{"id":235684,"date":"2025-12-08T13:00:51","date_gmt":"2025-12-08T18:00:51","guid":{"rendered":"https:\/\/ibkrcampus.com\/campus\/?p=235684"},"modified":"2025-12-09T06:27:26","modified_gmt":"2025-12-09T11:27:26","slug":"fed-funds-drove-spx-now-what","status":"publish","type":"post","link":"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/fed-funds-drove-spx-now-what\/","title":{"rendered":"Fed Funds Drove SPX.\u00a0 Now What?"},"content":{"rendered":"\n<p class=\"wp-block-paragraph\">I always enjoy getting questions about something I\u2019m already working on.&nbsp; It turns out that I was in the process of figuring out how best to display the apparent relationship between the probability of a Fed Funds cut and stocks when a call came in this morning.&nbsp; Though they have been moving in lockstep for weeks, we need to consider what might drive stocks after Wednesday\u2019s meeting.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">About two weeks ago, <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/dont-short-a-dull-tape-fed-funds-edition\/\">I created a chart<\/a> that displayed December Fed Funds Futures (ZQ) versus December S&amp;P 500 E-mini Futures (ES).&nbsp; The relationship is quite clear, but the magnitudes of the changes in Fed Funds expectations are not intuitive.&nbsp; We typically talk about the probability for a cut, whether it is in terms of the <a href=\"https:\/\/www.cmegroup.com\/markets\/interest-rates\/cme-fedwatch-tool.html\">CME FedWatch<\/a> or prediction markets like <a href=\"https:\/\/forecasttrader.interactivebrokers.com\/eventtrader\/#\/market-details?id=791099755%7C20251210%7C4%7CDecember%202025&amp;detail=contract_details\">ForecastEx<\/a>; while the price of ZQ is clearly the key determinant of those probabilities, it requires a bit of arithmetic to translate those futures prices into rate cut probabilities.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-30-days-30-minute-candles-nbsp-zq-red-green-candles-es-blue-line-december-2025-futures\"><strong><em>30 Days, 30-Minute Candles:&nbsp; ZQ (red\/green candles), ES (blue line) December 2025 Futures<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"747\" height=\"432\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/12\/image-21.png\" alt=\"30 Days, 30-Minute Candles:\u00a0 ZQ (red\/green candles), ES (blue line) December 2025 Futures\" class=\"wp-image-235687 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/12\/image-21.png 747w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/12\/image-21-700x405.png 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/12\/image-21-300x173.png 300w\" data-sizes=\"(max-width: 747px) 100vw, 747px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 747px; aspect-ratio: 747\/432;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Source: Interactive Brokers<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Using an external source, I was able to display the actual probability alongside the S&amp;P 500 (SPX) and Nasdaq 100 (NDX).&nbsp; The relationship is just as vivid, but a bit easier to interpret.&nbsp; Put simply, as the probability slipped definitively below 60%, stocks fell.&nbsp; Stocks rebounded on November 20<sup>th<\/sup> when the probability returned to a level above 60% after New York Fed President <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/john-williams-changes-the-tune\/\">Williams indicated that<\/a> he would favor a cut this week and continued their advance relatively unabated as the probability rose.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\" id=\"h-since-october-30-th-2025-fomc-december-rate-cut-probability-white-blue-daily-candles-spx-green-line-ndx-purple-line\"><strong><em>Since October 30<sup>th<\/sup>, 2025: FOMC December Rate Cut Probability (white\/blue daily candles), SPX (green line), NDX (purple line)<\/em><\/strong><\/h3>\n\n\n\n<figure class=\"wp-block-image size-full\"><img decoding=\"async\" width=\"754\" height=\"456\" data-src=\"https:\/\/www.interactivebrokers.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/12\/image-9.jpeg\" alt=\"Since October 30th, 2025: FOMC December Rate Cut Probability (white\/blue daily candles), SPX (green line), NDX (purple line)\" class=\"wp-image-235686 lazyload\" data-srcset=\"https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/12\/image-9.jpeg 754w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/12\/image-9-700x423.jpeg 700w, https:\/\/ibkrcampus.com\/campus\/wp-content\/uploads\/sites\/2\/2025\/12\/image-9-300x181.jpeg 300w\" data-sizes=\"(max-width: 754px) 100vw, 754px\" src=\"data:image\/svg+xml;base64,PHN2ZyB3aWR0aD0iMSIgaGVpZ2h0PSIxIiB4bWxucz0iaHR0cDovL3d3dy53My5vcmcvMjAwMC9zdmciPjwvc3ZnPg==\" style=\"--smush-placeholder-width: 754px; aspect-ratio: 754\/456;\" \/><\/figure>\n\n\n\n<p class=\"wp-block-paragraph\"><em>Source: Bloomberg<\/em><\/p>\n\n\n\n<p class=\"wp-block-paragraph\">While this is a solid explanation of what has happened recently, it offers no clue about what might happen in the coming days and weeks.&nbsp; For starters, we have no choice but to abandon the use of a December rate cut probability after Wednesday\u2019s FOMC meeting when it will become, by definition, old news.&nbsp; Also, today\u2019s relatively modest decline might be somewhat attributed to a lack of consensus and clarity about Fed policy in the months to come.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">I have heard the term \u201chawkish cut\u201d mentioned quite a bit recently.&nbsp; The implication is that Chair Powell will acknowledge the desirability, if not the necessity, of a cut at present but question the need for them at upcoming meetings.&nbsp; It is no coincidence that the last all-time closing high for SPX was on October 28<sup>th<\/sup> \u2013 the day before the last FOMC meeting \u2013 when Powell did something similar.&nbsp; It would be easy for him to lean into the idea of data dependency amidst the current paucity of government statistics.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Although there is plenty of discussion about a hawkish cut, it may already be priced into market expectations.&nbsp; Probabilities for the next three meetings are currently in the 20-30% range, indicating that fixed income traders, if not stock traders, are skeptical about the prospect for near-term cuts.&nbsp; With expectations that low, it is easier to make a case for them increasing than retreating further.&nbsp; Some positive rhetoric from the Chair or a changing \u201cdot plot\u201d could provide a boost.<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Remember also that the market will increasingly view Chair Powell as a \u201clame duck\u201d whose opinions will carry diminishing weight in the New Year.&nbsp; His term ends in May and may end sooner because it is customary for Fed Chairs to step down when their successor is confirmed by Congress.&nbsp; Chairs Bernanke, Yellen, and Powell all took office in February (2006, 2014, 2018, respectively) for that reason.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">Finally, it is hard to imagine that traders are not already gearing up for a \u201cSanta Claus\u201d rally.&nbsp; It is not a foregone conclusion that we will get a rally between now and year-end, but if the \u201cdon\u2019t short a dull tape\u201d experience of Thanksgiving week was any indication, then it is not unreasonable to foresee a similar performance into year-end.&nbsp;<\/p>\n\n\n\n<p class=\"wp-block-paragraph\">But there is one very important warning sign to be gleaned from the chart above: while SPX is within a whisker of a new closing high, NDX is about 2% below its own all-time high of October 29th.&nbsp; In some respects, this is positive because it means that investors are looking beyond megacap tech to other sectors.&nbsp; But I think of the experience of late 2021-early 2022, when SPX rallied to an all-time on the first trading day of 2022, but NDX never matched its high set on November 19<sup>th<\/sup>, 2021.&nbsp; Neither recovered those levels until late 2023.&nbsp; It could of course just be a coincidence, but as we <a href=\"https:\/\/www.interactivebrokers.com\/campus\/traders-insight\/securities\/macro\/looking-ahead-to-december-and-beyond\/\">pointed out last week<\/a>, there are a series of inconvenient factors that could converge in 2026.&nbsp;<\/p>\n","protected":false},"excerpt":{"rendered":"<p>I always enjoy getting questions about something I\u2019m already working on.\u00a0 It turns out that I was in the process of figuring out how best to display the apparent relationship between the probability of a Fed Funds cut and stocks when a call came in this morning.\u00a0 Though they have been moving in lockstep for weeks, we need to consider what might drive stocks after Wednesday\u2019s meeting.\u00a0<\/p>\n","protected":false},"author":4,"featured_media":235692,"comment_status":"open","ping_status":"closed","sticky":true,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":"","jetpack_post_was_ever_published":false},"categories":[14700,18,6,8,9,22,26,3],"tags":[],"contributors-categories":[13576],"class_list":["post-235684","post","type-post","status-publish","format-standard","has-post-thumbnail","category-ibkr-market-insights","category-macro","category-north-america","category-region","category-securities","category-stocks","category-text-articles","category-traders-insight","contributors-categories-interactive-brokers"],"pp_statuses_selecting_workflow":false,"pp_workflow_action":"current","pp_status_selection":"publish","acf":[],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.9 (Yoast SEO v28.0) - https:\/\/yoast.com\/product\/yoast-seo-premium-wordpress\/ -->\n<title>Fed Funds Drove SPX.\u00a0 Now What? | 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