Expect S&P 500 and dollar volatility to be loaded with uneven liquidity next week

S&P 500, Dollar, Fed Forecast, Recession Risks and Liquidity Talking Points:

• The market outlook: USDJPY bullish above 141; EURUSD bullish above 1.0000; Gold bearish below 1,750
• Congestion has built for the S&P 500 and the dollar, which will build on expectations already presented by the upcoming Thanksgiving holiday cash drain.
• The divergence in the Fed’s rate forecast may put pressure on a breakout of the dollar, but it is also important to monitor the broader rate forecast and the threat of recession

Markets Ditch Trends for the Holidays… But Don’t Underestimate Volatility

Not two weeks ago, we were in the midst of exceptional volatility which rightly proved favorable to “risk on” and a “dollar bearish” outlook. The catalyst for this move was the weaker than expected US consumer inflation report, which in turn would tap into the theme of interest rate speculation, which is reliably acting in the market. Despite speculation around a lower “terminal” benchmark rate this update would trigger, there hasn’t been much of a run after the initial load. This should come as no surprise given the still high rate of price pressures and headwinds from issues like an incoming recession. There may be a precarious balance in the macro backdrop, but it’s the ebb of liquidity we have ahead of us that could ultimately prevent a risk measure like the S&P 500 from clearing its well-established technical range that many moving averages, Fibonacci retracements and historically significant levels.

Chart of S&P 500 with 100 and 200 day SMA and 1-day (daily) rate of change

Chart created on Tradingview platform

Taking our benchmark for what is ahead of historical norms, November is known as a period in which volume and volatility historically decline as the underlying S&P 500 averaged its second-best performance ever. the calendar year. However, there are other activities to be found within the month itself. On a more granular basis, the 47th week of the year (which we are entering) averaged the third largest weekly loss of the year. That would seem at odds with expectations of a late holiday market with Thanksgiving next Thursday. It should be noted that historically, holidays in the United States do not always fall on the same week of the year, although they usually fall between the 47th and 48th week.

Chart of average weekly performance of the S&P 500 by calendar year since 1900

Graphic created by John Kicklighter

Whether Thanksgiving is the 47th or 48th week of the year, the implications for volatility appear to be about the same. If we look at the historical averages of the VIX since the beginning of its official series (1990), there is historically a drop in activity. Again, there are always possibilities for exceptions. In fact, in 2021 there was an increase in volatility during the 48th and 49th weeks of the year. It all depends on the fundamental direction of the market as well as scheduled and unscheduled events running through the wires. On this front, we have a seriously unresolved backdrop for a darkening recession. When it comes to upcoming event risk, there are a few known releases that have the ability to stir the markets.

Chart of the current VIX and the average weekly level of the VIX since 1990

Graphic created by John Kicklighter

Risks and Themes of Scheduled Events

Based on the expected economic record for the coming week, there is definitely a bottleneck in notable releases through the end of next week, but there are more than a few high profile listings that I will be watching for potential. of volatility. For the most comprehensive and overarching theme, the overall and timely picture of economic activity will come through November PMIs due Wednesday. The compass of these economic measures has been pointing south for the past few months and many are in technical contraction. If this trend continues, the threat into which reality sinks will only increase. Meanwhile, indicators like the Chicago Fed’s US National Activity Index, Durable Goods Orders and New Home Sales will reflect important aspects for the world’s largest economy. Earnings may also be light this week, but updates from Best Buy, Dollar Tree and even Baidu will talk about important standards (even carry, inflation and China).

Risk of a critical macro event on the global economic calendar for next week

Calendar created by John Kicklighter

While the threat of recession remains for me the most nebulous, and therefore the most powerful fundamental theme that is progressing; there are other topics that are more than capable of generating volatility. For the US dollar and financial markets, the outlook for monetary policy remains a strong driver. Last week, the Fed’s speech offered an unequivocal underlying message: that despite the recent ebb in inflation, there was still more tightening to be done – and at a higher terminal rate than previously expected. In terms of market expectations through fed funds futures, the rate implied through June 2023 wobbled only slightly and has since rallied above 5.00%. This provides a significantly divergent short-term position between these implied rates and the performance of the dollar. Will they continue to diverge or realign? And, if one corrects the other; who will capitulate.

Chart of the DXY Dollar Index overlaid on the June 2023 implied federal funds rate (daily)

Chart created on Tradingview platform