The biggest market-moving news of the week was the unexpected increase in reported inflation in the U.S. on Wednesday, 13 July 2022. Despite the shock, which was followed by related bad news for big banks pointing to developing weakness in the U.S. economy, the value of the S&P 500 (Index: SPX) reacted by mostly shrugging off the news, ending the week down less than one percent from where it closed the previous week.

The latest update to the dividend futures-based model's alternative futures chart helps explain why:

The chart shows that investors were tightly focused on 2022-Q3 throughout most of the week and especially so from Wednesday through Thursday, which we see as the actual trajectory of the S&P 500 aligning with the center of the latest redzone forecast range. That makes sense because the Fed's next actions affecting short-term interest rates in the U.S. will occur within this quarter. With Fed officials signaling those moves will involve larger than previously expected rate hikes to combat inflation, investors have had good reason to focus on this quarter.

But on Friday, 15 July 2022, stock prices unexpectedly jumped as they absorbed the bad news. We think that may be because investors began looking forward to the end of 2022. That timing lines up with the new expected timing of the Fed's final rate hikes before the U.S. central bank may be forced to start cutting rates to respond to developing recessionary conditions in the first half of 2023.

We can't quite call it a new Lévy flight event just yet, because of the overlap in the dividend futures-based model's projected ranges for the S&P 500 for both 2022-Q3 and 2022-Q4. But now that we're at the end of the latest redzone forecast range, we have a relatively easy way to find out because of the relative levels of the model's projections based on investors focusing on either of these quarters.

If the level of the S&P 500 remains below the 4,000 thresholds, that will be consistent with investors primarily maintaining their forward-looking focus on 2022-Q3. If the index rises above that threshold, that would be consistent with investors shifting their attention forward to 2022-Q4, which we would consider being a new Lévy flight event.

There are a lot of moving pieces at play right now! Here's our recap of the past week's market-moving headlines:

Monday, 11 July 2022

• Signs and portents for the U.S. economy:
  • Oil steadies as China COVID fears face tight supply concerns
• Fed minions worried about hiking rates too fast and not fast enough:
  • Kansas City Fed's George warns "abrupt" rate changes could strain economy
  • Bostic: Recent inflation data not as encouraging as hoped
• Bigger trouble developing in China:
  • China Doubles Population Under Lockdown, at Risk of BA.5 Shutdown
  • China's June factory inflation cools counter to global trends
  • Chinese protesters demanding bank deposits tussle with security men
• Bigger trouble developing in the Eurozone:
  • Jobs in Germany under threat if Russian gas taps stay off, trade union chief says
• Bigger trouble developing in Japan:
  • Japan's machinery orders fall for first time in 3 months
• BOJ minions say they can't stop, won't stop never-ending stimulus:
  • BOJ's Kuroda warns of high economic uncertainty, repeats easy policy bias
  • BOJ upgrades view on most regional Japan areas as pandemic impact fades
• ECB minions thinking about how to bail out most indebted Eurozone countries:
  • ECB should model new bond scheme on old one, Nagel says
• Wall Street ends lower ahead of economic data, earnings

Tuesday, 12 July 2022

• Signs and portents for the U.S. economy:
  • U.S. small business sentiment drops near 9-1/2-year low in June- NFIB
  • Oil slides on strong dollar and weaker demand outlook
    • Brent crude settles below $100/bbl on higher dollar, weak demand outlook
  • U.S. CPI preview: Past the headline, into the core
• Fed minions paying attention to U.S. economy:
  • Fed's Barkin says 'definitely' sees signs economy is softening
• Bigger trouble developing in the Eurozone as recession fears build:
  • Euro zone bond yields tumble amid economic outlook fears
• BOJ minions racking up problems from never-ending stimulus policies:
  • Japan's wholesale prices extend brisk gains as weak yen inflates import costs
  • Yellen sees yen's depreciation, says intervention only warranted in 'rare' cases
• Wall Street tumbles at close as worries mount ahead of CPI report

Wednesday, 13 July 2022

• Signs and portents for the U.S. economy:
  • U.S. annual consumer inflation posts largest increase since 1981
    • Oil edges up after U.S. stock build, big inflation figure
  • U.S. firms see growing signs of slowdown as inflation persists, Fed survey shows
    • Most U.S. small businesses worry recession is coming - Goldman survey
• Expectations grow that Fed minions next move will involve a full percentage point rate hike:
  • Hot inflation fuels bets on supersized Fed rate hike
    • Inflation report sets grim markets tone as investors ponder 100-basis-point hike
    • Fed's Bostic: 'Everything in play' for July rate hike
    • U.S. rate futures lift chances of 100-bps hike in July Fed meeting after hot CPI data
• Bigger trouble, stimulus, and positive signs developing in China:
  • China Q2 GDP growth seen dipping to 1% on COVID hit, 2022 growth at 4% - Reuters poll
  • China's central bank to step up policy support for economy, debt level to rise
  • China's exports bounce back, but global risks darken trade outlook
• Bank of Canada minions hike interest rates by full percentage:
  • Bank of Canada surprises with 100-bp rate hike as inflation risks gather steam
• South Korea, New Zealand central bank minions hike rates:
  • S.Korea's central bank joins peers in historic half-point rate hike
  • RBNZ raises cash rate by 50 basis points
• Wall St ends down as hot inflation data raises odds of steep Fed rate hike
  • U.S. recession risk up, but returns set to improve - Vanguard

Thursday, 14 July 2022

• Signs and portents for the U.S. economy:
  • Oil settles lower ahead of potential large U.S. rate hike
  • U.S. weekly jobless claims hit 8-month high; labor market still tight
  • U.S. producer prices accelerate in June, but underlying inflation slowing
• Fed minions want three quarter percent rate hike, worry about bond market falling apart without it buying bonds, say "no problem" for Fed officials trading stocks while setting monetary policies:
  • Fed hawks say they want 75 basis point rate hike in July
    • Fed's Bullard favors 75 basis point hike in July over 100 for now - Nikkei
  • Fed staff say balance sheet runoff could strain Treasury market
  • Trades by Fed's Powell, Clarida violated no rules -watchdog
• Bigger trouble developing in the Eurozone:
  • EU cuts euro zone growth forecasts, revises up inflation outlook
• Singapore hikes rates in surprise move:
  • Singapore steps up inflation fight with surprise central bank tightening
• S&P 500, Dow close lower after bank earnings, inflation data
  • Wall Street banks worry about economic storms ahead
  • Factbox-Wall Street sees gray skies ahead for equities as Fed tightens policy

Friday, 15 July 2022

• Signs and portents for the U.S. economy:
  • U.S. import prices rise less than expected in June
  • U.S. manufacturing production falls for second straight month
  • Oil rises 2% as no immediate Saudi output boost expected
• Fed minions want bigger rate hikes, but not too big they can be blamed for causing recession:
  • Fed officials still leaning to 75-basis-point rate hike in July
    • Fed's Bullard says policy rate should be at least 3.75% by end of 2022
  • Fed's Bostic: Should not move rates "too dramatically"
• Bigger trouble developing in China, more post-lockdown recovery signs:
  • China GDP data to show sharp slowdown in Q2, tepid recovery in June
    • Analysis: China makes tweaks, but tough COVID policy still drags on economy
    • Beijing's assurances on mortgage protests fail to convince investors
  • China June industrial output rises 3.9%, retail sales up 3.1%
• ECB minions have a huge Italian debt problem:
  • Italy spirals into crisis as government teeters on brink of collapse
  • Analysis-ECB bond aid plan's fault lines exposed by Italy's political crisis
• Wall St ends tumultuous week with strong rally as rate hike fears wane
  • Recession fears loom over U.S. value stocks

After the week's higher than expected consumer inflation data, the CME Group's FedWatch Tool still projects a three-quarter point rate hike for July 2022 (2022-Q3), followed by another one in September (2022-Q3). After that the tool sees two quarter point rate hikes in 2022-Q4, with the Federal Funds Rate topping out between 3.50 and 3.75%. The tool anticipates a quarter point rate cut in June 2023 as the Fed responds to recessionary conditions investors currently expect to have fully developed by then.

Looking backwards, the Atlanta Fed's GDPNow tool's final projection for real GDP suggests the U.S. economy will have shrunk by 1.5% in the recently ended second quarter of 2022. That's down from last week's projection of -1.2% growth. The BEA will provide its first official estimate of 2022-Q2's GDP near the end of the month. The Atlanta Fed's GDPNow tool will start giving its estimates of real GDP for the current quarter of 2022-Q3 next week.

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