Dow, SPX, and Gold surged on less hawkish Fed talks and soft data

·         NQ boosted by Nvidia/AI Chip optimism; Fed is now gradually preparing the market for the rate cut cycle from Dec’24 and may show confidence by Sep’24

On Friday, Wall Street Futures were almost flat on subdued US/UM consumer sentiment and hotter than expected US/UM 1Y inflation expectations data; consumers are quite worried about the higher cost of living, increasing borrowing costs, and some softness in the labor market.

On Wednesday, Wall Street, Gold stumbled from a softer-than-expected US CORE CPI high after the Fed’s hawkish hold, but the overall impact was quite limited as the Fed shifted 50 bps rate cuts deficit for 2024 to 2025-26. Now Fed will start the rate cuts cycle from Dec’24, just after the Nov’24 US election to keep both Democrats and Republicans happy and continue -25 bps rate cuts for the next eight quarters each in 2025-26 @-25 bps and then close the rate cut cycle after cutting -25 bps twice in June and Dec’27 (H1/H2) for a terminal rate +2.75% against pre-COVID terminal rate +2.50%. The market was expecting at least -50 bps Fed rate cut in 2024 (Nov+Dec’24) before Fed and May inflation data; but after softer inflation data, the Market also gave a higher probability of Sep’24 rate cut; i.e. ahead of the Fed, the market was discounting almost -75 bps (three) rate cuts.

On Thursday, Wall Street Futures and Gold got some boost from the Fed panic low after a softer-than-expected US PPI report but soon stumbled. In any way, Wall Street Futures were also buoyed by upbeat auctions OF US 30Y bonds. At EOD, Wall Street closed almost flat, while the European market tumbled on growing political/election uncertainty, especially in France. Gold tumbled below $2300 after it became almost clear that the Fed may not cut before the Nov’24 US election and China is slowing down its FX/USD assets diversification to Gold after repeated visits by Yellen to PBOC over the last few months.

On Thursday, some of the focus of the market was on US core/total PPI data after core CPI data and the Fed’s meeting a day before, in which Chair Powell almost made it clear that the Fed may start the long-awaited rate cut cycle from Dec’24, just after the Nov’24 election as Fed does not expect faster disinflation data in Q3CY24 or even H2CY24. Thus Fed/Powell may not take any undue risk by preparing the market well in advance (at least 3 months ago) for any rate cut action from Sep’24. Elevated inflation, at least 20% higher than the pre-COVID period is now a big anti-incumbent issue for the Biden admin ahead of the Nov’24 election along with other issues like excessive immigration (cheaper labor force), now affecting job opportunities of native Americans.

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 is now a laggard indicator. But 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 bank 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 around 8-10% price increase in general over -4-5 years, not 20%. Also, real wage growth is now almost flat. All these caused lower Biden approval than Trump in the forthcoming Nov’24 US Presidential election; i.e. Biden is now trailing in the election and the market may be also discounting gradually an emphatic Trump win and the continuation of Trump tax cut policy beyond 2025.

On Thursday, the BLS flash data (NSA) showed annual (y/y) U.S. core PPI (w/o food & energy) increased +2.3% in May’24, from +2.4% sequentially, and lower than the market consensus of +2.4%.

On a sequential (m/m) basis (SA), the U.S. core PPI was almost unchanged/decreased (-0.090%) in May’24 from +0.5% in Apr’24, and below the market expectations of +0.3% increase.

Overall, after the latest 4M revision, the 2024 (YTD) average of core PPI is now around +2.2% (vs prior +2.1%) against +2.9% in 2023, +7.8% in 2022, and pre-COVID levels around +1.5%; the 6M rolling average of US core PPI is now around +2.2% (vs earlier +2.1%). The 6M rolling average of sequential (M/M) core PPI is now around +0.2% in May’24 against +0.2% in the Apr’24 report, while the 2024 (YTM) sequential core PPI rate is now around +0.28%; the Fed needs +0.13% core sequential core PPI rate on a sustainable basis for its target/pre-COVID levels of +1.50%, so that core CPI would come around +2.0% targets.

On Tuesday, the BLS data (NSA) also shows U.S. annual (y/y) total PPI increased by +2.2% in May’24 from +2.3% reading sequentially, and below market expectations of +2.5%.

 

On a sequential (m/m) basis, the U.S. PPI contracted -0.2% in May’24, from a +0.5% increase in the previous month, and below market forecasts of a 0.1% increase. The fall in total PPI may be attributed to a fall in gasoline prices.

Overall, after the latest revision, the 6M and YTM rolling average of US PPI is now around +1.7% and +1.8% against the 2023 average of +2.0%.

In May’24, producer prices (PPI) for services increased +2.6%, while that of goods increased +1.6%.

Also, fine prints of BLS flash data show US core personal consumption for the PPI index, equivalent to core PCE increased around +0.3% in May’24 after a +0.2% advance in the previous month, while increasing +2.8% annually (y/y).

If this trend/sequential average rate of around 0.3% holds in May’24 sequential core PCE data, the annual core PCE inflation would be around 2.8% in May’24 unchanged sequentially. In that scenario, the 6M rolling average of core PCE inflation should be around +2.8% against 6M rolling average of core CPI around +3.7% and in that scenario, 6M rolling average of US core inflation (PCE+CPI) would be around +3.3%; Fed may not start the rate cut cycle until this average core inflation (PCE+CPI) goes at least below 3.0% on a sustainable basis. This may not be possible before Sep’24; i.e. Fed may not get the required confidence for indicating a definitive rate cut before Sep’24.

In that scenario, the Fed may give a definitive signal for eleven rate cuts from Dec’24 QTR onwards in its Sep’24 dot-plots, just before the Nov’24 election to keep both Wall Street, Main Street as well as Capitol Hill Street happy; both Democrats and Republicans may not object Fed in that case; Powell will keep both sides of the political Street happy.

 

On Friday, Fed’s Mester said:

·         We probably won't get to 2% inflation until 2026

·         It's important not to wait too long to cut rates

·         Risks to inflation to the upside, dual-sided for the job market

·         I penciled in 3% for a longer-term rate in the latest forecasts

·         I didn't revise my SEP forecasts after the CPI data

·         We got to see some more progress

·         CPI data this week was very good, if we got a lot of months like May's CPI data, we would be feeling very good

·         As inflation comes down, both mandates remain very important

·         Businesses say it's harder to raise prices this year

·         The policy is well-positioned for risks on both sides

·         I want to maintain a healthy job market as inflation falls

·         I want a few more months of similar inflation data

·         The median SEP projection is close to mine for the economy

·         There is still work to do to gain confidence in inflation

·         We are starting to see inflation move down again after stalling

·         The FOMC is doing good work understanding and forecasting the economy

·         The labor market is still very strong

·         We are in a good position with monetary policy

·         The neutral interest rate moves around all the time

·         It is clear that monetary policy is affecting the economy

·         We need to see inflation move down for a bit longer

·         We need to see inflation fall more from current levels

·         I am happy to see inflation moving down after Q1 stalling

·         We are starting to see inflation move down again after stalling

·         Inflation data out this week is welcome news

On Friday, Chicago Fed’s President Goolsbee said:

·         I don't take too much signal from the monthly payroll data by itself

·         The unemployment rate, quit rate, and the ratio of jobs to openings looks like the labor market is cooling

·         If inflation ahead behaves as it did in the first quarter, we will have a hard time cutting rates

·         A stronger dollar would affect the export/import balance, and affect US employment and inflation

·         As European countries cut rates, that could push up the dollar

·         Manufacturing & agriculture feel closer to the edge of a downturn

·         If we keep making progress on inflation, and the rates can come down, we may avoid a recession

·         Delinquencies have been rising, though not to a level like that in a recession

·         The pain is rising in various parts of the economy

·         If we get more months like we just saw on inflation, the Fed can cut rates

·         In the near to medium term, what will determine whether rates can go back to normal, is if inflation is on a path to 2%

·         CPI data this week was very good

·         I can't help but be optimistic if you look at the long view

·         External shocks have derailed soft landings in the past

·         The latest inflation number was 'excellent' hopefully more to come

·         There is still a little bit of juice left after last year's rapid inflation decline

·         The inflation number that came out during last week's meeting was excellent. Hopefully, we'll see more data like that

On Sunday, Minneapolis Fed’s President Kashkari said:

·         It is reasonable that the rate cut could come in December

On Monday, Fed’s Harker said:

·         Globally rates are heading down, just at a different pace

·         We are not even close to material deterioration in the job market

·         It is fine to keep rates where they are now and wait for the data

·         I think one cut is appropriate but could change depending on the data

·         The latest inflation data is quite promising but falls short of the confidence needed, has not quite dissipated uncertainty

·         The long-term stubbornness of shelter inflation remains a concern, as does service sector inflation

·         Last week's CPI data was very welcome, but overall progress on inflation in recent months has been modest

·         I still forecast slowing, but above-trend growth, a modest rise in the unemployment rate, and a long glide back to 2% inflation

·         Two cuts or none are also quite possible, depending on the data

·         If my economic forecast plays out, I think one rate cut would be appropriate by the year's end

·         More data is essential to decide on rate cuts given the choppiness so far this year

·         Over the ensuing months, I will continue to closely monitor data on inflation, labor markets and economic activity

·         Keeping rates where they are for a bit longer will help get inflation down and mitigate upside risks

·         Monetary policy remains positioned in restrictive territory

On Tuesday, NY Fed’s President Williams said:

·         I expect inflation to keep coming down this year

·         We still have a very strong labor market with some hiring slowing

·         3% inflation is not the new norm, the Fed will get inflation to 2%

·         Recent inflation data has been encouraging

·         Interest rates will come down over the next few years

·         Inflation is coming back to the Fed's 2% target

·         Politics will not influence Fed rate decisions

·         I expect interest rates to come down gradually as inflation eases

·         Things are moving in the right direction for monetary policy

·         The US economy is doing well and is in a better balance

·         The rate-cut path depends on the data

On Tuesday, Fed’s Kugler said:

·         We have two-sided risks, we continue to pay attention to data

·         In contrast to the rest of the world, there has been quite a bit of resiliency in the US economy

·         We certainly need to be convinced that we are not going to put in danger all the great progress made on inflation

·         When asked why not cut at the next meeting: There are risks on both sides of the mandate

·         How much we cut will be a question we continue to assess as more data comes in

·         Retail sales indicate that economic activity may be cooling

·         We have seen an increase in delinquencies indicating that households are being stretched

·         The neutral rate is probably higher now than it was before the pandemic

·         Confidence to cut rates could take months and likely quarters to play out

·         Policy has more work to do, judgement will be guided by data

·         I expect some cooling of economic activity to continue

·         Inflation is too high, but I am encouraged by the renewed recent progress & trajectory

·         I am watching closely for any signs of labor market deterioration

·         Policy has more work to do, judgment will be guided by data

·         I am optimistic that improving supply, and cooling demand will support continued disinflation

·         If wage growth continues to moderate, will soon be at levels consistent with price stability

·         Most indicators point to a slow, steady easing in the labor market

·         The preponderance of labor market data show supply and demand coming into better balance

·         I am optimistic about productivity growth, with the surge in new businesses, and AI likely to diffuse quickly

·         It is likely appropriate to begin easing policy sometime later this year if the economy evolves as expected

·         Monetary policy is sufficiently restrictive, economic conditions are moving in the right direction

On Tuesday, Fed’s Musalem said:

·         I am watching the labor market for signs of any unexpected deterioration, but I am not seeing those signs at the moment

·         I welcome the news that the labor market has been rebalancing

·         Artificial intelligence, if adopted widely, will have material productivity impacts over the long term

·         The Fed targets consumer prices, not housing prices

·         There are potential early signs of continued progress on inflation

·         Continued high employment and wage growth should moderate the impact of easing labor market conditions on aggregate demand

·         The current monetary policy stance seems restrictive, but there is some uncertainty about to what degree

·         The personal Consumption Expenditures Price Index should show a welcome downshift of inflation in May

·         Monetary policy transmission may be slower this cycle

·         I expect aggregate consumption to moderate in coming quarters without stalling and then return to or slightly exceed the trend by 2026

·         Financial conditions feel accommodative in some parts of the economy, and restrictive in others

·         The labor market no longer seems overheated but remains tight

·         I expect some further cooling in the labor market in the coming months

·         These conditions could take months and more likely quarters to play out

·         If inflation becomes stuck meaningfully above 2% or moves higher, I would support additional policy tightening

·         I will remain vigilant until inflation is clearly and convincingly well on its way back to 2%

·         The retail sales data for May suggests aggregate demand is growing at a moderate pace so far in Q2

·         I need to observe a period of favorable inflation, moderating demand, and expanding supply before he will have confidence in an interest rate cut

On Tuesday, Fed’s Logan said:

·         Will need to see 'several more months' of better CPI numbers

·         We are still seeing some lingering supply chain issues

·         We are seeing the economy come into better balance, but I am still worried about upside risks to inflation

·         The Fed's slowed balance sheet unwind is to provide a smoother path

·         I will be watching and seeing what's happening in the economy

·         It is great to see CPI data, will need to see several more months to have confidence we are heading to 2%

·         May CPI data was welcome news.

·         Inflation is still too high, but have made tremendous progress

·         I am optimistic about generative AI's effect on productivity

On Tuesday, Fed’s Collins said:

·         Too soon to say if inflation is retreating to 2 appropriate for the US central bank to remain patient

·         The US Central Bank has made notable progress in lowering inflation

·         Recent inflation data has been encouraging

·         Inflation is still stubbornly above the 2% target

·         The economy has been remarkably resilient

·         I remain realistic and optimist on the economy and monetary policy

·         It is too soon to say if inflation is retreating again to 2%

·         It is appropriate for the US central bank to remain patient on monetary policy

·         I am cautious about overreacting to recent inflation data

On Tuesday, Fed’s Barkin said:

·         A lot of economic signals have not worked so well this cycle

·         When asked about the yield curve: There could be lots of reasons why it is inverted

·         The household survey is much more volatile than the payroll/Establishment survey

·         Scenarios where one rate cut then hold may be sensible

·         My strong sense is that we are at a restrictive level

·         We will learn a lot more over the next several months

·         Choppiness in the data since last year means the path ahead on policy is not clear

·         I was very supportive of last week's policy decision

·         The dynamic underpinning spending is a strong jobs market, and stock market at record levels

·         Consumer spending is still solid

·         That said, it is not hard to see scenarios where the labor market weakens

·         The job market figures are healthy, with some signs of concern

·         The labor market is also heading in the right direction

·         Headline inflation numbers heading in completely the right direction

·         We are clearly on the back side of inflation

·         It's hard to know how much signal to take from inflation last year, this quarter, or the last couple of months

·         I need to see sustainment and broadening in disinflation to give me confidence we heading back to 2%

·         I didn't get more confidence in q1 this year about inflation, we'll see where we go

·         This month's inflation reading was very encouraging

·         Shelter and services inflation is not quite there

·         On the services side, I still think firms exploring raising prices as much as possible

·         On the goods side, I hear pricing power is waning

Bottom line: Summary

·         Fed has projected in the June’24 dot-plots -25 bps rate cut in 2024, -100 bps rate cuts each in 2025 & 2026, and -50 bps in 2027 for terminal neutral repo rate +2.75%

·         Fed may not cut rates in Sep’24. just before Nov’24 US election to avoid any political controversy

·         But the Fed may start the rate cut cycle from Dec’24 QTR (Q4CY24) and may cut cumulatively eight times in 2025-26 at each QTR end by -25 bps each; then Fed may cut twice in 2027 at June’27 (H1CY27) and Dec’27 (H2CY27) @-25 bps each

·         One month of data may not change the Fed’s narrative about higher for longer stance as the headline unemployment average is still below 4%, while average core CPI inflation is still around 4%

·         The 6M rolling average of US core inflation (PCE+CPI) would be around +3.3% by May; the Fed may not start the rate cut cycle until this average of core inflation (PCE+CPI) goes at least below 3.0% on a sustainable basis. This may not be possible before Sep’24; i.e. Fed may not get the required confidence for indicating a definitive rate cut before Sep’24

·         In that scenario, the Fed may give a definitive signal for eleven rate cuts from Dec’24 QTR onwards in its Sep’24 dot-plots, just before the Nov’24 election to keep both Wall Street, Main Street as well as Capitol Hill Street happy; both Democrats and Republicans may not object Fed in that case; Powell will keep both sides of the political Street happy.

·         Ahead of the Nov’24 U.S. Presidential election, White House/Biden and also Fed/Powell are more concerned about elevated inflation rather than the healthy labor market; prices of essential goods & services are still significantly higher (around +20%) than pre-COVID levels, which is creating some anti-incumbency wave among the general public (voters) against Biden admin (Democrats) due to relatively higher cost of living. Thus Fed is now giving more priority to price stability than employment (which is still healthy- hovering below the 4% red line) and is not ready to cut rates early as it may again cause higher inflation just ahead of the November election

·         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 4.75-5.00% at any cost (against present levels of average core CPI around +4.0%); i.e. Fed will not allow core real bond yield above +1.00%. Fed has to also ensure Wall Street stability by keeping SPX-500 TTM PE around 25 rather than lower/mean levels around 20.

·         Also, the reduction of Fed B/S from around $8.97T to around $6.60T by Dec’25 (projected); i.e. around $2.50T (~$2.37T) reduction over 2.5-3.00 years is equivalent to a rate hike of around +50 bps (higher 2Y bond yield)

·         Fed had boosted its B/S from around $3.86T in late September’2019 (after the QT tantrum) to around $8.97T in Apr’22; i.e. over $5T in a matter of 32 months (@0.16T/M) to fight previous QT and COVID induced financial crisis.; but in the process may have also caused huge inflationary pressure along with the deluge of COVID fiscal stimulus and direct fund transfer; all these may have caused the vicious cycle of higher deficits, higher debts, higher devaluation, higher borrowing costs, and still elevated inflation

·         Fed will continue the QT at a reduced rate of around 40B/M till Dec’25 for a B/S size of around $6.60-6.50T (around 22% of estimated US nominal GDP of around $30T by CY26)

·         Fed may continue the QT (even at an officially slower pace) and rate cuts at the same time despite being contradictory

·         Fed may say (like BOC) that as long as the policy rate is in the restrictive zone (say 1.50-2.00% above average core inflation), the Fed may continue both rate cuts and QT to reduce overall restrictiveness. When the policy rate moves into a neutral/stimulative zone, say 50 bps above average core inflation, then the Fed may go for more rate cuts and close the QT

·         Overall, Fed rate cuts along with QT (even at a slow pace) may be less dovish than pure/only rate cuts as QT is also equivalent to rate hikes to some extent

·         All other major G20 Central Banks including ECB, BOE, BOC, RBI, and even PBOC may be compelled to follow the Fed’s real rate action to keep present policy differential with the Fed

·         As USD, is the primary global reserve/trade currency, any meaningful negative divergence with the Fed will result in higher imported inflation, everything being equal; for example, if the ECB indeed goes for 50-75 bps rate cuts in H2CY24, while the Fed is still on hold, then EURUSD may slip further towards parity (1.0000), which will result in higher imported inflation as the EU is dependent quite heavily on imported goods, foods, and fuel/commodities

·         In this way, no major G20 Central Bank will take such rate action/cuts alone as there is a routine/regular coordination/consultation between all major central banks for a coordinated/synchronized policy action to avoid disorderly FX movement

·         The Fed also not seeking a very strong USD as it would eventually affect US export competitiveness. Thus all major central banks are now focusing on maintaining proper balance and coordination with the Fed, whatever may be the domestic political/election, inflation/economic narrative/jawboning; they can’t afford to diverge too much against the Fed, all being equal

·         Like in India, the US Presidential election in Nov’24 may be also acting as a big/moderate fiscal stimulus amid huge election spending, which may likely boost inflation again or prevent the disinflation process, making the Fed’s job harder to cut rates before Nov’24 election

·         Moreover, the Biden admin is spending huge for the US private defense industry in the name of aid to Ukraine and even Israel and will also actively participate in the reconstruction process of both Gaza and Ukraine when the war finally stops

·         Although the US Treasury may have some control of certain FX assets and also the Gold reserves of Russia, Ukraine, and even Israel, the deluge of deficit/fiscal spending, debt, and money printing is also boosting overall inflation

·         In H2CY24, the U.K., Canada, and also various other developed economies in the EU are going for general election, and economic issues such as elevated inflation/higher cost of living will be one of the major issues

·         For example, U.K. PM Sunak suddenly called for an early general election in July after a recent softening in inflation data. But all this election spending will also act as some fiscal spending and will not help the present disinflation pace. Thus Fed as well as ECB, BOE, BOC, and even RBI should feel less confident about going for any new/further rate cuts until Fed cuts in Dec’24

·         Thus almost all major G20 Central Banks including ECB, BOE, BOC, RBI, and even PBOC may not cut rates in H2CY24 if the Fed remains on hold; no central bank will go against the Fed irrespective of any narrative/rhetorics and make LCU weaker against USD, causing higher imported/total/core inflation in the process; all central banks led by Fed will continue the 24/7 jawboning to keep bond yields under control (indirect YCC like BOJ) and a vibrant financial/money/FX market

Market impact:

On Tuesday Wall Street got some boost on softer than expected US retail sales and less hawkish Fed talks, but the overall impact was quite limited as it’s quite clear that the Fed is gradually preparing the market for the mega rate cut cycles from Dec’24 with an eye on bond yield management (backdoor YCC). Gold and oil also wobbled on hopes & hopes of an imminent Gaza war ceasefire and Israel’s plan/action of an all-out offensive on Hezbollah in Lebanon.

On Tuesday, Wall Street was boosted by banks & financials, techs, Industrials, energy, real estate, healthcare, consumer staples, and utilities to some extent, while dragged by communication services, consumer discretionary, and materials. Nvidia boosted Wall Street/Nasdaq on AI chip optimism and became the most valuable publicly listed company in the world, surpassing Apple and Microsoft as these two are now struggling with EU regulatory/antitrust fines of billions of dollars. AI/Chip stocks like Micron, Qualcomm and TNSC also soared.

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

Whatever may be the narrative, technically Dow Future (39400) has to sustain over 39500 for any further rally to 39800/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 39450-39400 may again fall to 39200/39000-38900/38600 and further fall to 38400/38200-38100/37900* and 37600/37400 in the coming days.

Similarly, NQ-100 Future (20250) has to sustain over 20500 for a further rally to 20700-21050 in the coming days; otherwise, sustaining below 20450/2035020300/20250 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5560), now has to sustain over 5650 for any further rally in the coming days; otherwise, sustaining below 5625/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2325) has to sustain over 2285-2275 for any recovery to 2310/2320 -2345/2355* and 2375/2385 and further rally to 2400/2425-2435/2455* and 2475-2500; otherwise sustaining below 2270-2265 may further fall to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.