The S&P 500 Drifts Lower As Investors Focus On Potential Rate Hikes In 2022-Q3

Over the past week, Federal Reserve officials have worked hard to set the expectation they're going to be aggressive in hiking short-term interest rates in the U.S. At this point, the odds that 2022-Q2 will see two half-point rate hikes have risen over 80% according to the CME Group's FedWatch tool.

But the real question for S&P 500 (Index: SPX) investors is what will they do in 2022-Q3? The FedWatch tool gave a 2 out of 3 chance of a third half-point rate hike in July 2022, and only foresees quarter-point rate hikes after that point, raising questions about how many larger rate hikes there will be.

With that kind of information to digest, it's little wonder we find investors continuing to focus on 2022-Q3 in setting current day stock prices, as indicated in the freshly minted alternative futures forecast chart for 2022-Q2.

We've added a new red zone forecast to the chart because we're coming up on another one of those periods where the echoes of past volatility in stock prices affect the dividend futures-based model projections. This situation arises for the model because it directly incorporates historic stock prices as the base reference points from which it projects the potential futures for the S&P 500.

The red zone forecast range is a simple technique we've developed to work around the echo effect from the past volatility of stock prices, where we simply connect the dots on both sides of an upcoming period where the model's forecast accuracy will be impacted. The newest forecast range is based on the assumption investors will continue focusing on 2022-Q3 for the next several weeks.

Should there be no erosion in the expected level of dividends for stock prices, and no shift in focus toward a different point of time in the future, the model projects stock prices will slowly rise over the next several months. This projection represents what we called the "best-case scenario" described by Ed Yardeni in the previous edition of our S&P 500 chaos series.

Here is our selection of market-moving headlines that influenced investor expectations during the first week of April 2022.

Monday, 4 April 2022

• Signs and portents for the U.S. economy:
  • Two-year U.S. Treasury yields climb to new high
  • Transportation equipment, machinery pull down U.S. factory orders in February
  • Oil jumps over 3% as deaths near Kyiv prompt talk of new sanctions
• Fed minions claim they'll be watching economy closely while hiking rates:
  • Fed's Williams: Pace of rate increases depends on how economy responds
    • Williams: Must watch how economy responds as it presses toward neutral rate
• Bigger trouble developing in the Eurozone, Russia, China:
  • Germany faces steep recession if Russian oil and gas halted - banks
  • Russia, China woes risk worst EM corporate default wave since financial crash - JPMorgan
• ECB minions unexpectedly sets date for rate hike:
  • ECB expects to hike rates after ending bond buys in Q3: Schnabel
• S&P 500 rises on megacap stock boost, Twitter surge
  • Elon Musk buys 9.2% stake in Twitter, sending shares higher

Tuesday, 5 April 2022

• Signs and portents for the U.S. economy:
  • U.S. services sector regains momentum; inflation clouds outlook
  • U.S. Gas Production Set To Fall On Lack Of Pipelines
• Fed minions say no recession ahead, want to stop buying and shrink holdings of U.S. Treasuries sooner:
  • Fed's Daly sees slower growth, but no recession ahead
  • Fed's Brainard sees rapid balance sheet runoff, rise to neutral
• Bigger trouble developing in East Asia and Pacific nations:
  • World Bank cuts East Asia's 2022 GDP forecast on Ukraine war
• Mixed signs in the Eurozone:
  • Euro zone economy got March boost from reopening but prices soared -PMI
• ECB minions threaten to hike rates back up to 0%:
  • ECB could raise interest rates back to zero this year - Wunsch
• Wall Street tech shares stumble on fears of aggressive Fed
  • Brainard Batters Bonds, Stocks, Bullion, & Bitcoin With 'Fast & Furious' QT Threat

Wednesday, 6 April 2022

• Signs and portents for the U.S. economy:
  • U.S. mortgage interest rates rise to 4.9% - MBA
• Fed minions signing up for bigger rate hikes and shrinking balance sheet, think they have time to act:
  • FOMC Minutes Signal Bigger, Faster Expected QT, Multiple 50bps Rate Hikes
    • Fed likely to swing meat cleaver at balance sheet next month
    • Instant View: March FOMC minutes - Balance sheet reduction could start in May
    • Fed's Harker: "methodical" policy tightening designed to avert recession
    • U.S. lawmakers slam Big Oil for high gasoline prices
  • Barkin: Fed has time to reach a more neutral rate given ongoing pandemic effects
• Bigger trouble, stimulus developing in China:
  • China's widening COVID curbs exact mounting economic toll
    • China's services sector activity hit hard by Omicron surge - Caixin PMI
  • China's cabinet flags more measures to support economy
• Bank of Canada minions signing up for bigger rate hikes too:
  • Bank of Canada to hike rates by 50 basis points in April- Reuters poll
• ECB minions worry they'll crash Eurozone economy with rate hikes if they fight inflation:
  • Quick ECB action to rein in inflation could crash economy -Panetta
  • ECB's Nagel says interest rates may soon go up
• S&P 500 ends lower after Fed minutes
  • U.S. buybacks seen at record highs ahead of earnings reports
  • Gold inches up as inflation jitters offset U.S. rate hike bets

Thursday, 7 April 2022

• Signs and portents for the U.S. economy:
  • Oil settles lower on doubts about Russia oil sanctions
  • Worker shortages, seasonal factors change push U.S. weekly jobless claims back to 53-year lows
• Fed minions pitch using velvet hammer when hiking rates higher, executing new 'QT' plan:
  • Bullard: Fed "behind the curve," sees rates now at 3.5% by year's end
    • Bullard: Improvement in labor force not happening fast enough to ease inflation
  • Fed's Bostic, Evans back rate rises with dovish overtones
  • Explainer-The Fed's 'QT' plan: Then and now
• ECB minions thinking about not doing quite so much stimulus as way to cool inflation:
  • ECB policymakers keen to roll back stimulus amid high inflation: accounts
  • Euro zone inflation to run hot, fan recession risk: Reuters poll
• S&P 500 ends higher, lifted by Tesla

Friday, 8 April 2022

• Signs and portents for the U.S. economy:
  • Oil prices settle up 2%, post weekly loss on stockpile releases
  • A "recession shock" is coming, BofA warns
    • U.S. recession not imminent despite yield curve inversion, BlackRock executive says
  • Early signs of cooling housing market seen in some U.S. cities, Redfin says
• Bigger stimulus developing in China, Eurozone:
  • China will step up policy support for the economy - state media
  • Exclusive-Germany plans more than 100 billion euros of aid for companies
• Positive growth signs out of Taiwan:
  • Taiwan March exports hit new record, Ukraine war clouds outlook
• ECB minions working to keep Eurozone stimulus alive despite rate hikes!
  • ECB Is Crafting Crisis Tool to Deploy If Bond Yields Jump
  • Euro zone bond yields rise as traders, banks ramp up ECB rate hike bets
• Dow gains, S&P 500 ends lower as market weighs Fed rate hikes

The CME Group's FedWatch Tool is still projecting Fed's next moves will be three consecutive half point rate hikes in May, June, and July (the first two in 2022-Q2, the third in 2022-Q3). After which, the FedWatch tool foresees five quarter point rate hikes at six-week intervals.

The Atlanta Fed's GDPNow tool's latest estimate of real GDP growth in 2022-Q1 dropped down to 1.1% after factoring in the latest international trade data into its projections.