S&P 500 Recovers After Getting Rattled by Japan's Carry Trade Noise Event

The S&P 500 (Index: SPX) got rattled on Monday, 5 August 2024, losing a full three percent of its value in a single day.

That’s not a typical day for the index. Before 5 August 2024, there have been just 140 declines greater than 2.94% from previous trading day’s closing value recorded since 3 January 1950. Now there are 141.

And yet, after all that sound and fury to start the week, the S&P 500 had almost fully recovered all that it had lost by the end of the week, as if the index had simply gone mostly sideways during the trading week that was. The index ended the trading week at a level of 5,344.16, just 2.4 points less than where it closed the previous week.

The big story of the week came out of Japan, when the combination of the BOJ’s surprise rate hike combined with bad jobs data in the U.S. to start unwinding the “carry trade” based on the difference between Japan’s low interest rates and higher rates everywhere else.

Markets went on to recovered after the Bank of Japan quickly backed off its plans to continue hiking rates to fight inflation developing in Japan. Although it took the rest of the week, as shown in the latest update of the alternative futures chart.

Although the trajectory of the S&P 500 briefly deviated from it in what we’ll call the Japan carry trade noise event, the chart indicates stock prices recovered enough to continue falling within the range associated with investors focusing on the distant future quarter of 2025-Q2.

Investors absorbed quite a bit more information than that during the trading week ending Friday, 9 August 2024. Here are the week’s marking moving headlines:

Monday, 5 August 2024

• Signs and portents for the U.S. economy:

• Oil prices drop as US recession fears spark broader selloff
• US bond yield drop suggests lower mortgage rates may be coming
• Yields rebound, curve inverts again after brief positive shift

Fed minions expected to deliver bigger, more frequent rate cuts, but claim no recession is coming, issues new guidance for failing banks:

• Fed policymakers signal rate cuts ahead, but not recession

• US yields slide as traders bet on big Fed rate cuts after weak data
• Fed’s Barkin tells PBS program he won’t prejudge what to do at next meeting
• Fed’s Daly: more confident inflation is on path to 2%

Federal Reserve issues ‘living will’ guidance for large US banks

Mixed economic picture, much bigger stimulus developing in China:

• China’s services activity expands further, but external demand slows, Caixin PMI shows
• China announces huge stimulus package to boost lagging economy

BOJ minions starting to have second thoughts about its rate hike:

• Bank of Japan made hawkish tilt, debated inflation risk in June, minutes show
• Resurgent yen brings high-flying Japan Inc back to earth

• Stocks plunge: Nikkei down 13%, European shares near six-month lows

Japan’s Nikkei sees biggest rout since 1987 Black Monday

Bigger trouble developing in the Eurozone:

• Euro zone business growth at a standstill, July PMI shows

Nasdaq, S&P, Dow plummet as recession worries grow

• Black Monday: Futures Plummet As VIX Hits 62, Japan Suffers Worst Point Drop In History
• S&P 500 sinks: Top 5 losers and winners in the S&P 500′s worst session since 2022

• Magnificent Seven set to shed $800 billion in value

Tuesday, 6 August 2024

• Signs and portents for the U.S. economy:

• Oil prices climb more than $1 on fear of spreading Middle East conflict
• US recession worries surge again. What is in the data?

Fed minions expected to start cutting interest rates as expected in September 2024:

• Fed’s not yet ‘behind the curve’
• Hopes for gradual Fed rate cuts were always misplaced

Mixed economic signs developing in China:

• China’s exports seen expanded in July lifted by global trade upturn: Reuters poll
• China’s crude oil imports lowest since Sept 2022 amid dampened fuel demand

BOJ minions not getting data they want:

• Japan June household spending falls 1.4% year on year
• Japan plans record hike in minimum wage, NHK reports

Japan stock market rebounds, but danger remains:

• Japanese shares rebound sharply after biggest rout since 1987 Black Monday
• Aftershocks of carry trade at heart of market rout could still have reverberations

S&P, Nasdaq, Dow finish higher following rout fueled by recession fears

• Stocks Plunge After Ugly 10Y Auction Tails Bigly

Wednesday, 7 August 2024

• Signs and portents for the U.S. economy:

• US 30-year mortgage rate drops on weak jobs data, Fed rate-cut signal
• Oil prices rebound from multi-month lows on Mideast tensions
• Yields rise after weak 10-year auction, heavy corporate supply

Bigger trouble developing in China:

• China’s commodity imports show economy struggling for momentum
• China’s mounting bad debts have fewer places to go

BOJ minions in damage control:

• BOJ deputy governor plays down chance of near-term rate hike, yen slumps

• Yen dives as BOJ plays down chance of hikes, soothing markets
• Japan Rushed To Calm Markets, Trigger Buying Spree With Emergency Central Bank Meeting
• Capitulation: Yen Plunges, Nikkei Soars After BOJ’s Uchida Says “Will Not Raise Rates When Markets Are Unstable”

ECB minions willing to keep cutting rates if inflation continues to fall in Eurozone:

• ECB’s Rehn: Rate cuts can continue if downward inflation trend strengthens

Dow, S&P, Nasdaq fall as rebound effort loses steam, 10-year note auction disappoints

Thursday, 8 August 2024

• Signs and portents for the U.S. economy:

• Oil prices tick up on sharp fall in US crude inventories

Fed minions say they’ll cut interests on their schedule, not the stock market’s, but they’ll be in a cutting mood soon:

• Fed policymakers signal rate cuts ahead, but not because of market rout

• Fed responds to economic data, not politics or stocks, says Chicago Fed’s Goolsbee
• Fed’s Schmid says he’s more confident inflation heading to 2% goal

The Fed has cut rates amid stock swoons before. Not this time

Collapsing yen pauses while BOJ minions consider next steps and the loss of their credibility:

• Yen firms after sharp drop as traders assess Japan’s rate path
• BOJ’s communication about-face may haunt future rate moves

Nasdaq, S&P, Dow end higher as fall in jobless claims becalm recession fears

Friday, 9 August 2024

• Signs and portents for the U.S. economy:

• Oil set for 3% weekly gain on rising Mideast tensions, better US outlook
• US retailers rush holiday imports, fearing strikes and disruptions

Bigger trouble, bond market bailout developing in China:

• China’s consumer prices boosted by weather disruptions; domestic demand still soft
• China c.bank says it will increase treasury bond trading

S&P ends wild week largely flat as benchmark index rebounds strongly from 3% plunge

• Recession risks roil markets but not yet alarming

The CME Group’s FedWatch Tool projects the Federal Reserve will continue holding the Federal Funds Rate steady in a target range of 5.25-5.50% until 18 September (2024-Q3). On that date however, the FedWatch tool is now giving a little over 50% chance of a quarter point rate cut and a little under 50% chance of a half point rate cut, which is consistent with the expectation the U.S. economy may be in for a harder landing than previously anticipated. After September 2024, the FedWatch Tool projects quarter point rate cuts at roughly six week intervals well into 2025.

The Atlanta Fed’s GDPNow tool‘s forecast for 2024-Q3′s real GDP growth rate rebounded to +2.9% from the +2.5% figure it recorded a week earlier.

Image Credit: Microsoft Copilot Designer.. Prompt: “An editorial cartoon of a Wall Street bull and a bear looking at each other, with one of them asking ‘What was that all about?’”