Dow flat on a less dovish Fed hold, but Nasdaq and Gold surged

·         Powell’s comments & body language indicate Fed may wait for Q3 data for greater confidence to launch 11 QTR rate cuts from Dec’24 rather than Sep’24

·         Gold jumped on an escalation of Gaza war tensions as Iran may launch a direct attack on Israel after the assassination of the Hamas chief on Iranian soil by IDF/Mossad

·         Nasdaq surged as US may eventually allow selective exceptions for some Chip makers to bypass Chinese export restrictions

On Tuesday, Wall Street Futures closed mixed as tech-heavy NQ-100 stumbled around -1.50%% to its lowest in nearly two months; broader SPX-500 tumbled almost -1.00%, while blue-chip DJ-30 closed almost flat around life lifetime high, supported by banks & financials ahead of Fed. Early Wednesday, Gold surged more on escalating Gaza war geopolitical tensions as Hamas leader Haniyeh was assassinated in a Tehran missile strike by IDF after the killing of Hezbollah leader a few hours ago. But Wall Street Futures recovered to some extent after techs short covering, buy back boost by HSBC, and a less hawkish hike by BOJ.

On Friday, BOJ hiked only overnight reverse repo rates by +0.15% to +0.25% (uncollateralized overnight call rate at CDF) as highly expected. The BOJ kept its repo rate unchanged at +0.30% and announced the QE tapering by 50% to around JPY 3T/month from the present QE rate of JPY 6T/M; the QE tapering figure was less than expected; i.e. the BOJ just normalize decades-old negative/almost zero reverse repo rate at +0.25% against repo rate +0.30% to discourage banks to lend indiscriminately. Previously, BOJ tried to encourage banks to lend at ease by keeping the reverse repo rate at negative or almost zero levels, so that banks had to employ their excess funds in lending rather than keeping at the safe deposit window of BOJ and earn negative income.

On Wednesday apart from escalating Gaza war tensions, all focus of the market was on the Fed’s policy decision, where the Fed was expected to hold the rate with an indication of rate cuts from Sep’24; i.e. the market was expecting a dovish hold by Fed this time.

But on Wednesday, the Fed went for a less dovish hold as Powell/Fed was non-committal about any rate cut in/from Sep’24 despite huge pressure from the financial journalists present in the presser and general market implied probability of almost 93% of a rate cut in Sep’24 (before the Fed). Although Powell/Fed acknowledged progress on the front of inflation confidence, Powell continues to maintain that it's not enough and Fed needs to get more confidence about the disinflation process thus Fed needs more economic data relating to inflation and employment for the next few months or at least Q3CY24 (?) before arriving at a decision. But at the same time, Powell also didn’t rule out the probability of a rate cut in Sep’24 and also said the Fed is very close to rate cuts, while at the same time also trashed away any idea about a -50 bps rate cut in any remaining single meeting of Sep/Nov/Dec’24.

On Wednesday (31st July), the U.S. Fed held all primary policy rates for the 8th consecutive meeting (since June 24) as unanimously expected; i.e. the target range for the Federal Fund's Rate (FFR-interbank rate) at +5.38% (median of 5.25%-5.50%); primary credit rate (repo rate) at +5.50%; IOER (reverse repo rate) at +5.40%; overnight repurchase agreement rate (RP) at +5.50% and RRP (Overnight Reverse Repurchase Agreement Rate) at +5.30%, keeping U.S. borrowing costs to the highest level since January 2001 (23-years). Fed is still in a wait-and-watch mode, gained incrementally higher confidence in Q2 after dull Q1, but is not confident enough to launch the post-COVID rate cuts cycle right now (July meeting) as Fed needs more confidence that the present disinflation process will lead to 2% inflation target on a sustainable basis within a reasonable period (mid-term); i.e. Fed is looking for more pace in the present disinflation pace of around -0.2% Q/Q.

In the July meeting, FOMC policymakers noted that there has been some further progress toward the 2% inflation goal although it remains somewhat elevated. Also, recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low as per historical standards. The Fed judges that the risks to achieving its dual mandate of maximum employment and +2% inflation price stability goals continue to move into better balance. Still, the Fed does not expect it will be appropriate to reduce rates until it has gained greater confidence that inflation is moving sustainably toward 2%. During the regular press conference, Chair Powell said a September cut could be on the table if inflation moves down in line with expectations and that he could imagine scenarios in which the Fed could cut rates several times this year or not at all; the Fed will be able to clarify more in its next dot-plots projection (SEP) in September’24.

Full text of Fed’s statement: 31st July- Federal Reserve issues FOMC statement

Recent indicators suggest that economic activity has continued to expand at a solid pace. Job gains have moderated, and the unemployment rate has moved up but remains low. Inflation has eased over the past year but remains somewhat elevated. In recent months, there has been some further progress toward the Committee's 2 percent inflation objective.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals continue to move into better balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent. In addition, the Committee will continue reducing its holdings of Treasury securities agency debt and agency mortgage‑backed securities. The Committee is strongly committed to returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Austan D. Goolsbee; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller. Austan D. Goolsbee voted as an alternate member at this meeting.

Implementation Note issued 31st July’24: Decisions Regarding Monetary Policy Implementation.

The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on July 31, 2024:

·         The Board of Governors of the Federal Reserve System voted unanimously to maintain the interest rate paid on reserve balances at 5.4 percent, effective August 1, 2024.

As part of its policy decision, the Federal Open Market Committee voted to direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:

"Effective August 1, 2024, the Federal Open Market Committee directs the Desk to:

·         Undertake open market operations as necessary to maintain the federal funds rate in a target range of 5-1/4 to 5‑1/2 percent

·         Conduct standing overnight repurchase agreement operations with a minimum bid rate of 5.5 percent and with an aggregate operation limit of $500 billion

·         Conduct standing overnight reverse repurchase agreement operations at an offering rate of 5.3 percent and with a per‑counterparty limit of $160 billion per day

·         Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap

·         Reinvest the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage‑backed securities (MBS) received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding

·         Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons

·         Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions."

·         In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve the establishment of the primary credit rate at the existing level of 5.5 percent

Full text of Fed Chair Powell’s opening statement: 31st July’24

“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. Our economy has made considerable progress toward both goals over the past two years. The labor market has come into better balance and the unemployment rate remains low. Inflation has eased substantially from a peak of 7 percent to 2.5 percent. We are strongly committed to returning inflation to our 2 percent goal in support of a strong economy that benefits everyone.

Today, the FOMC decided to leave our policy interest rate unchanged and to continue to reduce our securities holdings. We are maintaining our restrictive stance on monetary policy to keep demand in line with supply and reduce inflationary pressures. We are attentive to risks to both sides of our dual mandate, and I will have more to say about monetary policy after briefly reviewing economic developments.

Recent indicators suggest that economic activity has continued to expand at a solid pace. GDP growth moderated to 2.1 percent in the first half of the year, down from 3.1 percent last year. Private domestic final purchases, or PDFP, which excludes inventory investment, government spending, and net exports and usually sends a clearer signal on underlying demand, grew at a 2.6 percent pace over that same period, the first half. Growth of consumer spending has slowed from last year’s robust pace but remains solid. Investment in equipment and intangibles has picked up from its anemic pace last year. In the housing sector, investment stalled in the second quarter after a strong rise in the first. Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.

In the labor market, supply and demand conditions have come into better balance. Payroll job gains averaged 177 thousand jobs per month in the second quarter, a solid pace but below that seen in the first quarter. The unemployment rate has moved up but remains low at 4.1 percent. Strong job creation over the past couple of years has been accompanied by an increase in the supply of workers, reflecting increases in participation among individuals aged 25 to 54 years and a strong pace of immigration. Nominal wage growth has eased over the past year and the jobs-to-workers gap has narrowed. Overall, a broad set of indicators suggests that conditions in the labor market have returned to about where they stood on the eve of the pandemic—strong but not overheated.

Inflation has eased notably over the past two years but remains somewhat above our longer-run goal of 2 percent. Total PCE prices rose 2.5 percent over the 12 months ending in June; excluding the volatile food and energy categories, core PCE prices rose 2.6 percent. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

My colleagues and I are acutely aware that high inflation imposes significant hardship as it erodes purchasing power, especially for those least able to meet the higher costs of essentials like food, housing, and transportation. Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. In support of these goals, the Committee decided at today’s meeting to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent and to continue reducing our securities holdings.

As the labor market has cooled and inflation has declined, the risks to achieving our employment and inflation goals continue to move into better balance. Indeed, we are attentive to the risks to both sides of our dual mandate. We have stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. The second quarter’s inflation readings have added to our confidence, and more good data would further strengthen that confidence. We will continue to make our decisions meeting by meeting.

We know that reducing policy restraint too soon or too much could result in a reversal of the progress we have seen on inflation. At the same time, reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering any adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.

As the economy evolves, monetary policy will adjust to best promote our maximum employment and price stability goals. If the economy remains solid and inflation persists, we can maintain the current target range for the federal funds rate as long as appropriate. If the labor market were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we are prepared to respond. The policy is well-positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.

The Fed has been assigned two goals for monetary policy—maximum employment and stable prices. We remain committed to bringing inflation back down to our 2 percent goal and to keeping longer-term inflation expectations well anchored. Restoring price stability is essential to achieving maximum employment and stable prices over the long run. Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals. Thank you.”

Highlights of Fed and Chair Powell’s statements/comments in the Q&A: 31st July”24

·         The FOMC leaves rates unchanged at 5.5% as expected, and repeats does not expect it will be appropriate to lower rates until it has gained greater confidence inflation is moving sustainably toward 2%

·         Rates unchanged but statement highlights dual risks

·         The longer-term inflation expectations appear well anchored

·         Inflation remains somewhat above the 2% goal

·         A broad set of labor market indicators show it is strong, but not overheated.

·         Data suggests that the labor market has returned to where it was on the eve of the pandemic.

·         In the housing sector, investment stalled in 2Q

·         Recent indicators suggest the economy has continued to expand at a solid pace.

·         The pace of spending has slowed but remains solid

·         The labor market has come to a better balance

·         Q2 inflation readings have added to our confidence

·         We need greater confidence in inflation

·         The longer-term inflation expectations appear well anchored

·         Policy is well-positioned

·         We will carefully assess incoming data for future decisions

·         We have made no decisions about future meetings, including September

·         Reducing too late could unduly weaken the economy and vice-versa

·         The policy is now well-positioned

·         We will carefully assess incoming data for future decisions

·         There is a broad sense that we are getting closer, but not quite at that point yet

·         A rate cut could be on the table in September if inflation data indeed comes as expected

·         There's a broad sense at the FOMC that we are moving closer

·         We have made no decisions about future meetings, including September

·         Fed's Powell when asked about the September cut: if inflation moves down in line with expectations, growth remains reasonably strong, the labor market remains as it is, rate cut in sept would be on the table

·         I can imagine a scenario of zero cuts to several cuts this year, depending on how the economy evolves

·         We don't think of the labor market as it is currently a likely source of inflation pressures. That's why I don't want to see excess cooling in the labor market

·         We have made no decisions about September but the broad sense is we're moving closer

·         The labor market is 'strong but not overheated'

·         If we see something that looks like a significant downturn in the labor market, then we will respond.

·         All of the data continues to point in a direction we want to see

·         We don't need to be 100% focused on inflation

·         It's coming to the time to adjust rates to support our continued process

·         We are now getting broader disinflation

·         In a base case, you would think policy rates would move down from here

·         The job is not done on inflation but can afford to begin to dial back restrictions in the policy rate

·         Upside risks to inflation have decreased as the job market cools

·         Downside risks to employment mandate are real now

·         There was a real discussion about the case for reducing rates at this meeting, but the strong majority supported not moving rates at this meeting.

·         All 19 participants supported the decision today.

·         Fed's Powell when asked about a 50 bps point cut: That's not something we are thinking about right now.

·         We are just keeping up with developments, but we are just evaluating what is happening, nothing more at the moment.

·         Fed does not have authority to issue a CBDC;  not seeking authority to issue central Bank Digital Currency (CBDC)

·         We would never try to make policy decisions based on the outcome of an election that hasn't happened yet.

·         We are a non-political agency

·         Anything we do before, during, or after the election will be based on data, outlook and risks; that's what we believe and is how we always operate.

·         We haven't made any decision about future meetings

·         The picture is not one of a really bad economy, just spots of weakness

·         Many perceived pieces of wisdom haven't worked, the situation has been unique

·         The total scope of data suggests normalizing the labor market

·         Chances of hard landing are low

·         Nobody has great vision deep of the future

·         We have to be humble about giving forward guidance

Overall, Powell’s comments, and underlying body language indicate that the Fed may like to wait for Q3CY24 economic data to have greater confidence to launch the cycle of 11-QTR rate cuts from Dec’24 rather than Sep’24. Fed may not cut in Sep’24, just before the US election in Nov’24, but may indicate clearly about the Dec’24 rate cut by Sep-Oct’24/7th Nov’24 MPC day, just before the election. Thus expect hotter labor market data and stalled inflation data for Q3CY24 to suit the Fed and White House narrative. Wall Street is also hovering around life lifetime high and may again scale that by Nov’24 even if there are some much-needed corrections in Q3CY24.

The market is still almost fully discounting Sep’24 rate cuts along with Nov+Dec’24; i.e. -75 bps rate cuts against the Fed’s official dot-plots (June 24) projections of only one rate cut of -25 bps. Looking ahead, if the Fed indeed prefers a Dec’24 rate cut rather than Sep’24, then it has to keep down the implied probability of a Sep’24 rate cut (now around 88%) to below 50% by hawkish jawboning and also hotter than expected inflation and labor market data. In that sense, Friday’s NFP/BLS job/labor market data for July would be closely watched.

Conclusions:

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump 2.0.

Although the market is now almost discounting the start of Fed rate cuts from Sep’24, considering overall pace of disinflation, Fed may continue its wait & watch stance till at least Dec’24 and may continue to indicate on 31st July FOMC/policy meeting that Fed is gaining incrementally higher confidence for overall disinflation process till Q2CY24, but still it’s not enough for launching the rate cut cycle in Sep’24 as Fed may want to be more confident after having actual data for another QTR. If Q3CY24 average US Core inflation (CPI+PCE) indeed goes around +2.9%; i.e. below the +3.0% ‘confidence’ line, then the Fed may officially indicate the start of the 11-QTR rate cut cycle from Dec’24 QTR till Dec’27 (two half yearly rate cuts in 2027).

The Fed will get the Sep’24 core inflation report by mid-late Oct’24 and accordingly may indicate the rate cut from Dec’24, just ahead of the Nov’24 election to keep both Democrats and Republicans happy; the Fed may indicate the start of a rate cut in Oct’24 (just ahead of the Nov’24 election) Fed talks and may start cutting rates from Dec’24 (just after the Nov’24 election), keeping Wall Street near life time high with some healthy corrections.

But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Market impact:

On Wednesday, Wall Street Futures surged on hopes & hypes of an early Fed pivot by Sep’24 but was also undercut after Fed Chair Powell’s presser as Powell sounded/looked less dovish than expected. Also, escalating geo-political tensions over the Gaza war dragged stocks to some extent, while boosting Gold, which scaled almost $2450, but also stumbled again to almost $2429 early US Session Thursday as it’s becoming clear that Iran may not attack Israel directly despite the public narrative of its Supreme Leader Khamenei, who ‘ordered’ a retaliatory strike on Israel in response to the assassination of the Hamas chief by IDF/Mossed in Iranian soil.

On Wednesday, broader SPX-500 surged +1.6%, tech-heavy NQ-100 soared +2.6%, while blue-chip DJ-30 eventually gained around +100 points (+0.2%). NQ-100 was helped by short covering/value buying of blue-chip tech stocks after crumbling to a multi-week low; NVidia soared amid an analyst upgrade and a report that some selected US MNCs (chip makers) may be less affected due to US export restrictions in China, thanks to exception rule; subsequently AMD, Qualcomm and Broadcom surged. But Microsoft slid amid disappointing report cards, especially cloud business.

On Wednesday, Wall Street was boosted by techs, consumer discretionary, communication services, utilities, industrials, materials, and energy, while dragged by healthcare, real estate, consumer staples, and banks & financials. Script-wise, Wall Street was also boosted by Amazon, Intel, Boeing, Apple, Meta, IBM, Verizon and Cisco, while dragged by J&J, Merck, Travelers, Coca-Cola, JPM, Microsoft, Walmart, and Amazon.

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

Whatever the narrative, technically Dow Future (40848) has to sustain over 41200 for any further rally to 41400/41500-41700*/41800 and 41950/42000*-42700 in the coming days; otherwise sustaining below 41100/40900-40700/40500, DJ-30 may again fall to 40400/40200-40000/39900 and further 39800/39600-39400/39200 and 39000/38800-38600/38300 in the coming days.

Similarly, NQ-100 Future (19173) has to sustain over 18800 for any recovery to 19300*/19600-19750/19950 and 20150*/20600-20800/21050 for a further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 18700/18500-18200/18000 it may further fall to 17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5498), now has to sustain over 5400 for any further recovery to 5475/5525-5605/5675 and rally further to 5725/5750*-5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5425/5400-5350/5300 may further fall to 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2385) has to sustain over 2400/2410-2430/2440 for a further rally to 2455*/2490-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2395/2390-2385/2360-2350*/2340, may further fall to 2320/2300-2290/2275* and 2235/2210-2160/2110 in the coming days (depending upon Fed stance, Gaza/Ukraine war trajectory and US election outcome).