Fed Love-Hate Relationship With Liquidity Injections Pushes S&P 500 To New Record High On Valentine's Day
The U.S. Federal Reserve has something of a love-hate relationship with its latest liquidity injection policy. The Fed keeps having to supply money markets with more and more liquidity, which has contributed to boosting the S&P 500 (Index: SPX) to four new record highs in the last week, but Fed officials are signaling they really want to stop.
That may be why investors appear to now be focusing strongly on 2020-Q4 in setting today's stock prices, as suggested by the dividend futures-based model that underlies our alternative futures spaghetti forecast chart for stock prices:
This brings us to something we missed in the data in the previous edition of our S&P 500 chaos series, where we took a cautious note in reading the week's data:
This is where we have to add a note of caution, because we're dealing with a rapidly evolving situation in the markets. If you look at the alternative futures chart above, if investors shift their attention fully toward 2020-Q3 in setting current day stock prices, the S&P 500 could continue to rise by as much as 250-300 points. But, if China's and the Fed's liquidity injections work to stabilize markets as intended, the FedWatch tool's probability estimates may only have caught investors in the process of shifting their focus more fully back toward 2020-Q4, which is consistent with the S&P 500's recent trajectory, which would also mean that stock prices are within a few percent of where they might go.
What we missed is that the reason investors would now be fixing their focus more tightly on 2020-Q4 in setting current day stock prices is because they are betting that this distant future quarter will see the Fed cut short term interest rates for a second time in 2020. According to the CME Group's FedWatch tool, investors are now giving a 46% probability they will follow a quarter point rate cut in 2020-Q3 with another in 2020-Q4.
Consequently, unless the arrival of new information leads investors to alter that expectation, we think the liquidity operations that Fed officials hate will be with us for quite some time longer than they would like.
In any case, here are the more significant market-moving headlines we found in the past week's news stream:
Monday, 10 February 2020
- Oil drops to 13-month low on weak Chinese demand, traders eye OPEC+ cuts
- Coronavirus could trim 1 percentage point from China GDP growth: government researcher
- Fed minions speak on interest rates, inflation, coronavirus impact:
- S&P 500, Nasdaq reach record closing highs; Chinese workers return
Tuesday, 11 February 2020
- Oil prices rise about 1%, up from 13-month low as virus cases slow
- U.S. job openings hit two-year low, point to slowdown in job growth
- Bigger trouble developing from impact of China's coronavirus epidemic:
- Fed minions speak on monetary policy, virus impact:
- S&P 500, Nasdaq eke out new closing highs
Wednesday, 12 February 2020
- Oil rises over 3% as demand worries ease amid fewer new coronavirus cases
- Bigger trouble developing all over:
- Bigger stimulus developing in China, U.S.:
- Fed minions speak from new confidence-building script:
- Stocks gain as China says fewer new coronavirus cases
Thursday, 13 February 2020
- Oil prices climb on prospects for deeper OPEC+ output cuts
- Bigger trouble developing in China:
- Bigger stimulus developing in China, Taiwan, Mexico:
- Taking the liquidity punch bowl away?
- Wall Street slips as coronavirus fears mount
Friday, 14 February 2020
- Oil rises over 1% on hopes demand will rebound from coronavirus effect
- Bigger trouble developing everywhere:
- German economy 'flirts with recession' as fourth-quarter output stagnates
- Singapore PM says recession possible due to coronavirus outbreak
- Japan's exports, machinery orders seen falling as virus risks grow: Reuters poll
- Chinese economy clobbered by coronavirus but set to recover soon: Reuters poll
- Electric shock: China power demand drops as coronavirus shutters plants
- U.S. January industrial output falls on weather, Boeing drop
- Bigger stimulus developing everywhere:
- Fed minions having trouble staying on new "all is well' messaging:
- S&P 500, Nasdaq gain on Nvidia, White House stock incentive report
Over at the Big Picture, Barry Ritholtz succinctly summarizes all the positives and negatives he found in the past week's economics and market-related news.
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