Dow slid on stalled core disinflation and Trump trade tantrum

·         But despite stalled core disinflation and stable employment, the Fed may cut on 18th December as the Fed may have made a policy mistake by not cutting in H1CY24

·         In line with the US, China may also provide both monetary and fiscal stimulus in 2025-26 to boost domestic consumption, while facing external trade headwinds

·         Nasdaq surged on Alphabet’s breakthrough in Quantum Computing and Nvidia’s denial of any Chinese restriction

On Tuesday, Wall Street Futures stumbled from Chinese stimulus optimism high on fading hopes of a Fed rate cut 18th of December, while Gold jumped as China’s Central Bank PBOC reportedly resumed the buying of the precious yellow metal after a pause of almost six months. Also escalating geopolitical tensions over Lebanon war and fading hopes of an imminent Gaza and Ukraine war ceasefire boosting gold ahead of US core inflation report and Fed meeting. The Fed may be now preparing the market for a potential pause on 18th December’24 as US core disinflation almost stalled, while the labor market remains robust.

Israel began an incursion into the demilitarized buffer zone in the Golan Heights region while also launching a series of airstrikes aimed at destroying military hardware belonging to the former Syrian regime. Meanwhile, Russia signaled it remained open to potential negotiations with Ukraine but also stressed it still intended to achieve the goals it outlined at the beginning of the conflict. On the other side, Ukraine’s President Zelensky also rejected Trump's demand For Ukraine peace after the Paris meeting, where French President Macron was also present.

Stimulus addicted Wall Street (US stocks) is now hovering around life lifetime on hopes & hypes of dual stimulus; President-elect Trump’s fiscal stimulus and also the Fed’s monetary stimulus. Fed is now cutting rates back-to-back as if the US economy has again fallen in the grip of another financial crisis (recession) after COVID. After holding rates for 13 months at +5.50% (from July’23 to Aug’24), the Fed suddenly began to panic after three months of rolling average (3MRA) of the US unemployment rate going above orange line 4.0% (against red line 4.5% and green line 3.5%).

On Wednesday, the focus of the market was on U.S. inflation data for October’24 as it may influence the Fed's decision for any rate cut action on 18th December’24. Fed will also consider the November’24 employment report along with the overall 6/3-month rolling average (6MRA) of data for both core inflation (CPI+PCE) and employment situation report/unemployment rate.

On Wednesday, the BLS data (NSA) showed the annual (y/y) US core CPI inflation increased by +3.3% in November’24, unchanged from +3.3% sequentially and in line with the market consensus of +3.3%. The US core CPI was unchanged at +3.3% for the last three months (September October November) after stalling at +3.2% in July and August. The core CPI for November 24 is still substantially over December’19 (pre-COVID) and the Fed’s price stability targets for core CPI levels of +2.3%.

Overall, the average of US core CPI remains unchanged at +3.5% in 2024 (YTM) against +4.8% in 2023, and +6.2% in 2022, while the 3M/6M rolling average was around +3.3% (y/y) in October, unchanged from the previous month and the 3M/6M rolling average was 3.3%. As per the current run rate, if the Oct’24 core CPI sequential rate comes again around +0.2 or +0.30%, then the annual rate would be +3.4% or +3.5%; i.e. the US core disinflation pace may have slowed down or even stalled in Q4CY24 too; the 2024 annual average core CPI inflation may remain to be around +3.5%, still substantially higher than +2.3% Fed’s targets. As per current and projected sequential rate, the US core CPI inflation may come down to around +2.3% Fed targets by December’26.

The US core CPI needs to go down at least 1.0%  from present levels of +3.3 for the Fed’s price stability target of core CPI inflation around +2.3%, which is equivalent to core PCE inflation around +1.5%. The Fed needs core CPI and core PCE inflation around 2.3% and 1.5% so that overall average core inflation remains around +2.0%~1.9%.

And Fed also needs to keep the US unemployment rate at least around 4.0% on a durable basis for its maximum employment on a sustainable basis on an average for the longer term, but also aspires to keep it down around historically low unemployment levels of 3.5% (pre-COVID) for a dream combination of maximum unemployment and price stability.

On Wednesday, the BLS data (SA) also showed the sequential (m/m) US core CPI increased +0.3% in November’24 from +0.3% in the preceding month; i.e. unchanged, but in line with the market expectations of +0.3%. Fed needs an average sequential core CPI rate of around +0.2% consistently for 2.0-2.3% core CPI targets in the longer/medium term, but it stalled at +0.3% in the last four months since August’24. Overall, the 6MRA of US sequential core CPI was +0.2%, while the 3MRA was +0.3% and the 2024-YTM average was +0.3% against +0.3% in 2023 and +0.5% in 2024.

The U.S. Core service inflation (w/o energy service) edged up to +4.8% in November’24 from +4.8% sequentially and is still substantially above pre-COVID December’19 levels of 3.0%. The Fed is now closely focusing on core service inflation, which is still quite elevated and sticky led by Shelter/Housing inflation amid higher demand for housing an increasing number of immigrant workers (increasing population), and the legacy issue of lack of adequate supply of affordable housing in the US.

Unlike China, the US is unable to create affordable housing (PPP model/private/public), smart cities, and high-speed railways for the increasing population due to a lack of political bipartisan consensus between Democrats and Republicans. The US has been suffering long from political & policy paralysis to increase the supply capacity of the economy (both social and traditional infra) to meet increasing demand and balance inflation.

Moreover, now homeowners are not ready to accept lower rent due to higher demand and higher borrowing costs (home/mortgage loans). And so far, President-Elect Trump’s election campaign promises didn’t share any meaningful plan to ensure more supply of affordable houses (like Democrats) as Trump may be more interested in the premium housing segment as Trump himself is a big building developer/promoter before becoming US President. In November’24, the US Shelter inflation edged down to +4.7% from +4.9% sequentially, but still substantially above pre-COVID (Dec’19) levels of +3.2%.

In November’24, the BLS data also shows the US super core CPI inflation (w/o food, fuel/energy, shelter/housing, used cars & trucks) edged up to +2.4% from +2.3% sequentially, and December’19 (pre-COVID price stability) levels of +1.7%.

In November’24, the annual US core CPI inflation was boosted by apparel, medical care products & services, alcoholic beverages, tobacco & smoking products, shelter, and transportation services, while dragged by new vehicles, and used cars & trucks.

On Wednesday, the BLS data (NSA) also showed the annual (y/y) US total CPI inflation edged up to +2.7% in November’24 from +2.6% sequentially, in line with the median forecasts of +2.7% and the highest since August’24. The US food inflation edged up to +2.4% from +2.1%, while energy inflation fell by 3.2% from -4.9%. The US food inflation was around +1.8% in December’19 pre-COVID days, while energy inflation was around +3.4% and total CPI (headline inflation) was +2.3%, at the Fed’s target and equivalent to total PCE inflation +1.5%.

In November’24, the US sequential total CPI was boosted by low base effects from last year. Energy costs declined less (-3.2% vs -4.9% in October), mainly due to gasoline (-8.1% vs -12.2%) and fuel oil (-19.5% vs -20.8%) while natural gas prices rose 1.8%, compared to 2%. Also, inflation accelerated for food (2.4% vs 2.1%) and prices fell much less for new vehicles (-0.7% vs -1.3%). On the other hand, inflation slowed for shelter (4.7% vs 4.9%) and transportation (7.1% vs 8.2%) and prices continued to decline for used cars and trucks (-3.4%, the same as in October).

Overall, the 6M rolling average (6MRA) of US CPI was +2.7% in November’24 against +2.8% in the prior month. The 3MRA of US CPI inflation was +2.4% in November’24 vs +2.5% sequentially. The 2024-YTM average US CPI was +3.0% against a yearly average of +4.1% in 2023; officially the US Congress has given Fed price stability mandate of 2.0% CPI on a sustainable basis; not core CPI or core PCE and even total PCE inflation.

However, the Fed usually takes the average of core PCE and core CPI inflation for any policy stance as core inflation generally gives a fair picture of underlying inflation (without volatile fuel/energy and food inflation); also there is always a difference of around 50-100 bps between core CPI and core PCE inflation. But ordinary Americans are now concerned with higher cost of living expenses, which is total CPI.

Overall, the US total CPI is now around +22% higher than pre-COVID December’19 levels against the normal run rate of +10% (@2.0-2.5% per year). Higher cost of living and higher input costs for SMEs were some of the primary economic factors behind the anti-incumbent wave against the Biden-Harris admin and Trump’s win in the November’24 election.

On Wednesday, the BLS data (SA) also showed the sequential (m/m) US CPI edged up at +0.3% in November’’24 from +0.2% in the prior month, in line with market expectations of +0.3% advance and highest since April’24.

In November’24, sequentially the index for shelter rose 0.3% (vs 0.4% in October), accounting for nearly 40% of the monthly all items increase. Food prices went up 0.4% (vs 0.2%) and energy went up 0.2%, led by gasoline (0.6%)fuel oil (0.6%), and natural gas (1%). Other increases were seen in prices for used cars and trucks (2% vs 2.7%), household furnishings and operations (0.6%), medical care (0.4% vs 0.4%), new vehicles (0.6% vs 0%), and recreation. The index for communication on the other hand, was down 1%. Overall, the 6MRA of US sequential CPI was +0.2%, while the 3MRA was +0.2% and the 2024-YTM average was +0.2% against +0.3% in 2023 and +0.5% in 2024.

Conclusions:

As US core inflation (CPI+PCE) almost stalled in H2CY24 at around +3.0% on average, while the unemployment rate remains stable at around 4.0% along with resilient Real GDP and PDPF growth around 2.9% on average, the Fed should pause in December’24. But the market is now still expecting a -25 bps rate cut each in December as the Fed may have missed the opportunity of two rate cuts in H1CY24. Thus to make up, the Fed may also cut -25 bps in Nov’24 and another -25 bps in Dec’24 for a cumulative -100 bps in CY24 (by front-loading to stay ahead of the curve). Fed has to also synchronize with BOC, ECB, BOE, SNB and various other European and APC central banks, most of which are in rate-cutting sprees like in a crisis to avert a looming stagflation or even an all-out recession.

As per Taylor’s modified rule, considering the desired real REPO rate of +1.0%, core CPI inflation targets of +2.3%, unemployment targets of 3.5%, and real GDP growth targets of 3.0% and expected 2024 average levels, the Fed should cut REPO rate from present +5.0% to 4.0% by Dec’25. But the Fed may cut -25 bps both in Nov and Dec’24 despite core disinflation almost stalled in Q3CY24, while the unemployment rate remains stable around 4.0% and economic activity remains resilient as Fed may quicken QT tapering to close the same by Dec’24 to Mar’25.

Also, the Fed may stay alert to ensure financial stability as Trump may be reelected again and create Trump tantrum 2.0. Fed reduced its B/S from around $7.70T in Dec’24 to almost $7.00T by Oct’24. For Financial stability, the Fed may keep its B/S size at around 22% of the estimated US nominal GDP of $30T by CY25. Fed may quicken the QT rate to close the QT to ensure full transmission of rate cuts as QT and rate cuts are two contradictory tools, whatever may be the Fed narrative.

As per Taylor’s modified rule, considering the desired real REPO rate of +1.0%, core CPI inflation targets of +2.3%, unemployment targets of 3.5%, and real GDP growth targets of 3.0% and expected 2024 average levels, the Fed should cut REPO rate from present +5.0% to 4.0% by Dec’25. But the Fed may cut -25 bps in Dec’24 despite core disinflation almost stalling in Q3CY24, while the unemployment rate remains stable around 4.0% and economic activity remains resilient.

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.

Bottom line:

The projected Fed rate cut of 25 bps in Dec’24 may not be assured as US core disinflation may have stalled in Q4CY24 too, while average unemployment remains around 4.0%; the Fed may also give a pause in Dec’24 as the Fed may also want to see Trump 2.0 policies, especially on immigration and tariffs, both of which may affect US price stability (inflation) and goldilocks labor market. The Fed may be now preparing the market for a potential pause on 18th December’24 as US core disinflation almost stalled, while the labor market remains robust. But despite that the market is now almost discounting 98% for another back-to-back rate cut on 18th December.  Usually, the Fed never takes any rate action without keeping the market into confidence to avoid disorderly market movement or an unusual volatility.

Thus despite supportive data including November core PPI data indicating stalled core PCE disinflation for November, and other reasons (need time to assess actual Trump policies), the Fed may cut 25 bps in December’24 if it does not try to talk down (indirect in the blackout period) the rate cut probability at least below 80-50% by next few days, the Fed may cut on 18th December for a cumulative rate cut of 100 bps in 2024 to repo rate 4.50% against average core CPI 3.5% for 2024, so that real repo rate remains around +1.00%. Fed may have made a policy mistake by not cutting from H1CY24 when 3MRA of core CPI was around +3.5% on average. Thus Fed is now cutting 50 bps extra in H2CY24 to stay ahead of the curve.

Market Impact:

On Wednesday, Wall Street Futures slipped in the early European session as a report that China may allow Yuan /CNY devaluation against USD to tackle Trump trade war 2.0. But Wall Street Futures also recovered as USDCNY already appreciated from around 7.00 to 7.30 in the last few months on anticipation and actual Trump 2.0.

On Wednesday, the broader S&P 500 gained 0.9, moving closer to its all-time highs, while the tech-savvy Nasdaq 100 surged 1.7%, reaching a new record. Techs surged as the "Magnificent Seven" mega-cap stocks all advanced, led by Alphabet following a quantum computing breakthrough; also Tesla, Nvidia, Meta, Amazon and Microsoft. China-savvy Dow was under pressure on the concern of a looming Trump trade war tantrum 2.0.

On Wednesday, Dow was also undercut by heavyweight United Health on unfavorable Health Secretary selection by Trump, who is against vaccines; also J&J, Merck & Co, McDonald’s, P&G, Amgen, IBM, Apple, and Chevron. Dow was also boosted by Nvidia, Nike, Amazon, Salesforce, Microsoft, Boeing and Walmart. Nvidia denied any tech restriction in China.

On Wednesday, Wall Street was boosted by Communication services, consumer discretionary, techs, banks & financials, and energy to some extent, while dragged by healthcare, consumer staples, utilities, materials, real estate, and industrials.

On early Thursday Wall Street Futures, USD got some boost, while Gold slips briefly as China may soon announce more monetary and fiscal stimulus. China’s Central Economic Work Conference said:

·         China is about to hit 2024 economic growth target

·         The economy is still facing some challenges

·         China’s President Xi: Unfavorable impact brought by external environment becomes severe

·         China will maintain stable economic growth, stable employment and prices

·         China will implement cuts in interest rates and Reserve Requirement Ratios

·         We will implement a more proactive fiscal policy, and raise the fiscal deficit ratio

·         We will issue an ultra-long special sovereign bond

·         China will implement an appropriate loose monetary policy

·         We need to increase the fiscal deficit ratio

·         China will continue to stabilize the property market

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

·         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.