The December S&P 500 E-Mini futures contract (ESZ23) traded sideways in choppy action on Wednesday and Thursday. A slow week for major economic news was led by Tuesday’s Conference Board Consumer Confidence Survey, which came in at 103.0 versus expectations of 105.5. On Wednesday, the Census Bureau’s Manufacturers’ Shipments, Inventories, and Orders (M3) survey slightly topped expectations. A fundamental driver in risk asset weakness over the past week has been the continuing move higher in interest rates.
While last week’s rate decision matched expectations of a pause in rate hikes, hawkish projections weighed on equities. The Summary of Economic Projections accompanies the Fed Funds rate decision released in the last month of each quarter. It contains the so-called “dot plot” which shows Fed members’ anonymous projections of where the Fed Funds rate will be at the end of the next few years, along with a longer-run projection. The most recent release had an unchanged target for the end of this year, with board members maintaining the consensus of one more rate hike in 2023. The anticipated rate for the end of 2024 moved from around 4.5% to over 5%. The “higher-for-longer” sentiment appeared to push equities and gold lower while interest rates and the dollar moved up.
The increase in the projected Fed Funds rate was accompanied by more optimistic views on GDP growth and unemployment. The Fed projects GDP growth at 2.0% for 2023 and 1.2% in 2024, upward revisions from the June projections of 1.0% for both years. Unemployment was revised lower as well. The Board expects year-end 2023 unemployment to come in around 3.8% versus the prior projection over 4%, with 2024 estimates moving from 4.5% to 4.1%.
While economic releases were mixed, there was a marked response to the Fed announcement in the treasury market. Yields increased across the curve. The 2-year yield reached a 17-year high at 5.2% last Thursday. The 5-year and 10-year yields charted similar paths, reaching levels not seen since 2007. The response on the 30-year treasury was relatively muted, reaching “only” a 13-year high at 4.80%. The dollar index ($NYICDX) followed yields upward, reaching a 9-month high of 106.84 on Wednesday.
With yields for risk-off assets reaching decade-plus highs, the resulting selloff in the equities market was no surprise. It did, however, demonstrate the good-news-is-bad-news response to Federal Reserve data, as optimistic revisions in economic forecasts and consequent higher expected short-term interest rates led traders to anticipate weakness in the stock market. Should inflation data, starting with Personal Consumption Expenditures on September 29, continue to moderate, a change in Fed sentiment may prove a boon to equities.
The December S&P 500 E-Mini contract dropped below 4300 on Wednesday. On a continuation basis it was the lowest print since June, when the (expired) September contract reached 4262. The contract pushed below 30% into oversold territory on the RSI at 24%, an all-time low for the December contract. The rebound over the last two days has restored it above 30%. The MACD has been negative since last Monday. Recent moves in the SMA have pointed down as well, with the 9-day crossing the 20-day last Tuesday and the slopes on all three averages heading lower. Our partners at Hightower have support at 4312 and 4279, with resistance at 4366 and 4388.
E-Mini S&P 500 December 2023 (ESZ23)
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Univ. of Michigan Consumer Sentiment – Final 10:00 AM ET