S&P 500 Recovery Meets Return of Liquidity, Last Run of Data Pre-FOMC

The swoon in liquidity through the Thanksgiving holiday period helped to stall a larger turn in speculative markets. Can its restoration revive the bulls or are conditions systemically shifted? 

Talking Points:

• The S&P 500 managed a 5-day rally through a truncated week which in turn salvaged a 7th consecutive month’s climb – the longest in four years
• As liquidity returns, we also have to consider the seasonal expectations for activity and a waning influence of key themes
• Top event risk this week focuses on re-igniting key themes in the US (PCE, UofM, ISM) or that which can prove an outlier for grey swans (Japan liquidity flows)

A Return to Liquidity but What Trend and Tempo?

Looking ahead to the coming week, standard market liquidity conditions are expected; but there is important context to evaluate in order to determine what that translates into for bearing and tempo. Even before the Thanksgiving week drain, there was a notable wanning of influence for the prevailing fundamental themes of the past months – rate forecasts, growth concerns, AI investment, etc. While it is probable that if bullish interests are resuscitated that confidence will hitch itself to at least one of these matters, generating a genuine head of steam into momentum will more likely require a substantial development in one of these areas. 

Otherwise, the transition to seasonal norms for participation and volatility will likely take over. Historically, volatility and volume – when measured via the S&P 500 – drop sharply through the month of December. If we revert to the ‘typical’, the baseline is likely to be congestion with a moderate bullish bias. Alternatively, in the event that concern turns to fear, the potential for panic to seize a thinned market and produce more dramatic declines exists as a very disproportionate ‘probability versus potential’ scenario.

Historical Average S&P 500 Change and Volume by Calendar Month  

Source: John Kicklighter, Standard & Poor’s

 

In light of the skewed probability versus potential of a general bullish and bearish scenario moving forward, it is important to keep attuned to the market’s focus. While there is always potential for a bullish bias to find some charge, say through added expectation of an additional 25 basis point rate cut from the Fed next year, it is likely to carry fleeting momentum given the reduced participation and the saturation of risk appetite as measured through factors like FINRA margin account ‘leverage’. Alternatively, the seemingly lower probability of a full reversal of trend to the bears carries a much greater potency if realized. We can chalk that up to lower anticipation, the abundant use of leverage and complication of reduced liquidity. As such, I like to keep tabs on potential grey swans through these periods. 

Black swans are highly unpredictable events to the point where they are rarely even considered in the spectrum of feasible scenarios with catalysts that an infinitesimally smally group of market participants were even aware was possible. Attempting to spot such occurrences is extremely impractical given their improbability and the extreme information accessibility issues as a foundation of such consideration. Grey swans on the other hand are foreseeable but just considered highly improbable. We can reasonably account for such developments with an evaluation of possible impact should it come to light which can then be leveraged to develop a strategy.

S&P 500 Overlaid with Difference of FINRA Margin Account Debit and Cash Balance (Monthly) 

Source: John Kicklighter, Standard & Poor’s, FINRA

 

High Profile Events with a Questionable Impact Potential

As far as density goes, the global macro docket through the coming week is impressive. However, the capabilities of these listings - either individually or even around collective themes - to move markets is hampered by the transition of expected seasonal market conditions. For the 49th week of the year, the S&P 500 has averaged a sustained decline in expected volatility (via the VIX) while volume rebounds from the Thanksgiving swoon. Considering the index has a healthy range developed over the past three months with an upper bound that is a record high, a reversion to the mean of ‘general conditions’ would make congestion more likely. That said, the top events on tap may revive some of the unsettled but presently dormant themes that have wrested control of market participants’ confidence recently.

Calendar of Top Global Macro Event Risk
 
Source: John Kicklighter

 

A Continuingly Uninspiring Economic Check in on the Largest Economy

While there is plenty of global event risk to draw upon through the week such as emerging market Q3 GDP updates (eg Turkey, South Africa, Brazil), Chinese PMIs, North American business sentiment and key country FX reserves; the US markets seem to be present the gate keeper for fundamental threats most readily escalating to global fallout. As such, the overview of US economic health provided by the ISM’s update on manufacturing activity (Monday at 15:00 GMT) and service sector activity (Wednesday at 15:00 GMT) will provide a particularly important insight for those watching the undercurrents. 

As the largest component of employment and GDP for the US, the service sector reading last month’s 8-month high has offered some room for complacency to breathe. However, the employment component extending a multi-month contraction while the price component continued to soar sets up a backdrop of some economic and monetary policy concern. As for the factory reading, the extended run below the ‘growth’ level (50) does not bode well for White House trade policy or general sentiment given the cost of actions targeting support to this area – such as inflation – were acute. 

Chart of the S&P 500 Overlaid with the ISM’s Service and Manufacturing PMI (Monthly)

Source: Standard & Poor’s, ISM

 

Japan May Prove One of the Global Market’s Grey Swans

Though the US will be the top candidate for impacting the global markets, it isn’t the only region with the fundamental capacity to spread. Japan’s political transition, shift in perceived monetary policy conviction, increased geo-political tensions, fiscal stimulus plans and financial pressures following a surge in JGB yields creates strain for the fourth largest economy in the world and third most heavily used currency (the Yen). 

That considered, there is a lot of insightful event risk due from the country this week.  Among listings worth monitoring, we have Q3 capital spending, the November money supply, the sale of a 30-year bond, FX reserves and a leading economic index update. However, the most pointed of the week’s listings may be household spending figures as it gauges domestic confidence with its implications for spending and investing amid such significant systemic changes for the country.

Chart of USDJPY with FX Reserves, Household Spending and Historical Interventions (Monthly)

Source: TradingView, Japan Ministry of Finance, Japan Ministry of Internal Affairs

 

A Critical Update on US Data Before the FOMC’s Decision and Forecast

Finally, the most headline-worthy event risk on tap for the week is not immediately the most ‘promising’ for volatility. Friday brings two key US events due for release at the same time (15:00 GMT): the PCE deflator and the University of Michigan consumer confidence survey. There are a number of ways that this event risk can interest but fall short of actually upending fundamental trends and market direction. The two events can offset each other, they can come in-line with expectations or simply not alter the expectations of the core theme that they each align to: monetary policy and growth respectively. For the Fed’s favored inflation reading (PCE), the reading is the delayed September update which is dated but there has been precious little insight into the components of the dual mandate (employment and inflation) owing to the government shutdown. 

As for the UofM reading, the series is just off of a record low going back approximately three quarters of a century and the Conference Board’s update last week showed alignment in the drop to its counterpart’s own October reading. While confidence in markets and assumptions that the US is comfortably avoiding an economic contraction persist, data from sources like this that contradict that narrative could ultimately prove the undoing of the speculative realm’s obliviousness.

DXY Dollar Index Overlaid with Implied Fed Cuts in 2025 and 2026 (Daily) 

Source: TradingView.com, ICE, CME Fed Fund Futures

 

-- Written by John Kicklighter, Global Head of Content

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