Dow slid on less dovish Powell/Fed talks and Tsunami warning

·         BTCUSD topped 100K after Powell termed it as ‘virtual gold’ and a competitor of Gold, not USD; Trump’s Crypto optimism also helped the Bitcoin bubble

·         Fed may pause in Dec’24 not only for stalled core disinflation but also to analyze the impact of Trump’s policies on US price stability and employment

·         But if there is no major impact of Trump policies on inflation and employment, the Fed may continue to cut 25 bps every alternate meeting in 2025-26 and H1CY27

Stimulus-savvy Wall Street has been in an early Santa mood for the last few days on hypes of dual stimulus; both monetary and fiscal. The market is now expecting synchronized global easing in 2025-26 by the Fed, PBOC, ECB, BOE, BOC, and even RBI along with Trump 2.0 fiscal stimulus of around $1T. The latest JOLTS hiring data may be indicating a robust US labor market with a +200K average NFP job addition for 2024 on an average. Wall Street is also topping fresh life time highs almost every other day in hopes soft landing, even after restoring price stability, while almost all other major economies are now facing a hard landing, stagflation and even deflation. Techs are also helping Wall Street in hopes of a less hawkish China Cold War policy under Trump 2.0, being managed by Musk & Company.

Wall Street Futures were also buoyed last week by hypes of an imminent Gaza war ceasefire after US President Biden successfully brokered the Hezbollah war ceasefire. But occasional breaches of the Lebanon/Hezbollah war ceasefire and Russian nuke narrative also buoyed Gold and silver, undercutting stocks. Lebanon Ceasefire may be also on the brink of collapse as tit-for-tat fire intensifies in the last few days soon after the Biden-sponsored deal. Also, Trump’s selection of Bessent as the next US Treasury Secretary boosted UST, dragged USD/US bond yields to some extent, and buoyed US stocks, while undercutting Gold. Overall, the market may be now expecting a ‘moderate’ Trump 2.0 despite early Twitter/Truth tantrum under a ‘sensible’ influential advisors team, having very close to Trump.

On Wednesday, some focus of the market was also on Fed Chair Powell to see whether he can shed some light on fading hopes of another back-to-back rate cut on 18th December. Although the market is now expecting around 75% of another rate cut in Dec’24 amid mixed Fed talks and mixed economic data, the market is now also focusing on Powell & Co talks and NFP job data for November to be released on 6th February.

On Wednesday (4th November), Fed’s Chair Powell said in a Dallas Fed symposium/ NY Times Deal Book Summit Q&A session:

·         Lower survey response levels have likely increased volatility in estimates of labor market data and there are unusual revisions on both sides even after one year

·         Fed is trying to be in a middle place where policy is less restrictive so inflation can fall, but not damage the labor market.

·         Fed sees discontent over rising prices.

·         US aggregate numbers are good but pressure on lower-income households

·         State of Financial Literacy in Congress is Mixed

·         The US economy is the envy of the world, I'm going to do everything to keep it there.

·         The economy is in good shape and no reason that can't continue

·         Unemployment is still very low, and making progress on inflation

·         We've moved very very quickly with rates

·         The US economy has exceeded expectations, with GDP growth of around 2.5% and inflation (PCE) down to 2.3% from a peak of 7.2%. While the labor market remains strong

·         There are some challenges in addressing stickier inflation

·         The economy is stronger than we thought it would be

·         I feel very good about where monetary policy is

·         The US economy is in remarkably good shape

·         On a path to more neutral rates over time, though downside risks are less than thought, the Fed can afford to be cautious in finding neutral.

·         We can afford to be cautious in finding neutral.

·         Growth is stronger than we thought in Sept and inflation has come in a little higher.

·         The economy is strong, and it's stronger than we thought it was going to be in September. The downside risks appear to be less in the labor market, growth is stronger than we thought, and inflation is coming a little higher. So the good news is that we can afford to be a little more cautious as we try to find neutral.

·         Trump said the same things privately in his first administration as he did publicly (about more White House control on the Fed)

·         There is broad support in both parties (Democrats and Republicans) for an independent Fed; do not think there is a risk of losing it.

·         I am not worried about the Fed losing its independence under Trump.

·         The US Fed Chair and Treasury Secretary have a long tradition of a weekly lunch together; the same institutional relationships between the Fed and Treasury will continue under the new admin; although I don’t know very much personally about the newly selected Treasury Secretary by President-Elect Trump, but I expect some good relationship whoever may be the new Treasury Secretary.

·         Part of the Fed's independence is that it's self-funded; Independence gives us the ability to make the best decisions; we may not be 100% right always, but we try to take lessons from past mistakes and move forward more diligently

·         Bitcoin is too volatile to rival the dollar; it may be termed virtual gold; but people are not using it as a form of payment or as a store of value. It's highly volatile. It's not a competitor for the dollar—perhaps --it's a competitor for gold

·         Bitcoin is used as a speculative asset; it is a competitor with gold, not the US dollar

·         We regulate and supervise banks, and we want the interaction between the crypto business and banks to not threaten their safety

·         There is a need for consumer protection, ensuring buyers fully understand crypto risks

On Wednesday, Fed’s Musalem said:

·         The risk that inflation won't cool fast enough has risen

·         Inflation has been higher than desired; there are worries about the job market being down

·         There is uncertainty about monetary policy, and the election has weighed on the economy

·         Monetary policy is moderately restrictive

·         Chances of labor market trouble are low right now

·         I expect that restrictive monetary policy will continue to cool inflation

·         It's possible to pause on cuts at upcoming Fed meetings

·         Time may be approaching to slow or pause rate cuts

·         Monetary policy is well-positioned for what lies ahead

·         The labor market is no longer overheated, a source of inflation risk

·         I expect moderation in economic growth and hiring

·         It is important to keep monetary policy options open amid uncertainty

·         Additional policy easing may be needed over time

·         There is uncertainty over the neutral rate, it could be between 3-4%

·         Expect moderation in economic growth and hiring

·         The labor market is no longer a source of inflation risk

·         Monetary policy is well-positioned for what lies ahead

·         Too much policy easing carries risks

·         Fed is currently well-above neutral

·         It's possible to pause on cuts at upcoming Fed meetings

·         Will wait to see the data before deciding on the December meeting

·         Easing too much too soon is a greater risk than too little

·         The US budget is on an unsustainable path; revenue and spending need to be better aligned; but debt is not unsustainable

·         Higher immigration is part of the reason growth was strong in 2023; rising immigration/population and consumption is one of the main reasons behind above-trend US GDP growth in the last few quarters

·         We're modeling, looking at, and evaluating tariff proposals

On Wednesday, Fed’s Barkin said:

·         If inflation is high in Q1, that would be a signal that we have a lot more to do

·         I'm encouraged by where inflation is headed

·         We want to get to a somewhat restrictive policy

·         We can't ignore the October jobs report, and also inflation is still above 2%

·         I expect overall housing inflation to decline over time

·         I'm encouraged by where inflation is headed

·         I see positives and risks on both sides of the Fed's mandates

·         I see positives on both sides of the Fed's mandate

·         You can't ignore last month's jobs report at +12K even if there are skews

·         To me, normalizing is a slower and more careful path to bring rates to neutral

·         Even the best models of neutral have a 200 bps span

·         We have people as low as 2.5% for neutral and as high as 3.75% at Federal Reserve

·         We want to get to a 'somewhat restrictive' policy but there are different points of view on what there is

·         Surveys of business leaders show 'significantly more optimism' since election

·         It's a judgment call for when you are done recalibrating and start moving more slowly to normalize

·         Whether tariffs cause inflation depends on the Fed's response

·         The bear to raising prices is lower than it was before the pandemic

Bottom line:

The Fed may be now preparing the market for a potential pause on 18th December’24.

Looking ahead, the focus of the market will be on the Nov’24 US NFP/BLS job report and also the core CPI inflation report; if there is no meaningful rise in the unemployment rate and an unusual drop in core CPI inflation, the Fed may pause on 18th Dec’24. Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it will maintain 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed will now try to bring down average core inflation from around 3.0% to 2.5% by keeping the unemployment rate at least around 4.0% by Dec’25 and then 2.0% core inflation and 3.5% unemployment rate by Dec’26 to achieve its mandate of maximum employment and price stability.

Market Impact:

On Thursday, Wall Street Futures got some early boost on hypes of an imminent Gaza war ceasefire as Hamas confirmed the resumption of ceasefire talks, while the US warned Israel shouldn’t blow ‘small’ Lebanon ceasefire violations out of proportion and resume an all-out war. But soon after slightly hotter than expected US jobless claims, Wall Street waved and eventually stumbled on fading hopes of a Fed rate cut on 18th December as Fed Chair Powell and also most of the other influential Fed policymakers are now preparing the market for a pause for at least January-Feduary’25.

Late Wednesday, USDBTC jumped above the much-awaited 100K to almost 104K. BTCUSD topped 100K after Powell termed it as ‘virtual gold’ and a competitor of Gold, not USD; Trump’s Crypto optimism also helped the Bitcoin Tulip bubble. On early Trump nominated crypto-friendly Stkins to replace Gensler as next SEC Chair. Subsequently, USDBTC soared to almost 104K early Asian session Thursday.

On Thursday, Wall Street was boosted by consumer discretionary, consumer staples, energy, utilities, and banks & financials, while dragged by materials, industrials, healthcare, communication services, real estate, and techs. Scrip-wise, Wall Street was boosted by 3M, Merck & Co, McDonald’s, Microsoft, Coca-Cola and Amgen, while dragged by United Health, Salesforce, Honeywell, Amgen, Caterpillar and Boeing. The S&P 500 and Nasdaq-100 edged down 0.2%, while the Dow Jones Industrial average stumbled almost 350 points.

On Thursday, Wall Street was also dragged by an earthquake with a magnitude of 7.0 that struck off the coast of California, triggering a brief Tsunami warning. The big quake was followed by a smaller 5.8-magnitude earthquake.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 45100) now has to sustain over 45500 for any further rally to 45800/46000-46200/46400 and 46800/47000-47500/48000 in the coming days; otherwise sustaining below 45450/45200, DJ-30 may again fall to 45000/44750-44650/44200, DJ-30 may again fall to 43900/43300-42600/41600 in the coming days.

Similarly, NQ-100 Future (21450) has to sustain over 21200 for a further boost to 21500 and further to 21700/21900-22050/22500 and even 21450 levels in the coming days; otherwise, sustaining below 21150, NQ-100 may again fall to 20950/20850-20500/20300 and 20000/19800-19650/19350 in the coming days.

Technically, SPX-500 (CMP: 6050), now has to sustain over 6100 for any further rally to 6150/6200-6350/6500 in the coming days; otherwise, sustaining below 6075/6050 may again fall to 6000/5950-5900/5850 and 5675/5600-5550/5500 in the coming days.

Also, technically Gold (CMP: 2650) has to sustain over 2660-2680 for a recovery to 2700-2725 and further 2735/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2655-2630 may again fall to 2605/2600 and 2590/2565 and further fall to 2550/2500-2470/2450 in the coming days (depending upon Fed rate cuts, Gaza/Ukraine war trajectory); Gold surged almost 75% in the last one year since Gaza war started back in October’23. Now it may retrace to $2100 levels if Trump indeed can mediate both Gaza and Ukraine war ceasefire by early 2025.

Similarly, BTSUSD now has to sustain over 110000 levels for the next leg of the rally, otherwise, sustaining below 108000-105000, may again fall to around 90000/73000-50000/44000 in the coming days.