Investors received some of the worst possible news they could have expected on Friday, 6 October 2023. The September 2023 jobs report featured employment numbers that were much higher than expected.

While that's something that would be considered good in the real world, in the world of Wall Street, it is bad news because if the reported "blowout" jobs numbers are to be believed, it elevates the probability of another rate hike by the Federal Reserve before the end of 2023. Rate hikes are bad for investors because higher interest rates increase the cost of borrowing for businesses. With many debt-laden firms in the position of having to roll over their short-term debts at higher interest rates, the number of firms expected to fail because they cannot afford those higher costs is increasing.

That increasing risk is on the mind of investors because several Federal Reserve officials have signaled they would hike rates if faster-than-expected economic growth prevents inflation from cooling down. Faster than expected growth that would be confirmed by a higher than expected "blowout" jobs report.

The bond market sank in response to the jobs report, as U.S. Treasury yields surged. That change will push up the cost of borrowing for businesses since "risk-free" Treasuries set the floor for the yields of corporate bonds.

But the S&P 500 (Index: SPX) behaved differently. Not at first, asthe index initially dropped by 0.9% in response to the news, but later in the day as the index rallied, reversing its plunge and rising 1.2% above the previous day's close to end the trading week at 4308.50, an increase of nearly 0.5% from the previous week’s close.

The latest update of the alternative futures chart shows that development, with the trajectory of the S&P 500 rising toward the middle of the redzone forecast range.

We're showing this final update for the alternative futures chart of 2023-Q3 because it shows the history we've described. Let's now roll the chart forward to show what the dividend futures-based model projects for the potential trajectories the S&P 500 may take through the fourth quarter of 2023.

The current redzone forecast range will run through 7 November 2023, after which we'll be able to resume using the model's standard projections for a short period, as the echoes of the past volatility of historic stock prices the model uses as the base reference points for making its projections of the future fade. Until then, it reflects the continuing assumption investors will maintain their forward-looking focus on the current quarter of 2023-Q4 in setting current day stock prices.

A big part of being able to understand the behavior of stock prices requires knowing the context in which investor expectations are shaped, where changes in expectations are driven by the random onset of new information. That's why we make a point of documenting the market-moving headlines each week. The S&P 500 chaos series itself is a running log that enables this kind of analysis. Here is the recap for the week that was:

Monday, 2 October 2023

• Signs and portents for the U.S. economy:
  • Oil tumbles 2% to 3-week low on strong dollar, profit taking
  • US manufacturing sector nears recovery; construction spending solid
• Fed minions on board with interest rates "higher for longer", still thinking about one more hike, blame the pandemic for making them do it:
  • Fed policymakers see rates staying high for 'some time'
    • Fed's Barr says his focus is on how long to hold rates high
  • Fed's Mester says one more U.S. rate hike may be needed
  • Fed's Powell: Economy still working through the impact of the pandemic
    • Fed chief Powell has warned of economic pain. In York, Pa., he heard all about it
• Signs stimulus gaining traction developing in China:
  • China's economy stabilises, factory activity returns to expansion
    • China's factory activity recovery slows in September - Caixin PMI
  • China's services activity expands at slowest pace this year - Caixin PMI
  • China's lottery ticket sales soar amid weak economy, job prospects
  • China new home prices tick up in Sept, ending four-month decline - survey
• BOJ minions thinking about ending never-ending stimulus again, take action to keep never-ending stimulus alive:
  • BOJ discussed factors for exiting easy policy at Sept meeting; 10-yr JGBs falter
  • BOJ announces additional bond buying after yield hits decade high
• ECB minions getting results they wanted from rate hikes:
  • Euro zone factory activity stuck in steep downturn in Sept - PMI
• S&P 500 ends near flat; utilities drop, focus on rate outlook

Tuesday, 3 October 2023

• Signs and portents for the U.S. economy:
  • Oil rebounds from 3-week low, settles up despite stronger dollar
  • US job openings post largest increase in two years; quits rate unchanged
• Fed minions give voice to wishful thinking:
  • Fed officials see high long rates as "complicated," but not yet a threat
    • Fed's Bostic: Rising long bond yields not having excessive impact on economy
      • Fed's Bostic sees no 'urgency' to raise rates again, but cuts a long way off
    • Fed's Mester open to another rate hike if economy stays on current path
  • DoubleLine's Gundlach says Fed's 'higher for longer' stance a problem
    • Why a rout in government bonds is worrying
• BOJ, JapanGov minions rumored to have intervened to prop up yen:
  • Yen surges against dollar, leads some to suspect intervention
    • Yen cowers near 150 as Japanese intervention chatter runs rife
    • Japan will take appropriate steps vs excessive yen moves - finance min
• Dow posts worst day since March, S&P slips, Nasdaq slides ~2%; US10Y scales 4.80%
  • S&P 500 ends at lowest since June 1 as data fuels rate worries

Wednesday, 4 October 2023

• Signs and portents for the U.S. economy:
  • Oil settles down more than $5 as US data shows weak demand for gasoline
  • US corporate bond spreads widen as hopes dim for soft landing
  • US factory orders beat expectations in August
• Mixed economic signs in Asia:
  • S.Korea factory activity shrinks again in Sept, mildest slump in 15 months - PMI
    • South Korea factory output posts biggest gain in over three years boosted by chips
  • Japan service activity growth slows down in September - PMI
• BOJ minions say there was no intervention to prop up falling yen, claim Japan's economy is running at full capacity:
  • BOJ data suggests there was no forex intervention on Tuesday
  • Japan's economy running at near full capacity, BOJ estimates show
    • Surging Tokyo property prices squeeze out young professionals
• ECB minions look at what they've accomplished with rate hikes, start to think they might be done with them:
  • Euro zone economy likely contracted in Q3 amid waning demand
    • Euro zone retail sales fall much more than expected in Aug
    • Euro zone Aug producer prices edge up month-on-month as expected, plunge year-on-year
  • ECB's Centeno says rate cycle likely completed, inflation retreating
• Nasdaq, S&P, Dow end solidly higher amid a reprieve in bond rout, slump in crude oil

Thursday, 5 October 2023

• Signs and portents for the U.S. economy:
  • Oil prices extend rapid slide on demand worries
  • US jobs report stands as next catalyst for Treasury market gyrations
  • Low weekly jobless claims, shrinking trade deficit boost US economic picture
• Fed minions say they're not worried when asked about recent rapid rise in U.S. Treasury bond yields:
  • Fed officials largely sanguine about rise in US bond yields
    • Fed's Goolsbee does not see rise in long-term yields imperiling soft landing
• BOJ minions get updated mission statement:
  • Japan Splits Management Of The Impossible Trilemma: MOF For The Currency, BOJ For The Yields
• Bigger trouble developing in the Eurozone:
  • German exports fall more than expected in August
  • Euro zone retail sales fall much more than expected in Aug
• ECB minions thinking about not continuing rate hikes, even though inflation "not yet defeated":
  • ECB's Kazimir: latest hike was maybe the last, still need to see data
  • 'Greedy beast' of inflation not yet defeated, Bundesbank chief says
• Nasdaq, S&P, Dow post marginal losses a day ahead of key non-farm payrolls report
  • Ritholtz Wealth Management: If jobs report comes in hot, indexes could suffer year lows

Friday, 6 October 2023

• Signs and portents for the U.S. economy:
  • Oil prices rise, but post biggest weekly decline since March
  • Soaring Treasury yields ignite turbulence throughout markets
    • Column-'Risk-free risk' re-emerges as bonds minesweep 5%-plus - Mike Dolan
  • US job growth beats expectations in September; unemployment rate unchanged at 3.8%
  • Treasury yields' wrecking-ball surge gets fresh fuel after blowout jobs report
    • Ten-year yields highest since 2007 on strong jobs report
• Fed minions get data that may prompt them to hike short term interest rates higher, but say they won't:
  • Further Fed rate hike comes into view as job growth accelerates
  • Fed's Mester: Strong jobs data do not change underlying view on hiring
• Signs of stimulus getting traction developing in China:
  • China's Golden Week holiday spending per capita surpasses 2019 levels
• ECB minions to get more results they wanted from rate hikes:
  • Analysis-Fall of the zombies? Why corporate failures could surge in 2024
• Nasdaq, S&P, Dow end higher after a bumpy start with payroll figures coming in hot
  • Big Squeeze Saves Stocks From Bond Bloodbath
  • U.S. Treasury yields rocket higher after the hot payrolls report

Despite the "blowout" topline jobs data, the CME Group's FedWatch Tool continues to project the Fed will hold the Federal Funds Rate steady in a target range of 5.25-5.50% through May (2024-Q2). Starting from 12 June (2024-Q2), investors expect deteriorating economic conditions will force the Fed to start a series of quarter point rate cuts at six-to-twelve-week intervals through the end of 2024, which is six weeks earlier than indicated in the previous week's outlook.

The Atlanta Fed's GDPNow tool's forecast of annualized real growth rate during 2023-Q3 held steady for a third consecutive week at +4.9%.

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