Dow gains on soft landing optimism; NQ slips on Nvidia woes

·         Overall, Q2CY24 US GDP data shows strong PDFP (core GDP); real GDP for 2024 may grow by around +3.0% against the Fed’s June projection of +2.1%

Wall Street Futures stumbled Wednesday on lingering geopolitical tensions over the Gaza war as Iran may launch the much-awaited retaliatory attack on Israel by the weekend, while the Hezbollah/Hamas-Israel war of rockets/missiles intensified despite some progress of ceasefire; the U.S. is trying this time with another peace meeting at Doha in the next few days. But Israel Launched a preemptive strike on Hezbollah in Lebanon 'to prevent major attack'.

The Israeli PM Netanyahu said:

·         Israel Destroys Thousands of Short-Range Rockets (of Hezbollah)

·         Israel's Pre-emptive Strike on Hezbollah stopped a bigger attack

·         Event Today is Not the End of the Story

Moreover, after Ukraine’s missile attack deep inside Russia, Ukraine sounds alarm over the large Belarus military build-up on the border. Wall Street was also cautious ahead of Nvidia earnings, the bellwether of techs/AI space, which has been a bubble zone for a long. But Dow is now outperforming techs/NQ led by real economy stocks on hopes & hypes of an early Fed pivot to avoid a hard landing.

On Thursday some focus of the market was also on US GDP data as it’s an indication of whether the US economy is set for hard or soft landing while trying to restore the price stability mandate. The BEA data (2nd estimate) shows U.S. real GDP for Q2CY24 was around $22924.90B vs $22918.70B in the 1st estimate against $22758.80B sequentially (+0.7%) and $22225.40B yearly (+3.1%); all in 2017 constant prices and at seasonally adjusted annualized rates. In other words, the U.S. economy has expanded by around +0.7% sequentially (Q/Q), which is equivalent to a +2.9% annualized rate (~3.0%?), above the 1st estimate of +2.8%. In the previous QTR, the U.S. Real GDP grew at an annualized rate (seasonally adjusted) of +1.4%.

Overall, the US real GDP edged up slightly in the 2nd estimate from the 1st estimate. The increase in real GDP primarily reflected increases in consumer spending, private inventory investment, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. Compared to the first quarter, the acceleration in real GDP in the second quarter primarily reflected an upturn in private inventory investment and an acceleration in consumer spending. These movements were partly offset by a downturn in residential fixed investment.

The increase in consumer spending reflected increases in both services and goods. Within services, the leading contributors were health care, housing and utilities, and recreation services. Within goods, the leading contributors were motor vehicles and parts, recreational goods and vehicles, furnishings and durable household equipment, and gasoline and other energy goods. The increase in private inventory investment primarily reflected increases in wholesale trade and retail trade industries that were partly offset by a decrease in mining, utilities, and construction industries. Within nonresidential fixed investment, increases in equipment and intellectual property products were partly offset by a decrease in structures. The increase in imports was led by capital goods, excluding automotive.

The Fed is now focusing on PDFP (Private Domestic Final Purchase; i.e. Personal Consumption Expenditure-PCE+ Gross Private Domestic Investment); i.e. core real GDP, constituting almost 87% of overall real GDP. The seasonally real PDFP has grown +3.8% in Q2CY24 on an annualized basis, more than the overall real GDP. But if we consider the overall TTM average, the annualized growth rates of both real PDFP overall GDP are almost the same.

The US nominal GDP (at current prices) increased +5.4% (seasonally adjusted annualized rate) to around $28652.3B in Q2CY24 against +4.5% in the previous QTR. Overall, the U.S. real GDP may grow around 3.0% in 2024 to over $23T, higher than the Fed’s estimate and trend rate of +2.1%. Consumer spending is the backbone of the US economy, contributing almost 69% of the real GDP, followed by private CAPEX/domestic investment (18%) and government spending (17%), while net trade (export-import) dragged -4%.

On seasonally not adjusted (NSA) and quarterly rate (not annualized), the actual US Real GDP was around $5739.70B vs $5737.20B (1st estimate) in Q2CY24 and $5573.10B sequentially (+3.0%) and $5569.50 annually (+3.1%). The actual nominal US GDP (NSA/NA) in Q2CY24 was around $7202.10 vs $7196.50 (1st estimate) and $6925.20B sequentially (+4.0%) and $6802.40B yearly (+5.9%).

The core price index for personal consumption expenditures (Core PCE/core GDP deflator) in the GDP data rose by an annualized +2.8% vs +2.9% (1st estimate) in Q2CY24, easing from the +3.7% increase in the previous QTR. The US core GDP deflator was around +1.5% in pre-COVID days against core PCE inflation of around +1.75% on average.

The US GDP price index (GDP deflator) increased at +2.3% vs +2.3% (1st estimate) in Q2CY24 against +3.1% in the previous quarter.

Overall on Thursday, Wall Street Futures and Gold briefly slipped on hotter-than-expected real GDP growths in Q2CY24, but also soon recovered amid softer than expected core PCE GDP deflator component, which may be indicating overall goldilocks nature of the US economy, if we consider the PDFP and overall GDP growths for the last few quarters. But US real GDP may grow around +3.0% in CY24, which is much higher than the Fed’s June’24 projections of +2.1%. Thus Fed may revise upwards its real GDP growth projection in the forthcoming Sep’24 projections (SEP) and may also hold rates till at least Nov’24 to evaluate further data, before launching the eleven QTR rate cut cycle from Dec’24.

On Tuesday (27th August), SF Fed’s President Daly said:

·         The labor market is in complete balance

·         We are far from declaring victory, but we will get inflation to the goal

·         I expect growth to be at or a little below the trend

·         We have a long way to go, and even after cutting rates we will be restrictive

·         We could see the neutral real rate to be as high as +1%

·         I don't want to declare we are on the path to a neutral

·         We want the labor market to stay about where it is. We need to adjust the policy rate to keep it there

·         I do not want to see the labor market weaken further

·         If the economy weakens more than anticipated, we will need to be more aggressive.

·         It is reasonable to adjust policy at a normal cadence if the economy develops as expected

·         The most likely outcome is that we continue to get gradual inflation slowing, and a sustainable pace of labor market growth

·         It is too early to know how big rate cuts will be

·         I don't see warning signs of weakness, but I want to be sure to adjust the policy as we go

·         I am not hearing signs that firms are poised for layoffs

·         I don't see signs of abrupt weakening in the labor market

·         The labor market is completely in balance

·         I don't want to keep making policy tighter, as inflation comes down

·         The time to adjust policy is upon us. It's hard to imagine anything could derail the September rate cut

On Tuesday, the Richmond Fed President Barkin said:

·         I'm hearing that consumers are still spending but they're choosing

·         Disinflation has spread beyond goods to the rest of the economy, boosting confidence that it will continue

·         There is a risk that firms will resort to layoffs if the economy weakens

·         The current low-hiring, low-firing approach companies now take to employment is unlikely to persist

On Thursday, Atlanta Fed’s President Bostic said:

·         On inflation, there is still a distant to go

·         Prefers waiting longer, even if it means being cautious

·         Waits for more data before considering a rate cut

·         Sees solid employment despite historical context

·         Inflation has more room to decline

Also, former Fed's Mester said:

·         I don't think the Fed is behind the curve, I don't support a 50bps rate cut out of the box

On Thursday, NQ-100 was also dragged by a mixed report card of Nvidia for Q2FY25 earnings:

·         Revenue $30.0B, vs $28.86B EST

·         Adjusted EPS $0.68 vs $0.64 EST

·         Adjusted gross margin 75.7% vs 75.5% EST

·         Data centre revenue $26.38 vs $25.08B EST

·         Gaming revenue $2.9B vs $2.79B EST

·         Guidance: Q3 revenue $32.5B +/- 2% vs $31.9B EST

·         Guidance: Q3 adjusted gross margin 74.5% to 75.5% vs 75% EST

·         Maintains quarterly dividend at $0.1 per share

·         Blackwell production ramp is scheduled to begin in Q4

·         Expects several billion dollars in Blackwell revenue in Q4

·         Changes needed to improve Blackwell's production

·         Announces $50B stock buyback

Most of the FOMC Policy makers are still in wait & watch mode to be more confident about launching the 11-QTR rate cut cycle from Dec’24 rather than Sep’24 and also not ready to accept the US labor/job market recession despite July’s terrible and 2024 negative revision for NFP.

Conclusions:

Overall, despite Powell put narrative at Jackson Hole's speech, Fed Chair Powell indicated Fed may further evaluate economic data in August (unemployment and core CPI) and the outlook thereof before deciding on the timing of rate cuts. If overall data is not satisfactory to provide the much-awaited full confidence about the disinflation process, then the Fed may further watch September data (Q3CY24) and outlook thereof for any rate cuts from Dec’24. If the Fed indeed goes for rate cuts based on one/two months of mixed/bad jobs data, then it may look Fed is panicking. In any case, the Fed may also start cutting rates from Sep’24, if Aug’24 job report shows higher unemployment (4.3%-4.5%) and satisfactory disinflation.

But, recent jobless claims and other data may also indicate better/improved/upbeat US job data for not only August but also for Sep and October and a moderate inflation report (ahead of Nov’24 US election) to justify Bidenomics. Fed is not in a hurry to start the rate cut cycles of 11 QTR cuts without evaluating data for a few more months in totality. Thus Fed may not only evaluate inflation and employment data for July and August but also for September and October/ November before launching the much-awaited rate cut cycles from Dec’24 QTR end.

Despite the market now suddenly panicking for a hard landing for the ‘terrible’ NFP/BLS job report for July, if we consider the increasing number of multiple job holders, higher number of temporary layoffs, and an unusual addition in labor force due to one-time seasonal factor), the overall nature of US labor market is still strong enough for Fed to continue its wait & watch stance to gain more disinflation pace and required full confidence to launch the series of rate cuts from Dec’24 rather than Sep’24. Fed is also of the view that the present weakness in the job market is not due to widespread layoffs due to any recession, but a cumulative effect of a higher number of workers/laborers and declining job openings from very high levels previously.

But even if the Fed responds to the present market panic and begins cutting rates from Sep’24 instead of Dec’24, it will make no significant difference in reality; even if the Fed cuts the rate by -25 bps each (no question of -50 bps pace), it will continue the pace of 4 rate cuts each in 2025-26 and one QTR/HLY cut in 2027. The market has already discounted about -275 bps rate cuts from Sep/Dec’24 till Dec’26/Dec’27.

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. Fed may not want to create any political controversy by opting for rate cuts just before the US Presidential election without the support of a terrible employment report. Trump has already warned Fed/Powell about rate cuts just before the election to help Biden/Harris (Democrats)!

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 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; both Democrats and Republicans will be happy too!

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 additional mandate to ensure financial and economic 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. At the same time, the Fed may not allow core 10Y bond real bond yield below average core CPI to continue its restrictive (real positive) policy stance at any cost to ensure durable price stability.

Bottom line:

At present, the 2024 (YTM) average of US core CPI is +3.6%, and the 6M rolling average is +3.5%, while the YTM and 6M rolling average of the unemployment rate is now 3.9% and 4.0%. Fed’s red line range of unemployment rate may be around 4.5-5.00%; i.e. Fed may not allow an unemployment rate above 4.5% on a sustainable basis for long.

Thus Fed may keep the 10Y US bond yield between 4.75/5.00% (upper range) and 3.50/3.25% (lower range) to ensure a proper balance for its entire mandate (maximum employment, price stability, and also financial stability). Looking ahead, the Fed may start cutting rates 11 times (QTR) @-25 bps from Dec’24, but the Fed is also open to cut rates from Sep’24 QTR if data supports (higher unemployment rate above 4.5%, while core CPI falls incrementally by another 0.1/0.2%). Fed will not go for -50 bps rate cuts at one go at this point.

Although the Fed is nervous/worried to some extent after the unemployment rate surged to 4.3% in July unexpectedly, it may be also a case of transitory factors and the headline unemployment rate may also soon fall below 4.0% in the coming months. Thus Fed may not decide about the Sep’24 rate cut or hold without evaluating the Aug’24 job and core inflation data in totality. Thus despite growing probability, the Sep’24 rate cut is not a done deal.

Market wrap:

On Thursday, Wall Street Futures closed mixed as real economy-heavy DJ-30 surged on soft landing optimism amid robust economic activities (Q2CY24 GDP) and softer than expected jobless claims data. But tech-heavy NQ-100 slid on a disappointing/mixed report card from AI tech bellwether Nvidia; broader SPX-500 also closed almost flat. On late Thursday, Wall Street Futures were also undercut by a CNBC report that Democrat Presidential Candidate and current US VP Harris may have a plan to impose capital gain tax even on unrealized stock gains (MTM) on super riches (net worth over $100M for around 11K super riches in the US).

On Thursday, Wall Street was boosted by energy (higher oil due to a production outage from Libya, a production cut plan by Iraq and lingering geopolitical tensions), banks & financials, industrials, materials, utilities, healthcare, and consumer discretionary, while dragged by techs, consumer staples, real estate and communication services. Scrip-wise, Wall Street was boosted by Intel, Visa, Apple, Goldman Sachs, Honeywell, Cisco, American Express, 3M, Caterpillar, Chevron, Boeing, Amazon, Best Buy (upbeat report card) and Microsoft, while dragged by Nvidia, Dollar General (terrible report card), Home Depot, Salesforce and Verizon.

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

Whatever the narrative, technically Dow Future (41260) has to sustain over 41500 for any further rally to 41650/41750*-41950/42100* and 42700/41900-43050/44250-44500/44800 in the coming days; otherwise sustaining below 41450, DJ-30 may again fall to 41000/40700-40500*/40300 and 40150/40000*-39700/39450 and further 39350/39200-39100/38900 and 38500*/38300-38000/37600 in the coming days.

Similarly, NQ-100 Future (19790) has to sustain over 20100-20200 for any 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 20050. NQ-100 may again fall to 19750/19650*-19550/19400 and 19300/19100-18800/18700* and further 18550/18450-18200/17950 and may further fall to 17650/17450-17300/17000 in the coming days.

Technically, SPX-500 (5650), now has to sustain over 5700 for any further rally to 5725/5750*-5850*/5900 and 6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5650 may again fall to 5575/5550-5450/5400* and 5440/5300-5250/5100* and further 5050/4950*-4850/4750 and 4550/4450-4350*/3850 in the coming days.

Also, technically Gold (XAU/USD: 2510) has to sustain over 2540 for a further rally to 2560*/2575-2600/2650 in the coming days; otherwise sustaining below 2535-2520, may fall to 2490/2480-2460/2445* and 2435/2420-2410/2400 and further to 2375/2350*-2325/2300 in the coming days.