Dow, NQ slip on flat GDP revision and less dovish Fed talks

On Tuesday, Wall Street Futures were mixed amid hopes & hypes of an imminent Gaza war ceasefire and fading hopes of an earlier & deeper Fed rate cut. The CME Fed swaps now price in only 75 basis points of easing in 2024 against earlier -150 bps a few months ago.

On Wednesday some focus of the market was also on US GDP data. The BEA 2nd estimate data shows U.S. real GDP for Q4CY23 was around $22669.00B against $22490.70B sequentially (+0.79%) and $21990.00B yearly (+3.09%); all in 2017 constant prices and at seasonally adjusted annual rates. In other words, the U.S. economy has expanded by around +0.79% sequentially (Q/Q), which is equivalent to +3.2% annually (y/y).

In the 1st estimate, the U.S. real GDP for Q4CY23 was around $22672.90B against the 2nd estimate of $22669.00B; i.e. negative revision of around $3.90B. The 2nd estimate of real GDP was boosted by a positive revision of personal consumption expenditure (PCE-consumer spending), higher government consumption and investments, while dragged by a negative revision of private CAPEX/investment, and change in private inventories. Although Dow and Gold got some boost on the slightly softer revision of Q4CY23 real GDP, but soon stumbled as the negative revision was mainly due to lower inventories, while consumer spending was revised higher.

Considering the full 2023, the US economy grew 2.5%, compared to 1.9% in 2022. Overall, the U.S. real GDP for CY23 is now around $22374.35B vs $21822.04 in CY22 (+2.5%) and $21407.69B in CY21 (+1.9%); i.e. the U.S. real GDP grew +2.5% in CY23 against +1.9% in CY22, below Fed’s estimate of +2.6%. The U.S. real GDP is now growing around +0.8% average sequential rate (q/q); i.e. +3.2% yearly rate, above +2.0% yearly (y/y) trend rate, which is +0.5% sequential (q/q) rate.

Although the Q4CY23 real GDP growth was higher than expected, overall CY23 real GDP growth at +2.5% was less than the Fed’s estimate of +2.6% and the Fed will not be influenced by such minor deviation in real GFP growth.

On Wednesday, Fed’s Logan said:

·         We need to disconnect the idea of slower runoff (QT) pace and ending QT

·         Slowing balance-sheet runoff means controlling the pace

On Wednesday, Fed’s Collins said:

·         I need to see more evidence that the disinflationary process will continue before starting to carefully normalize policy

·         More time is needed to discern if the economy is sustainably on a path to price stability, with a healthy labor market

·         Expecting all of the data to speak uniformly is too high a bar. We shouldn't overreact to individual data readings

·         I want to see continued evidence that wage growth is not contributing to inflationary pressures

·         The return to 2% will likely require demand to grow at a more moderate pace this year

·         In assessing the inflation progress, I will look for inflation expectations remaining well anchored, and an orderly moderation in labor demand

·         I want to see continued declines in housing inflation and non-shelter services inflation

·         The threat of inflation remaining above 2% has receded

·         I see risks as more balanced between cutting too early and too late

·         We expect we will see more of a decline in reserves and will be paying attention to what point it might be appropriate to revisit QT

·         I expect to see more declines in bank reserves

·         It is too early to tell if we are extracting the right signal from housing inflation data

·         We should be taking time on policy

On Wednesday, Fed’s Bostic said:

·         There is still work to do on inflation, haven't declared victory

·         I expect inflation to continue on a trajectory toward 2%

·         I am comfortable being patient with the policy

·         It won't be a fast march to 2% inflation, expect volatility

On Wednesday, Fed’s Williams said:

·         Inflation pressures have fallen a lot amid broad-based improvement

·         I see a likely uneven path back to 2% inflation

·         I will let incoming economic data determine the monetary policy path

·         I am fully committed to achieving the Fed’s 2% inflation target

·         There are still some ways to go before hitting the 2% inflation target

·         The current 3.7% unemployment rate is around the long-term level

·         The economy and job market are strong, and imbalances waning

·         I see growth at 1.5% this year, unemployment up to around 4%

·         Inflation is to hit 2%-2.25% this year, 2% in 2025

·         Risks to the outlook exist on the ups and downsides

·         Risks to Fed job and inflation mandates are moving into better balance

·         The debate over rate cuts is a sign of progress in lowering inflation

·         The Fed is likely to cut rates later this year

·         Still, some way to go before hitting 2% inflation

·         The pandemic aftermath is still affecting the economy, but I am optimistic about the outlook

·         I see a repricing of commercial real estate. It will take years for commercial real estate to adjust to the new reality

·         Fed likely decode rates later this year

·         I am confident that challenges to commercial real estate can be navigated

·         Three interest rate cuts in 2024 are reasonable for the US central bank officials to debate

·         The current US economy is similar to where it was during the December policy meeting

·         It is unclear what impact a potential US government shutdown would have on the economy

Conclusions:

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 are 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.

Bottom Line:

Fed, ECB may also 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 BOE, BOC, RBI, and also PBOC has to follow ‘King Fed/USD’, whatever may be the narrative.

Market wrap:

On Wednesday Wall Street Futures, Gold slipped on less dovish Fed talks and fading hopes of an imminent Gaza war ceasefire. Wall Street was boosted by real estate, banks & financials, consumer discretionary, utilities, industrials, materials, and consumer staples, while dragged by communication services, techs, healthcare and energy. Dow Jones was boosted by Boeing, Goldman Sachs, Walt Disney, Visa, Caterpillar, Home Depot, JPM and McDonald’s, while dragged by United Health, Intel, 3M, Nike, Apple, Travelers, MERCK & Co, Cisco, Amgen and Amazon.

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

Whatever may be the narrative, technically Dow Future (38972), now has to sustain over 39500 levels for a further rally to 39700/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39450-39350 may again fall to 39250/200-39150/39000-38950/38600 and  38400/38200*-38000*/37300 levels in the coming days.

Similarly, NQ-100 Future (18000) now has to sustain over 18400 levels for a further rally towards 18500/18675-18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, sustaining below 18350/300-18250/200 may fall to and 17300-16830-16750-16550 in the coming days.

Also, technically Gold (XAU/USD: 2031) now has to sustain over 2045-2055 for any further rally to 2067/2085-2100/2125-2130/2175; otherwise sustaining below 2030, may again fall to 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card.