Dow, Gold slips on hotter US core PPI data

Wall Street Futures slipped Wednesday as techs dragged after helping Tuesday despite hotter-than-expected core CPI data; Gold was also under stress. The market is now expecting Fed rate cuts from June and also the start of QT tapering from June’24. But the Fed may start QT tapering from March’24 and close the same by June’24 before going for rate cuts from July’24 as rate cuts and QT continuation are contradictory, at least theoretically. And Fed can always control the overnight unsecured reverse repo rate, the target of monetary policy by reverse repo operation under a liquidity adjustment facility.

On Thursday, the focus of the market was on US core PPI data along with retail sales for February. The market usually tries to assume the core PCE inflation trend/sequential & annual rate through core CPI and core PPI data which is published around mid-month against core PCE at the month's end. In that sense, core PCE inflation data, which the Fed officially gives priority to gauze the trend & outlook of underlying inflation for any policy action. Officially, the US Congress has given the Fed price stability target of +2% for headline inflation (total CPI, not PCE).

In his recent Congressional testimony, Fed Chair Powell acknowledged that headline/total CPI 2% consistently is Fed’s price target while facing an ‘angry’ Senator as the average price levels for various goods & services affect the daily life of ordinary Americans (vote box for any party) is still substantially higher by over +20% than pre-COVID levels in the election year, despite political blame game of Bidenflation, Putinflation, Corporate greedflation and also shrinkflation. As per the 2% headline CPI, there should be a 10% price increase in general over 5 years, not 20%. Also, real wage growth is now almost flat.

On Thursday, the BLS flash data (NSA) shows U.S. core PPI surged +2.0% in Feb’24, unchanged sequentially and above the market consensus of +1.9%.

On a sequential (m/m) basis (SA), the U.S. core PPI eased to +0.3% in Feb’24 from +0.5% in Jan’24 and higher than the market expectations of +0.2%.

On Thursday, the BLS data also shows U.S. annual (y/y) PPI surged to +1.6% in Feb’24 from +1.0% reading in Jan’24, above market expectations of +1.1% and sharpest increase since Sep’23.

On a sequential (m/m) basis, the U.S. PPI rose 0.6% in Feb’24, from a +0.3% increase in Jan’24, above market forecasts of 0.3% and the sharpest increase in the last 6 months (since Aug’23). In Feb’24, goods prices rose by 1.2%, the most in six months, primarily driven by a 4.4% surge in energy costs and a 1.0% uptick in food prices. Additionally, the cost of services moved up by 0.3%, following a 0.5% increase the previous month, with prices for transportation and warehousing services climbing 0.9% and those for trade declining 0.3%.

Overall, the sequential 6M rolling average rate of core PPI (SA) rate was around +0.16% in Feb’24 with an underlying rate of around +2.8% against +2.3% in 2023 and +6.7% in 2022 on average. Similarly, the underlying rate of headline CPI is now around +2.7% against +1.6% in 2023 and +8.0% in 2022 on average. A lower PPI rate indicates higher pricing power/operating margin for producers; i.e. more greedflation.

Also, fine prints of BLS data show US core personal consumption for the PPI index, equivalent to core PCE increased around +0.4% in Feb’24 after a +0.4% advance in Jan’23. Meanwhile, the sequential rate of core CPI is also around +0.4% in January and February. If this trend/sequential rate of around 0.4% holds in Feb’24 sequential core PCE data, the annual core PCE inflation would be around 2.9-3.0%% from +2.8% annual rate and may also put a question mark on the present trend of disinflation. But overall, the US core inflation is cooling and by Dec’24, the average reading may be around +3.0%.

Conclusions:

The 6M rolling average of US core inflation (PCE+CPI) is now around +3.6%. Fed may cut 75-100 bps in H2CY23 if the 6M rolling average of core inflation (PCE+CPI) indeed eased further to +3.0% by H1CY24.

As per Taylor’s rule, for the US:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(4.50.00-2.00) =0+2+2.50=4.50% (for 2024)

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation for CY23

Fed may announce a plan for QT tapering in the March meeting and close the same by June before going for rate cuts from July’24. Fed, the world’s most important central bank may not continue QT and rate cuts at the same time, which is contradictory.

Ahead of the Nov’23 U.S. Presidential 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 (dissatisfaction) 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. Fed may hike only from July’24, which will ensure no inflation spike just ahead of the 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 (2% core inflation), and maximum employment (below 4% unemployment rate) 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 the 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 in conjunction with overall less dovish/hawkish Fed talks to control the overall market (Wall Street), inflation expectations, and the most vital bond yield. It’s a well-planned jawboning strategy by the Fed in synchronization with ECB, BOE, and BOC to control the overall financial market and bring down inflation towards targets without causing an outright recession; i.e. soft & safe landing.

Fed may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps; every major central bank including ECB, BOE, and BOC has to follow ‘King Fed/USD’, whatever may be the narrative (synchronized global rate cuts amid a synchronized easing in core inflation). In any way, as the Fed is not in a hurry to cut rates in H1CY24, expect generally hotter than expected US labor market data and gradual easing of core inflation data to suit the Fed narrative. The White House/Biden admin will also be happy going for the election supported by a strong economy, robust labor market, and cooling inflation almost at the 2% target.

Market wrap:

On Thursday, Wall Street Futures, Gold stumbled on hotter than expected US PPI data, softer than expected jobless claims, but also briefly boosted by colder than expected retail sales. Blue chip DJ-30 tumbled from around 39700 to almost 39126 before recovering to some extent and closing around 39325, down -136 points, snapping a 3-day winning streak. Similarly, tech-savvy NQ-100 and broader SPX-500 edged down around -0.3% each.

On Thursday, Wall Street was dragged by an interest-sensitive sector led by real estate, utilities, consumer staples, banks & financials, materials, consumer discretionary, healthcare, industrials and techs, while boosted by communication services and energy. Script-wise, Wall Street was dragged by JPM and Honeywell. IBM, Amgen, Verizon, J&J, Intel, Tesla (analyst downgrade) and Nike, while boosted by Microsoft, Amgen, Chevron, Apple, Amazon and Visa.

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

Whatever may be the narrative, technically Dow Future (39300), now has to sustain over 39700 levels for a further rally to 39800/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39650-39450/39400-39300/39200 may again fall to 39000-38600 and  38400/38200*-38000*/37300 levels in the coming days

Similarly, NQ-100 Future (18234) now has to sustain over 18700 levels for a further rally towards 18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, sustaining below 18650/18450-18350/300-18250/200 may fall to and 17300-16830-16750-16550 in the coming days.

Also, technically Gold (XAU/USD: 2161) now has to sustain over 2210 for any further rally to 2225/2250-2275/2300; otherwise sustaining below 2205/2200-2195/2190, may again fall to 2130-2100/2080-2060/2039 and 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card.