Dow and gold stumbled on fading hopes of a jumbo Fed rate cut

·         Latest US retail sales data shows resilient consumer spending on goods; Fed will not panic and go for normal 25 bps rate cuts every QTR end from Sep’24-Mar’27

On Friday and Monday, Wall Street Futures surged on hopes & hypes of a jumbo Fed rate cut -0.50% against normal -0.25% for not only Sep’24 but also Dec’24 after ECB cuts repo (MLF) & MRO date by -60 bps and reverse repo (DRF) by -25 bps in Sep’24 policy meeting (one-time technical adjustment of spreads as already announced in Mar’24). And overall, ECB rate cuts may be termed as less dovish than expected as ECB may not cut in Oct’24 and some market participants were also expecting a 50 bps jumbo rate cut in Sep’24. The US stock market was also boosted by increasing odds of Harris winning in the Nov’24 Presidential election against Trump, which is positive for policy certainty & continuity and may be the best available option under the present scenario.

On Tuesday (17th Sep’24), ahead of the FOMC day, some focus of the market was also on US retail sales as consumer spending is the backbone of the US economy and the Fed also watches this data closely for an assessment of overall economic activities.

On Tuesday, the CB flash data (SA) showed U.S. retail sales (Goods only) for Aug’24 were around $710.8B against 710.4B sequentially (+0.1%) and 695.9B yearly (+2.1%%); i.e. the U.S. retail sales increased around +0.01% in Aug’24 sequentially (m/m), against an upwardly revised +1.1% in the prior month and higher than the market consensus -0.2% decline, while increased by +2.1%. annually (y/y).

Overall, after the latest revisions the average/month retail sales are now around $703.8B in 2024 (MTD) against an earlier average of $702.8 in the prior report and the 2023 average of $692.5B. The current 2024 (MTD) US retail sales nominal growth is now around +2.3% against the 2023 rate of +3.6%. The US retail sales growth although cooled, remained strong despite higher borrowing costs and higher cost of living as the broader labor market is still robust. Adjusted inflation (CPI), the underlying real retail sales have contracted around -0.5% in 2023 against +1.2% in 2022, while remaining around -0.6% in 2024 (YTM).

In 2024 (YTM), the real retail sales contracted by around -0.6%; i.e. real US retail; sales are still negative while continuing to hover around 29% of nominal GDP as overall, the goldilocks nature of the U.S. economy remains intact despite some volatility in underlying economic data due to various transient/seasonal factors.

The 3M rolling average of US retail sales is now around $707.8B and 691.8B yearly; i.e. grew by around  +2.3%, while US core retail sales (w/o food and fuel) grew +2.7% annually.

In Aug’24, the US Retail Sales were boosted by miscellaneous stores (+1.7%); non-store retailers (+1.4%); health and personal care stores (+0.7%); and sporting goods, hobby, musical instrument, and book stores (+0.1%), while dragged by gasoline stations (-1.2%); electronics & appliance stores (-1.1%); food and beverage (-0.7%); furniture and home furniture (-0.7%); clothing (-0.7%); general merchandise stores (-0.3%); and motor vehicle and parts dealers (-0.1%). Meanwhile, sales excluding food services, auto dealers, building materials stores, and gasoline stations, which are used to calculate PCE of GDP, the so-called US super core retail sales (used in real GDP calculation-consumer spending) were up +0.3% in August following an upwardly revised +0.4% gain sequentially. The US Retail sales data is not adjusted for inflation and includes mostly goods, not services, while the US economy is primarily a service oriented economy.

Overall, US retail sales are still hot enough for the Fed to keep a restrictive rate (higher) for longer to produce additional slack in the economy so that demand comes down to some extent and try to balance with the present constrained supply capacity of the economy, pulling inflation down to around +2.0% on a sustainable basis. The US retail sales average remains around 30% of nominal GDP, indicating no recession or even a moderate slowdown in consumer spending despite higher borrowing costs as the US labor market remains robust. Thus Fed may not go for any kind of jumbo (50) or even back-to-back -25 bps rate cuts. F   ed will prefer -25 bps normal rate cuts every QTR end without showing any panic to balance its dual mandate.

Bottom line:

Fed may start cutting rates by -25 bps from Sep’24 QTR and may also project similar -25 bps rate cuts each QTR end as below for 2025-26 in its September dot-plots unless there are some signs of the next financial crisis or some real exigencies. Fed will not go for jumbo or any type of back-to-back rate cuts to maintain the Goldilocks nature of the US economy. After Aug’24, the 6MRA of US core inflation (CPI+PCE) would be around +3.0%, the unemployment rate of 4.0% against a target of +2.0% (core inflation-price stability) and 3.5% (maximum employment-unemployment rate).

Market Impact:

On Tuesday (17th Sep’24), Wall Street Futures closed almost flat after slipping from the session high (NQ-100) and also a fresh life time high (DJ-30 and SPX-500) on hopes & hypes of a jumbo Fed rate cut and subsequent fading hopes as US retail sales remain robust if we consider 6MRA of data. Also, growing trade war rhetoric with China ahead of the US Presidential election in Nov’24 (early voting/polling already started in some states) and domestic political compulsion are affecting Wall Street risk trade sentiment. But Harris's win over Trump may be good for the US economy/market due to policy continuity and predictability rather than another episode of Trump tantrum.

On Tuesday, Wall Street was boosted by energy (higher oil), consumer discretionary, industrials, banks & financials, communication services and materials, while dragged by healthcare, consumer staples, real estate, techs and utilities by some extent. Scrip-wise, Wall Street was boosted by Intel, Dow Inc., Caterpillar, American Express, Walt Disney, Amazon, Nike, Chevron, Microsoft (JV with Amazon), JPM, Boeing, Apple, and Visa, while dragged by Nvidia, Walmart, Verizon, United Health, IBM, McDonald’s, Cisco, 3M, P&G, Amgen, Salesforce and Coca Cola.

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

Whatever the narrative, technically Dow Future (42200) has to sustain over 42300-42500 for any further rally to 42700/42900-43050/43250 and 43500/44000-44500/44800 in the coming days; otherwise sustaining below 42200-42000, DJ-30 may again fall to 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (19900) has to sustain over 20150 for a further rally to 20300*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20100/20000-19900/19800, NQ-100 may again fall to 19600/19350-19100/18900 and further 18750/18550-18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5720), now has to sustain over 5750 for any further rally to 5775/5805*-5850/5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5725 may again fall to 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: 2575) has to sustain over 2605 for a further rally to 26252650-2675*/2700 in the coming days; otherwise sustaining below 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).