Dow, Nasdaq slip on hotter JOLTS job openings report

On Monday, Wall Street Futures recovered from their panic low after Fed’s Brar sounded less hawkish than expected as he talked about careful steps/caution in the next hike. On early Monday Asian Session, Wall Street was also boosted as the Biden admin was able to avert the government shutdown at the last minute after intense political drama (as usual).

On Saturday, the U.S. House led by Republican Speaker McCarthy passed the CR/stopgap funding bill by 335-91 votes and the U.S. Senate led by Democrat Majority Leader Schumer also passed the same at the last minute (late Saturday) by 88-9 votes, so that President Biden can sign it in time to avoid another government shutdown for scarcity of fund/exhaustion of borrowing (credit card) limits in the world’s biggest economy and most democratic country.

As usual, the latest CR bill was passed by the U.S. Congress after days of political soap operas. But the market was more or less confident about it and thus it was in expected line. Wall Street Futures got some boost early Monday Asian session but soon stumbled on growing political and policy paralysis with the U.S. economy coupled with the Fed’s higher for a longer stance to ensure a +2% price stability mandate sustainably.

The market is now concerned about subdued discretionary consumer spending amid the higher cost of living and elevated cost of borrowing along with slowing China. The corporate earnings may be significantly affected. The U.S. now needs targeted fiscal stimulus/reform to improve the supply capacity of the economy along with tighter monetary policy from the Fed to reduce demand of the economy, so that both supply demands balance each other for the required price stability without causing an all-out recession (hard landing).

Wall Street and Gold were also under stress on the Fed’s higher-for-longer stance and the growing tech/cold war between the U.S. and China. On late Monday, the U.S. warned China that more semiconductor export curbs are coming. A U.S. official said: “The Biden administration warned Beijing to expect updated rules curbing shipments of AI Chips and chip-making tools to China as soon as early October”.

On Tuesday, the U.S. Treasury Secretary Yellen said:

·         I don't think we should decouple from China, but we have over-dependence on China in areas of national wellbeing

·         Higher for longer rates is by no means a given

·         Progress in AI is unbelievably rapid and could make a significant difference in productivity

·         U.S. public debt cost forecasts assume a reduction in interest rates

·         Debt service costs will be 1% of GDP for the next decade, assuming deficit reduction

·         I am very optimistic about the U.S. economic outlook

On late Monday, Fed’s Mester said:

·         Will keep rates restrictive to get inflation down

·         I don't see the dollar getting dethroned, the dollar is a very strong currency

·         Higher rates are needed to make sure the disinflation process continues

·         AI technology will change a lot in the economy

·         The Fed will keep rates restrictive to get inflation down

·         It’s likely the FOMC will need to raise rates one more time this year

·         The job market is strong but slowing, coming into better balance

·         The economy has grown more strongly than expected

·         We see some signs that wage pressures are easing

·         Inflation is ‘too high’ but sees welcome signs of progress in lowering price pressures

·         The risks to inflation are tilted toward the upside

·         The economy's on a ‘good path’ amid ongoing re-balancing of supply and demand

·         The Fed will need to keep rates high to ensure a return to 2% inflation

·         Credit conditions have tightened in line with monetary policy

·         It is not clear that the surge in long-term yields will be sustained

·         Yields are up on a number of factors, including a changed outlook on growth

·         I am likely to favor a hike at the next meeting if the current economic situation holds

·         I don’t see rate cuts happening any time soon

·         Long-term yield rise will affect the monetary policy outlook

·         Higher long-term rates will moderate growth

·         The Fed likely at or near peak for interest rate target

·         I expect to hit 2% inflation by the end of 2025

On Tuesday, Fed’s Bostic said:

·         The Fed still has a way to go to get inflation back to target

·         The Fed should be on hold for a long time

·         We're not in a hurry to hike again, but also not in a hurry to cut and send a premature signal of policy easing

·         Let's be patient, we don't have to get to 2% tomorrow

·         There is no urgency for the Fed to do anything more

·         As long as inflation expectations don't spike the Fed can afford to be patient

·         The Fed should let the world move and be patient as long as inflation continues to slow

·         The economy is "getting back into balance"

·         The economy has been incredibly resilient, but the "fervor" of spending and investment has decreased

·         The question now is how fast the economy will slow

·         The Fed still has a ways to go to get inflation back to target

·         The Fed is in restrictive territory and that is helping inflation fall

·         Higher long-end rates matter if they slow growth too much, no sign yet

·         Energy prices & geopolitics pose upside risks to inflation, the loss of childcare benefits, and student loan repayments, which could sap demand

·         I am assessing the need for below-trend GDP growth to cure inflation, it depends on assessing other trends like productivity

·         The share of goods with faster price increases has declined; businesses agree that the slowing trend is likely to continue

·         I see inflation approaching the 2% target by the end of 2025

·         Signs of balance are also coming to the labor market, with slower job growth concentrated in the healthcare and social assistance industry

·         Businesses say that it is getting easier to hire, & wage growth is likely to slow

·         I see the next move as a single quarter-point rate cut towards the end of next year

·         Higher long-term rates are not impacting business beyond what would happen in a normal tightening cycle

·         Higher long rates matter if they start to slow growth too much, so far that is not happening

·         I see one rate cut in 2024 near the end of the year

·         Reports suggest US labor market slowdown will continue

·         I am monitoring the impact of tighter financial conditions

On Tuesday, the focus of the market was on JOLTS job openings data for July, which the Fed watches keenly for the underlying health of the labor market (leading indicator).

U.S. job openings (private + public) unexpectedly surged from a 28-month low in Aug’23: JOLTS/BLS data

On Tuesday, BLS/JOLTS (Job Openings and Labor Turnover Summary) flash data showed the number of job vacancies/openings in the U.S. increased to 9610K in August from 8920K in June, above market expectations of 8880K, and the 1st increase after the 3rd consecutive month of a decline in job openings.

In August, U.S. job openings increased in professional and business services (+509K), finance and insurance (+96K), state and local government education (+76K), nondurable goods manufacturing (+59K), and Federal government (+31K).

After positive revisions in July, the 3M rolling average of job openings to unemployed person ratio is now around 1.53 against the 2022 average of 1.87 and pre-COVID level of 1.25. The U.S. economy is still suffering from an acute shortage of labor force due to various structural as well as cyclical issues including unfavorable demography, shrinkage of workforce after COVID, early retirements, legal immigration issues, lack of properly skilled workers, outsourcing, and a increasing number of multiple job holders/gig workers/freelancers

Fed is now looking for at least a 1.50 ratio of job openings/unemployed persons consistently as a sign of the labor market cooling. The 3M rolling average data is showing some cooling in the labor market amid higher borrowing costs for businesses and also the resolution of immigrant worker's issues after COVID. JOLTS job opening survey data is one of the preferred labor market indicators for the Fed to gauge the underlying strength of the labor market (as a leading indicator).

Market wrap:

On Tuesday, Wall Street Futures were dragged by more hawkish than expected comments by Fed’s Mester, while also got some support from less hawkish comments by Fed’s Bostic. But Wall Street Futures tumbled soon after hotter than expected JOLTS job opening reports, which may keep the Fed for another +25 bps hike on 1st November and the continuation of higher for longer policy. As a result, the USD/US bond yield also surged, while Gold slipped as the US10Y and 30Y bond yields reached their highest level since 2007, with the longer-term bond trading above 4.9%. The rise in yields was also causing concern in the credit market, with at least two issuers canceling sales on Tuesday.

On Tuesday, blue-chip DJ-30 stumbled almost -600 points from the session high and closed around 33175 (-1.50%); tech-heavy NQ-100 tumbled -1.90%, while broader SPX-500 slumped -1.4% to its lowest levels since June’23 on Fed’s higher for longer policy stance.

On Tuesday, Wall Street was dragged by consumer discretionary, real estate, tech, financials, communication services, healthcare, industrials, consumer staples, materials, and energy to some extent, while supported by only utilities (beneficiaries of higher bond yields). DJ-30 was boosted by Boeing, Intel, Verizon, Walgreens Boots, Nike, Chevron, P&G and J&J, while dragged by Goldman Sachs, American Express, Home Depot, Microsoft, Walt Disney, Amgen, Apple, and Caterpillar. Also, Amazon and Tesla tumbled.

On Tuesday, Wall Street was also dragged by growing U.S. political and policy uncertainty as Republican House Speaker McCarthy was ousted by some of his own colleagues as he saved the Biden admin from a shutdown by approving the CR/stopgap funding bill. Democrats have termed it as Republicans' civil war.

Conclusion:

The Fed is now preparing the market for another hike in November and then a possible end of the tightening cycle by Dec’23. Overall, the U.S. labor market and core inflation trajectory are still hot enough for another Fed hike. Fed never surprised the market with its rate action and by mid-October (after core inflation and labor/wage data for September), it will be clear whether the Fed will go for another +25 bps hike in Nov’23 before going for a final pause in Dec’23.

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)*(5.50.00-2.00) =0+2+3.50=5.50%

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 (CPI+PCE) =5.50% (for 2022); H1CY23 average core inflation around +5.40% (~5.50%)

As there is no significant easing of core inflation, especially core service inflation, the Fed may go for another +25 bps hike in Nov’23 and possibly the end of a tightening cycle. But, if core CPI inflation indeed eased further to below +4.0% by Oct’23, then the Fed may refrain from any further rate hike in 2023 and may also indicate some rate cuts in Q2CY24 in the Dec’23 SEP (ahead of the US Presidential Election in Nov’24) to keep real repo rate around +1.00% levels (restrictive zone).

Looking ahead, oil prices may stay elevated in the coming months between $75-95 instead of the earlier $65-75 despite US efforts to bring more supply from, Mexico, Brazil, Iran, Iraq, and Venezuela. OPEC/Saudi Arabia will not ‘cooperate’ with the U.S. for ‘breach of trust’ in refilling SPR (as agreed ‘verbally’). Elevated oil prices around $90 will continue to boost energy/transportation/logistics costs and core inflation. Saudi Arabia/most OPEC producers and even Russia are now seeking $85 oil prices on a sustainable basis to fund budget deficits, EV transition, and also the cost of the Ukraine war. China may also deploy more targeted stimulus to bring out the economy from the deflationary spiral in the coming days, which may also support elevated oil prices.

The U.S., as a producer, is also benefitting from elevated oil prices. The U.S. is also a beneficiary of the Russia-Ukraine war and other geo-political tensions involving North Korea, China, and Iran. The U.S. defense/military industry is now booming. Also, the lingering Cold War mentality with China is resulting in supply chain disruptions and elevated inflations. The global economy continues to face the daunting challenges of macro-headwinds- elevated inflation, high levels of debt, tight and volatile financial conditions, continuing geopolitical tensions, fragmentations, and extreme weather conditions.

Going by the present trend/run rate, the U.S. core CPI may fall to +3.8% by Dec’23 and +3.4% by Feb’24, which may keep the Fed to hold on rates at +5.7% till at least Aug’24 before going for any rate cuts -25 bps or even -50 bps each in Sep’24 and Dec’24. Fed would like to boost Wall Street as well as Main Street before Nov’24 U.S. Presidential election. Fed has to ensure a soft landing; i.e. price stability along with financial/Wall Street stability and Main Street stability.

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut from June’24 (H2CY24) to ensure a soft landing while bringing down inflation. Also, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%. This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price stability and soft-landing.

Overall, it seems that the White House would be quite happy if the Fed could bring back core inflation towards 2% on a durable basis, while keeping the unemployment rate below 4% ahead of Nov’24, the U.S. Presidential election. The Fed is itself eager to cut its losses by cutting rates. The U.S. 2Y bond yield is now hovering around +5.13% and may soon scale 5.25-5.50% in hopes of another +25 bps Fed rate hike for a terminal repo rate of +5.75%.

Bottom line:

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

Whatever may be the narrative, technically Dow Future (33175) now has to sustain above 33300-500 levels for any recovery to 33850/34000-34150/34250 and 34300/34555-34600/34825-35070/200-415/850 levels; otherwise, sustaining below 33000 may again fall to 31700-31500 levels in the coming days.

Similarly, NQ-100 Future (14799) now has to sustain over 14600-550 levels for any recovery to 14925/15150-15325/15500 and 15750/900-16000/655 in the coming days; otherwise, sustaining below 14500 may further fall to 14300/175-100/13890 and 13650-13125 levels.

Gold (XAU/USD: 1823) now has to sustain above 1843-1837 for any recovery to 1867/1875-1885/1900 and 1910/1920-1926/1937 and 1952/1970 levels; otherwise, sustaining below 1835, may further fall to 1825/1813*-1798/1770 level in the coming days.