Dow, Gold slip on fading hopes of an early Fed rate cut

Wall Street Futures recovered Friday from blockbuster US NFP headline panic low as the fine details indicated another month of Goldilocks job report (Jan’24), which may not affect the Fed’s plan to go for rate cuts in H2CY24. On Friday, Wall Street Futures were also boosted by upbeat report cards from tech majors (except Apple), softer 1Y inflation expectations and upbeat consumer sentiment. Overall Wall Street has scaled another new life time high on soft & safe landing optimism despite higher borrowing costs, tighter financial conditions, and falling inflation; the U.S. labor market remains robust.

On early Monday, the OECD predicted a brighter outlook for the U.S. and global economy:

·         OECD sees the Fed cutting rates in Q2, and ECB in Q3, but adds policy stance should remain restrictive for some time

·         OECD's Chief Economist Lombardelli: I see a stronger economic picture in the US

·         OECD raises global growth prospects amid strengthening US outlook

·         Monetary policy should remain restrictive for some time

·         If Red Sea attacks continue they could add 0.4 percentage points to CPI after a year

·         OECD sees Japanese growth of 1% in 2024 (unchanged) and cuts 2025 to 1% from 1.2%

·         OECD elevates 2024 global growth forecast to 2.9% (vs 2.7% in November) and sees 3% in 2025 (unchanged)

·         China's GDP is to grow 4.7% in 2024 and 4.2% in 2025

·         Hina inflation at 1% in 2024 and 1.5% in 2025

·         Euro-Area GDP to grow 0.6% in 2024 and 1.3% in 2025

·         US GDP to grow 2.1% in 2024 and 1.7% in 2025

·         Sees Euro-Area inflation at 2.6% in 2024 and 2.2% in 2025

·         Sees US inflation at 2.2% in 2024 and 2% in 2025

On early Asian Session Monday, Wall Street Futures stumbled from record high as US bond yield surged on less dovish or rather than hawkish comments from Fed Chair Powell, who reiterated no rate cuts probability in March, but also indicated mid-2024 rate cuts in line with Dec’s Fed SEP; i.e. Powell poured cold water of market’s assumption of an early & deeper Fed rate cut in 2024.

On late Sunday, in an interview with ABC (60 minutes), Fed Chair Powell said:

·         A March Federal Open Market Committee (FOMC) rate cut is unlikely

·         FOMC Rate forecasts remain unchanged since December

·         It's unlikely the Fed will have confidence in a March interest rate cut

·         Commercial real estate loans are not a recipe for crisis, unlike past

·         China issues unlikely to affect U.S. economy, some impact expected but shouldn't be significant

·         Geopolitical risks pose the biggest near-term threat, mainly outside the US

·         No high likelihood of a recession

·         It would have been better to have tightened policy earlier in hindsight

·         Fed was wrong about considering elevated & sticky inflation as ‘transitory’

·         By Q4CY21, it was clear that surging inflation was not transitory and thus went for lift0ff

·         Almost all members of the policymaking committee see rate cut as appropriate this year

·         Inflation is not dead/cold, but cooling with good progress

·         Fed is fully committed to making sure to fully restore price stability for the benefit of the general public

·         Fed is not in a hurry to cut rates despite inflation cooling satisfactorily; the Fed will now debate about the possible timing of rate cuts and make a careful decision after considering the 6M rolling average of economic data

·         We have a strong economy. Growth is going on at a solid pace. The labor market is strong: 3.7% unemployment. And inflation is coming down. With the economy strong like that, we feel like we can approach the question of when to begin to reduce interest rates carefully

·         We want to see more evidence that inflation is moving sustainably down to 2%. We have some confidence in that. Our confidence is rising. We just want some more confidence before we take that very important step of beginning to cut interest rates

·         Fed will ensure cutting rates not too early or too late for a soft & safe landing; i.e. bring back price stability in a sustainable way without causing an outright recession or even a significant slowdown of the economy

·         But the Fed may act (cut) early if it sees a substantial slowdown in the labor market or keep higher rates for longer if core inflation becomes hotter than expected in the coming days

·         We have to balance those two risks. There is no, you know, easy, simple, obvious path. We have to balance the risk of moving too soon, which, as you mentioned, or too late. And there are different risks. We think the economy's in a good place. We think inflation is coming down. We just want to gain a little more confidence that it's coming down sustainably toward our 2% goal

·         We're very focused on our jobs, you know? We're focused on the real economy and doing the right thing for the economy and the American people over the medium and long term. And I can't overstate how important it is to restore price stability, by which I mean inflation is low and predictable and people don't have to think about it in their daily lives. In their daily economic lives, inflation is just not something that you talk about. That's where we were for 20 years. We want to get back to that, and I think we are on a path to that. We just want to kind of make sure of it

·         We're committed to returning inflation to 2% over time. I've said that we couldn't wait to get to 2% to cut rates. You know, we're actively considering now going forward cutting rates, and on a 12-month basis inflation, you know, is not at 2%. It's between 2-3%. But it's moving down in a way that it gives us some comfort

·         I think the base case, the main expectation I would have, is that inflation will continue to move down in the first six months of this year, we expect. So, we look at inflation over a 12-month basis. That's our target. And the first five months of last year were fairly high readings

·         Those are going to fall out of the 12-month window and be replaced by lower readings. So, I do expect that you will see the 12-month inflation readings coming down over this year. We've seen inflation pressures subsiding really for a couple of reasons

·         One is the reversal, the unwinding of these unusual pandemic-related distortions to both, to both supply and demand. And the other is our tightening of policy, which was essential in getting -- it's a part of the story for why inflation's coming down. Not the whole story, by far

·         Despite the softening of the inflation, prices of essential goods and services are still significantly higher compared to pre-COVID days; thus general public has been relatively dissatisfied with the overall economy despite its running pretty good

·         FOMC will approach the question of rate cuts very carefully to ensure the dual mandate of price stability and maximum employment

·         Most of the FOMC participants except two do believe that rate cuts will be appropriate this year; thus now the question is when, not why (but probably no rate cuts in March)

·         That time is coming (for rate cuts). We've said that we want to be more confident that inflation is moving down to 2%. And I would say, and I did say yesterday, that I think it's not likely that this committee will reach that level of confidence in time for the March meeting, which is in seven weeks

·         As of now Fed/FOMC is sticking to its Dec’23 SEP/dot-plots for -75 bps rate cuts, but will update it also in the next Mar’24 SEP after carefully considering economic data, outlook, and balance of risks

·         Fed is not being influenced by politics

·         Core inflation and labor market data most important for the Fed

·         Supply-side easing coupled with tighter financial conditions bring down inflation, but the job is not done yet fully

·         Americans should have some more patience to lower borrowing costs

·         High US government/public debt (fiscal path) is not sustainable in the long run as debt is growing much higher than the economy; the government should reduce debt in good times and focus on fiscal sustainability

·         Fed does not think there will be another banking crisis in the US like the 2008 GFC days, but some regional banks may face a crisis related to CRE; the Fed is watchful

·         The Chinese slowdown is not significant for the U.S. economy except for any supply chain disruptions (in China), which may affect goods inflation in the U.S.; financial system not deeply intertwined with China

·         Europe is much more affected than the U.S. due to Ukraine and Gaza war issues as Europe depends on imported fuel & food

·         The U.S. economy is dynamic, flexible, innovative, and adaptive; this along with U.S. supremacy (global superpower) and the status of USD as the global reserve currency is unique for the U.S. (i.e. USD is always in demand as the global trading/reserve currency despite Fed’s 24/7 printing)

·         Labor force supply is normalizing after the opening of immigration (post-CIVID)

·         So, we're making progress in getting through this now. You know, I would say that for the first time, inflation's coming down. The labor market is normalizing. Growth is returning. The composition of demand is returning to what it was

·         So, we're getting there. But I think the last, the last bits of normalization are probably gonna take a couple of years. And this isn't big stuff. Just continuing normalization of the labor market and the economy will probably take a couple more years

·         And then, we'll be looking back, and I think I've been reluctant to try to draw the big lessons until, 'cause they would have changed, you know? What we thought we were learning two years ago, we would look back and say completely different now

·         Two years ago, we hadn't seen -- three years ago, we hadn't seen inflation come up. The last time we were together was April of '21, I think, and that was just before the big inflation surge arrived. So, I think we need to let that run, and I think we'll learn those lessons better starting in a couple of years

·         The economy's strong. The labor market is strong. Inflation's coming down. There's no reason why that can't continue. We're gonna try to use our tools to give the economy -- to continue to improve as inflation comes down. We'll give it every chance to do that. That's our plan. We don't have a perfect crystal ball about the future, and things could happen. But I do think the economy is in a good place, and there's every reason to think it can get better

On Monday, Fed’s Kashkari said:

·         A higher neutral rate means monetary policy may not be as tight as thought

·         Data on the economy are not unambiguously positive, with some signs of weakness including rising consumer delinquencies

·         Interest-sensitive sectors of the economy are holding up well

·         Core inflation is making rapid progress towards the Fed's target

·         Possibly higher neutral rate means the Fed can take more time to assess upcoming data before beginning rate cuts with less risk to the recovery

On Monday, Fed’s Goolsbee said:

·         I have seen a decidedly tighter lending market over the last year

·         March cut is unlikely, but I don't want to rule out a March cut.

·         An inverted yield curve, typically, is not applicable as a recession indicator

·         Strong jobs data doesn't necessarily mean overheating

·         I won't speculate on the potential for a 50 bps cut

·         I need to see more data showing inflation progress

Ahead of the Nov’23 election, White House/Biden/Fed/Powell is more concerned about elevated inflation rather than the labor market; prices of essential goods & services are still significantly higher than pre-COVID levels, which is creating some incumbency wave among general voters against Biden admin (Democrats). Thus Fed is now giving more priority to price stability than employment (which is quite robust) and not ready to cut rates early as it may again cause higher inflation just ahead of the election. Thus Fed may hike only from July’24, which will ensure no inflation ahead of Nov’24 election (as any rate action usually takes 6-12 months to transmit in the real economy), while boosting up both Wall and Real/Main Street.

Overall, the Fed’s mandate is to ensure price stability, and maximum employment along with financial/Wall Street stability as well as lower borrowing costs for the government. As the US is now paying almost 15% of its tax revenue as interest on debt, the Fed will now not allow a 10Y US bond yield above 4.50-5.00%. Thus some Fed policymakers like Goolsbee are trying to balance hawkish talks by sounding less hawkish/dovish.

Bottom Line:

Fed may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps (synchronized global rate cuts amid a synchronized easing in core inflation); every major central bank including ECB, BOE, and BOC has to follow ‘King Fed/USD’, whatever may be the narrative.

Market wrap:

On Monday, Wall Street Futures slumped as Fed Chair Powell almost poured cold water on an early Fed rate cut in H1CY24. Also mixed report cards of corporates and hotter than expected ISM Service PMI data dragged Wall Street; Gold also slips. Wall Street was dragged by materials, utilities, real estate, consumer discretionary, communication services, banks & financials, consumer staples, industrials and energy, while boosted by techs and healthcare. Dow Jones was boosted by Caterpillar, Apple, Salesforce, Intel, P&G, and Chevron, while dragged by McDonald’s, 3M, Walgreens Boots, Verizon, Honeywell, United Health, Microsoft, Cisco, Boeing and IBM. Nasdaq was also dragged by Amazon and Tesla.

Technical trading levels: DJ-30, NQ-100 Future, and Gold

Whatever may be the narrative, technically Dow Future (38426), now has to sustain over 39000 levels for a further rally to 39200/39500 levels in the coming days; otherwise, sustaining below 38850 levels may again fall to 38400/38200*-38000/37300 levels in the coming days.

Similarly, NQ-100 Future (17700) now has to sustain over 18000 levels for further rally; otherwise, sustaining below 17950-17750 may again fall to 17375-16390 in the coming days.

Also, technically Gold (XAU/USD: 2025) now has to sustain over 2045-2055 for a further rally to 2065-2085-2105/2120 and 2130/2152 levels; otherwise sustaining below 2040-2035, may again fall to 2020-2010-2000-1990-1975-1960/1940 in the coming days.