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
• The S&P 500 range on Monday was the smallest in three months: a historical comparison with a period before a major technical break
• Thanksgiving liquidity will have some influence going forward, but that doesn’t mean the market will just freeze in place…just look at how the dollar is moving

We have entered a week where there is a known slowdown in activity: the well-known impact of the Thanksgiving holiday in the United States on broader markets. Liquidity and volatility don’t always benefit from a positive correlation, but calm conditions without provocative fundamental updates can lull market participants into a comfortable holding pattern. This seems to be the pace the markets were aiming for to start this week. As the World Cup tournament distracted many traders, the benchmark S&P 500 (one of my favorite and imperfect measures of “risk”) carved out an exceptionally small trading range. The under-24-point range throughout the session represented the smallest stretch of the day in place percentage since August 18. For the viewer of the chart, this happens to be the end of the consolidation after a bullish leg from July to August. Many may focus on the change in direction – which was significant – but I think the escalation in activity is a more reliable comparison. These are exceptionally small trading ranges for both the Monday session and the last 7 day chop; and the risk of volatility stimulated by low liquidity is probably very high. Yet, if such a break occurs before the holidays; tracking will be just as easily stalled by the lack of liquidity in Thursday’s US session.

Chart of S&P 500 with 100 and 200 day SMA and 1 day historical range (daily)

Chart created on Tradingview Platform

While many “risk” trending assets struggled to generate significant heat in active trading over the past session, there was a noticeable outlier in terms of traction. The US Dollar managed to gain a significant rebound during the last session. And, while it wasn’t a record load by a long shot, it represented one of the biggest one-day rises we’ve seen since the market started to really challenge the prevailing trend. . This would lead to an interesting capitulation of the bullish leg of EURUSD after it failed to hold above 1.0350 as well as USDJPY extending its rebound above 141 – and would put pressure on Japanese political authorities who had failed to gain ground in previous months through active intervention. in the name of the yen. Equally good progress was recorded in key commodities priced in dollars, such as gold which accelerated in its four-day slide. Crude Oil, on the other hand, came under severe strain during the first half of Monday’s session but managed to reverse most of its losses and fight a rally away from the greenback.

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

Chart created on Tradingview platform

What moves the dollar where broader capital markets are struggling? Basic motivation. While the economic record was very light at the opening this week, there is nevertheless active speculation around interest rate expectations. The rebate demanded on the dollar after the October CPI release two weeks ago appears to have significantly exceeded real expectations for interest rates as measured by Fed Funds futures or other similar measures. With Fed officials like Loretta Mester offering such comments that she thinks the central bank is “far close” to the end of its tightening regime, it’s no surprise that there is active rebalancing going on. fundamental assumptions via the dollar. That said, rate forecasting remains an open theme based more on the balance of speculation via products such as Treasury yields than on forecast data – as there isn’t much over the next session that will tip the scales here without the central bank talking. That said, recession fears may carry more weight over the next 48 hours.

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

Calendar created by John Kicklighter

As we face further rhetoric from central banks in the coming session – including the leading trio of Fed hawks in Mester, George and Bullard – the focus is likely to shift to economic forecast – or more correctly, the assessment of the recession. The past session has seen an increasingly deep inversion in the 2- to 10-year Treasury yield curve watched by investors. As of Monday’s close, the negative figure is the highest in four decades. Further evidence of economic pain is unnecessary, but the Chicago Fed’s National Activity Survey for October reinforces a trend in the data punctuated by the Conference Board’s leading economic index on Friday. We will see the most important and time-sensitive look at economic activity in developed countries with Wednesday’s PMI release; but for now, the market is ready to operate complacently. What happens when the market is more accepting of an impending recession? and what will solidify this painful perspective?

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

Chart created on Tradingview platform