gains 'greater confidence' about inflation
• Fed Chair Powell says interest rate cut made to maintain strong U.S. economy
• Fed's Powell: Central bank forecasts don't point to urgent action
• Wall Street Reacts To Today's 50bps "But No Crisis" Rate Cut
• Fed rate-cutting cycle could be shallower than expected
• Fed policymakers see end-2024 policy rate at 4.4%: projections
• Fed Bowman's dissent is first from Fed governor since 2005
• Bigger trouble, stimulus developing in China:
• Ultra-weak home prices in northern China arrive in southern powerhouses
• JapanGov minions say economy is doing just fine, thank you:
• Japan says economy in moderate recovery, cautious on risks
• How could Japan’s LDP election impact BOJ rate hike timing?
• S&P erases 1% gain, ends lower after Fed delivers supersized rate cut, says in no rush

Thursday, 19 September 2024

• Signs and portents for the U.S. economy:
• Oil prices little changed as US rate cut fails to boost sentiment
• US 30-year fixed-rate mortgage falls to 6.09%
• US existing home sales drop in August; supply improves
• Some Fed minions wonder if they did the right thing:
• Fed (finally) joins a global rate-cutting cycle
• Ex-Kansas City Fed chief sees renewed inflation risk after large rate cut
• Fed's big cut may have been closer call than lone dissent suggests
• Bigger stimulus developing in China:
• China to ramp up policy steps to revive economy but no 'bazooka' stimulus seen
• China expected to trim main policy rate and lending benchmarks: Reuters poll
• BOJ minions decline to raise rates, but say they might:
• BOJ to keep policy steady, signal more rate hikes to come
• ECB minions being looked at to deliver next rate cut in October 2024 as bigger trouble develops in Eurozone economy:
• Big Fed cut puts an ECB move next month on traders' radar
• ECB may accelerate rate cuts in coming months, Panetta says
• German economy could shrink again in Q3, Bundesbank warns
• S&P closes above 5,700 and Dow ends above 42K in historic firsts as Wall Street soars
• China Shares Surge Amid U.S. Rate Cuts and Economic Stimulus Hopes
• Fed rate cut to reduce yuan outflow pressure, open up room for China’s easing: analysts
• Fed cut positive for Asia stocks and risk currencies, analysts say

Friday, 20 September 2024

• Signs and portents for the U.S. economy:
• Oil prices set to end week higher after US rate cut
• US drillers cut oil and gas rigs for fifth week in six, Baker Hughes says
• FedEx sends a shiver throughout the transportation and logistics sectors with soft guidance
• Auto parts sector faces recession headwinds, but some will do better than others - analyst
• Fed minions expected to deliver smaller rate cuts in months ahead, read data very differently from each other:
• Fed to cut rates by 25bps in Nov and Dec, approach neutral level sooner
• US inflation data cemented big cut for one Fed official, dissent for another
• Fed Governor Waller says inflation softening faster than he expected put him in half-point-cut camp
• Fed's Bowman says dissent on large rate cut based on above-target inflation data
• Bigger trouble developing in China (and Japan):
• China dairy farms swim in milk as fewer babies, slow economy cut demand
• China's Collapsing Economy Adds To Headwinds For Japanese Automakers
• China unexpectedly leaves benchmark lending rates unchanged after Fed’s jumbo cut
• BOJ minions leave interest rates alone, search for credible monetary policy as yen falls:
• BOJ signals no rush in raising rates again, keeps policy steady
• Yen slides as BOJ governor steers clear of rate hike talk
• BOJ Governor Ueda's comments at news conference
• ECB minion says they won't know much about Eurozone economy until December 2024, not sure if they'll cut rates in October:
• ECB Will Know More in December, But All Options Open, Guindos Says
• Bumper Fed week ends with S&P sitting above 5,700 and Dow at a new record close
• Rate cuts are here, but US stocks may have already priced them in
• Gold breaks $2,600 barrier as Fed cut bets prolong historic run
• How investors buy gold and what drives the market
• Fed jumbo rate cut puts pressure on money market fund investors

The CME Group's FedWatch Tool projects additional rate cuts ahead. After the Fed announced a half point reduction in the Federal Funds Rate on Wednesday, 18 September, the FedWatch tool is projecting nearly even odds of another half point rate cut on 7 November 2024, followed by a continuing series of 0.25%-0.50% rate cuts at approximate six-week intervals well into 2025.

The Atlanta Fed's GDPNow tool's projection of the real GDP growth rate for the current quarter of 2024-Q3 rose to +2.9% from the previous week's forecast of +2.5% growth.

Image credit: Microsoft Copilot Designer. Prompt: "An editorial cartoon of a Wall Street bull sitting at a kitchen table and eating breakfast while reading a newspaper with the headline 'FED RATE CUT GOOD FOR CHINA ECONOMY!'"