It was just a week ago that we were looking at the serious prospect of a change in market regime for the S&P 500 (Index: SPX). But now, we have strong evidence the market regime that's been in place since 9 March 2023 has reestablished itself. Because it has, the index rose 5.85% over the past week, closing out Friday, 3 November 2023 at 4358.34.

That increase points to a signficant role for the U.S. Treasury yield curve in determining the market regime for the U.S. stock market. Last week's developments came as the Federal Reserve, which has strong control over short-term interest rates, chose to leave them alone. The Fed however has little control over long-term interest rates, which are set by the market.

Up through 19 October 2023, those rates had been headed higher and were moving toward "reverting", which is to say that long-term rates were increasing to where they would soon rise higher than the short-term rates controlled by the Fed. Since 19 October 2023 however, longer-term rates have fallen, with the U.S. Treasury yield curve becoming more inverted again as a result.

These changes affect publicly-traded companies that borrow to support their long-term growth plans. Rising long-term rates would mean higher costs to borrow over the lifespan of their investments in their businesses, but falling long-term rates mean they will have lower costs. The first scenario was accompanied by falling stock prices, while the second has been accompanied by rising stock prices. These companies have better prospects for investors in the second scenario.

Stock prices have risen enough in response to the shifting of the long-term portion of the U.S. Treasury yield curve that the recent decline now looks fully like an outlier event with respect to the redzone forecast range in the latest update for the alternative futures chart.

(Click on image to enlarge)

The past several weeks have provided the basis of a natural experiment, one that's given us the best look we've ever had at what can cause a change in market regime. Right now, with no change in market regime, the multiplier for the dividend futures-based model looks like it will continue unchanged with m = +1.5.

Meanwhile, for additional context behind what may be influencing the direction of the longer-term portion of the yield curve, here is our summary of the other market moving events of the week that was.

Monday, 30 October 2023

• Signs and portents for the U.S. economy:
  • Oil falls more than 3% as concerns about Mideast supply ease
• Bigger trouble, signs stimulus getting traction developing in China:
  • China's property foreclosures up by a third so far in 2023
  • China's Oct factory activity likely rose as economy finds footing: Reuters poll
• Mixed economic signs developing in the Eurozone:
  • German economy shrinks slightly in Q3
  • German inflation eases in October to lowest level in two years
• ECB minions don't want people thinking they might cut rates during next eight months, want Eurozone banks to stop doing business with Russia:
  • ECB hawks take aim at rate cut bets for first half of 2024
  • ECB keeping up pressure on banks to loosen ties with Russia -Enria
• Nasdaq, S&P, Dow add +1% each as markets bounce back from correction territory

Tuesday, 31 October 2023

• Signs and portents for the U.S. economy:
  • Benchmark 10-year Treasury yield could top 7%: Ned Davis Research
  • Wages boost US labor costs, house price inflation picks up
  • US annual home price growth accelerates again in August
• Fed minions wondering what to do with balance sheet:
  • Fed's reverse repo facility drawdown looms large in balance sheet debate
• Bigger trouble developing in China:
  • China factory activity unexpectedly shrinks in Oct, dents recovery momentum
  • Some Chinese institutions borrow at 50% rate as liquidity squeezed
• Bigger trouble developing in Canada:
  • Canada's economy stalls in August, seen slipping into recession in Q3
  • Canadian factory sector downturn extends to longest since 2016
• BOJ minions try to keep never-ending stimulus alive as inflation runs higher, get ready to prop up yen with JapanGov minions:
  • BOJ modifies bond yield control, re-defines long-term rate cap
    • BOJ relaxes grip on rates as end to yield control looms
  • Japan on standby to deal with 'one-sided' yen moves - top FX diplomat
• ECB minions getting results they wanted from rate hikes:
  • Euro zone inflation and growth fall as ECB hikes bite
    • Italy's economy stagnates in Q3, but inflation slows sharply
    • French GDP growth slows, inflation eases
    • German retail sales fall unexpectedly in September
  • ECB's Nagel says inflation has not been defeated yet
  • ECB's Villeroy: France has clearly passed inflation peak - statement
• S&P 500 notches three-month losing streak for first time since Q1 2020

Wednesday, 1 November 2023

• Signs and portents for the U.S. economy:
  • Oil falls to settle at 3-week low as Fed policy stance lifts dollar
  • U.S. manufacturing sector slumps in October-ISM
• Fed minions expected to sit on hands, then does:
  • Fed poised to hold rates steady despite economy's bullish tone
  • Fed keeps rates unchanged, Powell hedges on possible end of tightening campaign
    • Fed's Powell says higher rates need to persist to affect Fed policy choices
    • Fed's Powell says balance sheet rundown will proceed without change for now
• BOJ, JapanGov minions prop up yen, BOJ minions may be forced to end never-ending stimulus sooner:
  • BOJ intervenes as JGB yields make decade highs after YCC tweak
  • Weak yen, inflation overshoot may prod BOJ to phase out stimulus by year-end: ex-BOJ official
• ECB minions worried about losing money:
  • ECB reviews interest on government deposits to curb losses -sources
• Nasdaq, S&P, Dow end higher while yields extend drop after Fed stands pat on rates

Thursday, 2 November 2023

• Signs and portents for the U.S. economy:
  • US factory orders surge in September
  • US holiday sales growth to slow as inflation pinches wallets - report
• Fed minions non-action reverse rising interest rates on Treasuries:
  • Analysis-Fed meeting revives Treasury bulls after brutal selloff
• Central banks hold interest rates steady, some start cutting rates:
  • Bank of England set to keep rates at 15-year high despite slowdown signs
  • Hong Kong central bank leaves interest rate unchanged, tracking Fed move
  • Norway keeps interest rates on hold, eyes December hike
  • Brazil cenbank cuts rates, with more likely to come, but flags 'adverse' backdrop
• Bigger trouble developing in Japan:
  • Japan's GDP likely shrank in Q3 as China slowdown hits exports: Reuters poll
• BOJ minions thinking about ending never-ending stimulus next year, may be falling being on fighting inflation:
  • Exclusive-BOJ plans to exit from easy policy next year but needs some good fortune
  • BOJ risks being behind the curve on inflation: ex-central bank economist
    • Japan compiles $113-billion package to cushion inflation
• Bigger trouble developing in the Eurozone:
  • Euro zone factory downturn deepened in October -PMI
  • German unemployment rises more than expected in October
• ECB minions say all is good in the Eurozone:
  • ECB interest rates are at good 'cruising altitude', ECB's Knot says
  • ECB sees no consumption boom as rich have most of the savings
  • ECB's Lane sees good case for 'soft landing' of economy
• Wall Street indexes rally on bets of peak US interest rates, strong earnings
  • S&P notches best day since April, Dow since June; Nasdaq posts five-day win streak

Friday, 3 November 2023

• Signs and portents for the U.S. economy:
  • US job growth slows in October; unemployment rate rises to 3.9%
    • Instant View: US jobs growth slows more than expected in October
  • US service sector at five-month low in October- ISM survey
• Fed minions excited to do nothing after worst-than-expected jobs report, admit they don't get the Treasury yield curve:
  • As US job market cools, Fed's own job gets easier
    • Fed's Bostic, cheered by jobs data, still leans against further rate hikes
  • Fed's Kashkari: a lot of uncertainty about what is driving yield curve
• Bigger trouble developing in the Eurozone:
  • Hamburg skyscraper construction halted in grim sign for German property sector
  • German exports fall more than expected in September
• S&P 500 posts best week of 2023, caps stunning reversal from correction territory
  • Traders see fading chances of Fed rate hike, bet on earlier rate cut

The CME Group's FedWatch Tool's projections have changed in the past week. It now anticipates the Fed will only hold the Federal Funds Rate steady in a target range of 5.25-5.50% through April (2024-Q2). Starting from 1 May (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.

The Atlanta Fed's GDPNow tool's estimate of real GDP growth for the current quarter of 2023-Q4 is +1.2%, dropping from the +2.3% annualized growth it projected last week.

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