Dow and gold scaled life time high on hypes of bigger Fed pivot

·         Gold was also being boosted by increasingly complex/serious Israel-Hezbollah and Russia-Ukraine war situation

·         Although to justify Sep’24 jumbo rate cut of 50 bps, Powell/Fed took the excuse of the sharp drop in total CPI data released during the blackout period, in reality, core CPI has stalled in August

·         The US unemployment rate ticked up for increasing labor force due to the increasing influx of immigrants (led by India) and limited fresh job creations

·         The resolution of the growing US unemployment rate requires proper fiscal stimulus and policy to create fresh jobs and control immigrants rather than only Fed monetary stimulus

·         After the start of Fed easing, China’s PBOC also launched a monetary stimulus plan as a part of synchronized global easing

On Wednesday, Wall Street Futures, Gold surged initially as a jerk reaction to an unexpected jumbo rate cut by the Fed (-50 bps) against the general market expectations of -25 bps; but soon stumbled as such jumbo rate cut may be ‘political’ and also indicating ‘panic’ by Fed. As the overall economic data does not indicate any early signs of recession/hard landing, but despite that Fed is going for unusual crisis-era rate cuts of 100 bps in three months, the market may be nervous about any real possibility of next financial crisis, which Fed may be aware, but the market is not.

Also, the Fed rate cuts of -100 bps by Dec’24 were partially discounted by the market already going by the recent rally, and thus this may be another example of buying the rumor and selling the news/fact. And Fed rate cuts; i.e. lower bond yield may be negative for the banks as their NIM/NII may be affected. Thus overall, Friday is a classic example of long unwinding and fresh shorts at record-high levels for both stocks and Gold. Also, the Fed has projected a higher terminal repo rate at +3.00% against earlier +2.75% along with a stagflation-like economic forecast (higher employment and flat GDP growths).

On Monday (23rd Sep’24) Fed’s Goolsbee said:

·         Many more rate cuts over the next year

·         Labor market deterioration typically happens quickly

·         The jobless rate is at levels many consider full employment

·         Keeping rates at decade-high does not make sense when you want things to stay where they are

·         I am comfortable with the Fed's 50 bps rate cut; it shows the Fed is focused on risks to employment, not just inflation

·         Many more rate cuts are likely needed over the next year, rates need to come down significantly

·         Overall, the economy has some warning signs and some strength

·         A 0.7% increase in unemployment over a year is usually a warning sign of a recession

·         Directionally, unemployment is rising, but the level is still low

·         The rise in delinquencies is also a warning sign

·         GDP growth, Consumer spending, and wage growth have been strong

·         It's a little bit of a cautionary period

On Monday, Fed’s Bostic said:

·         Levels of excess savings have diminished for many households, but some still have cash on hand and could fuel demand

·         I had earlier been concerned rate cuts would unleash pent-up demand, but that may be substantially less than thought

·         The range of views about the path forward is robust

·         I feel that the neutral is in the 3% to 3.25% range

·         Long-run inflation expectations remain relatively stable

·         If the labor market deteriorates, that is a reason for a faster pace to neutral, but that is not the baseline

·         I expect some choppiness on inflation going forward; we will wait and see what is needed on rates

·         The labor market is not flashing red, I am optimistic about the future

·         I expect demand will continue to sustain employment

·         I do not expect to see unemployment increase much further

·         As long as consumer spending continues there will be demand for products and therefore for workers

·         The Fed is not in a mad dash to neutral, in favor of not rushing to judgment or assuming the job is done on inflation

·         The range of views about the path forward and debate over neutrality is robust

·         Recent dots show a fair amount of dispersion in opinion at the Fed

·         A disagreement over the level of the neutral is inconsequential when rates are this high

·         The labor market is weakening but not weak

·         The labor market is weakening but not weak

·         A half-point cut at this meeting does not lock in a cadence for future rate cuts

·         Risks to the labor market have increased, with the possibility of broad weakness higher than a year ago.

On Monday, Fed’s Kashkari said:

·         I penciled in 50 basis points more cuts in 2024

·         The labor market has not been driving inflation

·         There's a lot of uncertainty about where the Fed will cut to.

·         A 25 or 50-basis point rate cut, both would have been reasonable

·         The FOMC meeting had active deliberations over Fed rate cut

·         I supported a 50 bps cut as a compromise between remaining uncertainty around inflation and risks to unemployment

·         We won't declare mission accomplished on inflation

·         A 50 basis point Fed rate was a meaningful step to get the process moving

·         I expect smaller steps going forward for the Fed

·         An uptick in unemployment bigger risk than inflation

·         There is a lot of ambiguity around what the neutral rate level is

·         Fed policy is still in a net tight (positive) position

·         The labor market is strong, want to keep it that way

·         We won't declare mission accomplished on inflation

·         The labor market is weakening but not weak

·         Recent data show convincingly that the US is on a sustainable path to price stability

·         Business leaders say pricing power has all but evaporated

·         Low recent levels of some recent inflation indicators portend well

·         The Fed is now facing two, largely balanced risks

·         Businesses are becoming more careful in hiring but not considering layoffs

·         The economy is effectively near conditions that would be considered normal

·         Price increases have narrowed and become concentrated in housing

·         Risks to the labor market have increased, with the possibility of broad weakness higher than a year ago

·         A half-point cut at this meeting does not lock in a cadence for future rate cuts

·         Recent data show convincingly that the US is on a sustainable path to price stability

·         I supported a 50 bps cut as a compromise between remaining uncertainty around inflation and risks to the job market

·         50 bps rate cut was the right decision

·         I project 50bps in additional cuts this year

·         It's too soon to declare victory on inflation, but the dis-inflationary process appears on track

·         I see the end of 2024's Fed policy rate at 4.4% and the end of 2025 at 3.4%; the same as the median of Fed policymakers

·         The Fed's 50 bps rate cut was the right decision, it reflects progress on inflation and the softening of the labor market

·         The balance of risks has shifted towards the risk of further labor market weakening & higher unemployment

·         There is little evidence that recessionary forces are building, or that inflation could surprise to the upside

·         Signals on the strength of the economy are confusing, with GDP and consumer spending surprisingly resilient

·         Fed policy remains tight, though it's uncertain how tight

·         Fed rate path will depend on the totality of incoming data

On Saturday (21st September), Fed’s Harker said:

·         There is a risk that the inflation decline could stall

·         There's a risk disinflation could stall, and there is a risk that the US labor market could soften.

·         I see risks to inflation and employment as balanced

·         The Fed has done a good job of navigating the economy

On Friday (20th September), Fed’s Bowman explained her dissent (1st time since 2005 for a FOMC voter) and said:

·         I would have preferred a smaller rate cut (-25 bps) instead of -50 bps

·         I respect and appreciate that colleagues preferred to go with a larger reduction and remain committed to working with them to ensure the policy is appropriately positioned to achieve dual mandate goals.

·         My reading of labor market data has become more uncertain because of measurement challenges, and difficulty assessing immigration impact.

·         I believe moving at a measured pace toward a more neutral policy stance will ensure further progress is made in returning inflation to the 2% goal.

·         The economy remains strong and the labor market remains near full employment.

·         Such an approach would avoid unnecessarily stoking demand

·         I see a risk that the FOMC's larger policy action could be interpreted as a premature declaration of victory on inflation

·         We have not yet achieved the inflation goal

·         I agreed it was appropriate at this meeting to recalibrate the Fed funds rate level, but I preferred a smaller first move

On Friday, Fed’s Governor Waller said:

·         We're at a point where the economy is strong and we want to keep it that way

·         Inflation is potentially on a lower path than we were expecting

·         I am a bit more concerned about inflation running softer

·         We see a lot of room to move down in the next 6-12 months

·         We could even pause, depending on the data

·         If the labor market worsens and inflation data softens quickly, we could do more

·         Inflation is softening much faster than I thought it was going to

·         CPI report and PPI report flowing into PCE inflation were my consideration

·         In terms of 25 bps vs 50 bps, my speech two weeks ago said 25 bps was a good idea but open to 50. The inflation data during the blackout pushed me to a 50 bps

·         I estimate that the August PCE will be very low.

·         We are at the point where the economy is strong, we want to keep it that way, 50 bps right policy action to do that.

·         When asked about the 50 bps rate cut: It was the right number

Conclusions:

Fed/Powell may have taken the jumbo rate cut decision in Sep’24 after being confident about no Trump 2.0 in the blackout period and after missing a rate cut opportunity in June-July’24. Although Powell batted for blackout period data to justify the jumbo cut, in reality, he may have gained confidence about starting the process of the next easing cycle after being confident about no Trump 2.0 (Trump Tantrum 2.0) after the Trump-Harris debate on 10th September. Powell almost acknowledged in the Q&A that the Fed may have missed one rate cut opportunity in June-July’24 due to the concern of Trump tantrum 2.0 as former President Trump has already issued some veiled warning for Powell to go for any ‘unnecessary’ rate cuts to help Bidn-Harris admin.

In any way, the ‘apolitical’ Fed's credibility may be now at stake as after jawboning gradual (normal) 25 bps cuts for months, the Fed goes suddenly for -50 bps cuts just ahead of the Nov’24 election based on just one inflation and retail sales report in the blackout period which also indicated stalled core disinflation and resilient consumer spending.

Fed always keeps changing its goalposts to accommodate its changing narrative. Although the Fed usually targets core inflation (PCE+CPI average), this time Powell tried to defend the unexpected/unusual crisis era jumbo rate cut of -50 bps by pointing to the sharp decline of total CPI in Aug’24 to +2.5% from the prior +2.9% sequentially and an average of +3.2% in H1CY24; +4.1% in CY23. But the core CPI was stalled at +3.2% against H1CY24 average levels of +3.6%; and +4.8% in CY24.

The sharp fall in total CPI was due to a rapid fall in fuel/oil/energy prices. In his last Congressional testimonial, Powell reiterated Fed always targets core inflation rather than total inflation due to volatile fuel & food. But it prefers both inflations to be around +2.0% on a sustainable basis for its price stability mandate. Fed usually prefers core PCE inflation around +1.5% and +2.3% core CPI for durable price stability (core inflation (1.5+2.3)/2=1.9%); core PCE is always less than core CPI by around -0.50% on an average.

Fed’s targets for a Goldilocks US economy

Against this price stability target of +2.0% average core inflation (PCE+CPI), the Fed aspires that the unemployment rate would be around 3.5% (~3.6%) on an average for a sustainable achievement of dual mandate (maximum employment and price stability). Although the Fed’s longer-term sustainable average unemployment rate is around 4.0%, it usually keeps the red line at 4.5% (as maximum tolerable) and the green line at 3.5% (minimum, below which there is a threat of deflation).

As per core CPI and PPI data, US core PCE inflation may come around +2.8-2.7% in Aug’24 against +2.6% in July (unless there is another abnormal revision). In that scenario, the average US core inflation (PCE+CPI) would be around +3.0% against +4.0% unemployment rates for YTM 2024 (till August). Thus Fed is now targeting to bring down average core inflation back to +2.0% on a sustainable basis keeping the average unemployment rate around 4.0% for its dual mandate. And if the US unemployment rate falls below 4.0% towards 3.5%, it would be a bonus for the Fed or a dream scenario. However, the Fed projected an elevated unemployment rate of around 4.4% by Dec’24 and Dec’25 amid a huge influx of immigrants in the US after COVID; the US labor force is now growing much more than US job openings or fresh job creation.

Although higher population growths, even by immigrants and not native Americans (declining birth rate) is causing higher demand, higher consumer spending, and higher GDP growths (than historical trends), it’s also causing high inflation as the supply capacity of the US economy is not increasing proportionately due to lack of adequate fiscal/infra stimulus and political/policy paralysis like situation for decades; US political/election system does not favor Trifecta/absolute majority for either Democrats or Republicans for more than two years. Even in exceptional situations. If one party gets a Trifecta (White House, House and Senate) through the Presidential election, it may eventually lose it after the mid-term election only two years later.

Also, the US has now around $40T public debt if we consider both Federal ($35T) and state debts ($5T) and is paying more than 15% of core tax revenue as interest on such public debt and nominal GDP around $ 28 T. Thus US Congress, Treasury and also Fed has always an issue with such huge public debt and interest burden and fiscal policy.

Although is the global reserve and most trusted currency, USD is always in great demand globally from various countries and even terrorists! Thus despite almost 24/7 printing, USD has not tuned into a toilet paper, but the never-ending cycle of increasing public deficit, public debt, and currency devaluation (3D) is boosting Gold as an inflation hedge traditional asset in limited supply. Also, Gold is being boosted by safe-haven asset appeal amid lingering geopolitical tensions (Ukraine and Gaza war), especially in the last few years under the Biden admin (war-savvy Democrats!)

Looking ahead, the US needs to recalibrate its policy on immigration and fiscal/infra stimulus to balance the growing demand of the economy by growing supply capacity; otherwise, there may be higher inflation, higher unemployment and the Goldilocks nature of the US economy may be at risk, making Fed’s jobs more difficult. The present immigration flood into the US is being led by countries like India, Mexico, and also China to some extent.

Apart from any political narrative, even if we take the US economic data at face value despite abnormal revisions even after several months, the Fed has miscommunicated with the market; and also created confusion and asset bubbles by jawboning too much. Normally, the Fed never surprises the market as it has immense jawboning power and policy space. But this time, despite a very low FFR Swap probability of -50 bps cut, the Fed goes for the same, maybe after being confident not only about disinflation & reaching price stability target of +2.0% inflation, but also no Trump 2.0, Trumpflation, and Trump tantrum. Powell may not have to face Trump again in 2025.

Now, looking ahead, the Fed may take a pause in Nov’24 due to very little economic data and may cut -50 or -25 bps in Dec’24 (Q4CY24 end) and then may shift to -25 bps normal pace of rate cuts each QTR end (every alternate meeting) in 2025 for a cumulative cut -100 bps (for 2025). Further, the Fed may cut -50 bps in 2026 for an indicative terminal/neutral rate of +3.00% Compared to the Jun’24 sot-plots of +2.75%. Fed has front-loaded 50 bps rate cuts from 2026 into 2024 and also fully dialed back 25 bps projected rate cut in 2027 and projected higher longer-term neutral terminal rate at +3.00% against earlier +2.75%.

Further assuming +2.0% average core inflation (PCE+CPI); the Fed may now want to maintain a minimum real positive rate at +1.00% against pre-COVID times +0.50% and June’24 projections of +0.75%; i.e. Fed may maintain lowest range of real positive neutral rate at 0.50-1.00%.On the higher side, the Fed may also maintain a 2.00-2.50% real positive rate (as restrictive). But at the same time, the Fed will be flexible and nimble as always in line with actual economic data and outlook thereof and thus may change the goalpost again.

Although Fed may not cut again on 7th November, just days before the US election, and should wait for the next QTR end (Dec’24), considering underlying political pressure, Fed may also change its rhetorics to say that it has done a ‘policy mistake’ by not cutting in March and June QTR (after negative revisions in NFP/job data), it’s now correcting the path by going for another 25 bps cut in Nov’24 followed by another -25 bps in Dec’24. Thus Fed may also cut 25 bps in Nov’24 and then another 25 bps in Dec’24 to be ahead of the ‘recession’ curve and continue the normal -25 bps rate cuts every QTR end in 2025 too.

Another point is that Aug’24 core PCE inflation may tick up and the overall core disinflation process may slow down in Sep-Nov’24, while the unemployment rate may also come down below 4.0% ahead of Nov’24 election. Oil may also flare up amid growing war/conflict between Israel and Hezbollah/Lebanon/Iran just ahead of the US election along with Russia-Ukraine (Putin conspiracy?). Thus Fed may also cut -25 bps in Dec’24 after pausing in Nov’24 due to an unfavorable mix of data.

Bottom line:

Looking ahead, with the fading concern of Trump tantrum 2.0, Fed/Powell may go for a normal gradual rate cut pace of -25 bps every alternate meeting (each QTR end) in line with actual economic data and outlook thereof from 2025. But the Fed may go for a pause in Nov’24 and may cut either by -50 bps or even -25 bps depending upon actual economic data (unemployment and core inflation rate) and also policy action by ECB, BOE, and BOC as G4 central banks have to maintain or may want to maintain pre-COVID real spreads by going for similar synchronized easing to manage FX and export/import/imported inflation equation, everything being equal.

Market Impact:

Wall Street Futures led by DJ-30 and also SPX-500 scaled a new life time high (LTH) on hopes & hopes of bigger Fed pivots/rate cuts and an early end of QT (by Dec’24?). But tech-savvy NQ-100 underperformed to some extent due to the growing tech war between the US and China (domestic political compulsion ahead of the US election). Also, subdued report cards from FedEx have undercut the broader market. An upbeat PMI report by S&P Global also affected the Fed pivot trade Monday.

On Monday, Wall Street was boosted by energy (higher oil), consumer discretionary, real estate, utilities, materials, industrials, consumer staples, and banks & financials, while dragged by healthcare, communication services, and techs. Scrip-wise, Wall Street was boosted by Intel, Boeing, Walmart, Visa, IBM, Chevron, Amazon, McDonald’s, 3M, Caterpillar, Nvidia, Meta, Alphabet and Home Depot, while dragged by Merck, Salesforce, Walt Disney, Apple, American Express, J&J, Amgen, Microsoft, Nike and United Health. Apart from the Fed boost, Gold is also being boosted by a growing war-like situation between Israel and Hezbollah/Lebanon.

On early Tuesday, Wall Street Futures, Metals, and even oil were also boosted by China's PBOC stimulus plan to boost not only real estate but also the overall economy from years of slumber. The Chinese economy may be now suffering from excess capacity, lower demand, and a subsequent deflation-like scenario. Export-heavy China is suffering from weak global demand/trade and also subsequently lower domestic demand, resulting in abnormally lower inflation or deflation.

On early Tuesday, just days after Fed easing, as a part & parcel of synchronized global easing, China/PBOC also announced some stimulus measures to boost domestic demand. The PBOC introduced several measures to boost the economy amid concerns that the official growth target of around 5% might be out of reach due to recent weak data.

The PBOC Governor Pan said in a rare media briefing that the Chinese central bank will cut the reserve requirement ratio (RRR) by -50 bps, which will inject CNY 1T into the financial system, with the possibility of another reduction of -25 bps or -50 bps later this year. In addition, the PBOC will lower the seven-day reverse repo rate by -20 bps to 1.5%, aiming to reduce short-term borrowing costs for banks. This move is accompanied by a -30 bps reduction in borrowing costs of the medium-term lending facility (MLF).

Chinese Mortgage rates will also be trimmed, with an expected average drop of -50 bps, and the minimum down payment for second homes will be cut to 15% from 25%. But Pan did not specify when all these moves will take effect. This followed the unexpected PBOC decision Monday to cut the 14-day reverse repo rate by -10 bps to 1.85%.

Additionally, PBOC benchmark loan prime rates are expected to be lowered by 20-25 bps following their hold at the September meeting. The PBOC also anticipates lowering existing mortgage rates by about 50 bps, potentially reducing household interest payments by around CN¥ 150 billion. Furthermore, down-payment requirements for second homes will be cut to 15%, aligning them with those for first-home purchases. Overall, these measures underscore Beijing's commitment to achieving a 5% GDP target for 2024. Additionally, the PBOC plans to cut existing mortgage rates by around 50 basis points, potentially reducing household interest payments by about CN¥ 150 billion. The central bank also announced a reduction in down-payment requirements for second homes to 15%, aligning them with first-home purchases. These measures reflect the PBOC's intensified commitment to achieving a 5% GDP target for 2024. Overall, the latest PBOC monetary stimulus will provide more liquidity/funds at lower borrowing costs for the Chinese economy.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500, and Gold

Whatever the narrative, technically Dow Future (42500) has to sustain over 42700 for any further rally to 42900/43050-43250 and 43500/44000-44500/44800 in the coming days; otherwise sustaining below 42600/650, DJ-30 may again fall to 42400/42300-42100/42000 and 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20400 for a further rally to 20600/20700-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20350/300, NQ-100 may again fall to 20000/19750* and 19600/19350-19100/18900 and further 18750/18550-18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5780), now has to sustain over 5850 for any further rally to 5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5825/800, may again fall to 5725-5675/5625-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also, technically Gold (XAU/USD: 2625) has to sustain over 2655 for a further rally to 2675*/2700-2725/2750 in the coming days; otherwise sustaining below 2650/2645, may again fall to 2625 and 2595/2590-2585/2575, may again fall to 2560*/2540-2530/2515 and 2495/2480-2470*/2425 and further 2415/2400-2390/2375 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory).