Dow stumbled on intensifying Gaza war; Gold jumped

On Wednesday, Wall Street Futures surged on hopes of an early Fed cut in 2024 amid mixed economic data and the progress of the Gaza war temporary pause/ceasefire. The market is now expecting a -50 bps Fed rate cut by July’24. Gold slips from around 1975 to 1955 on the progress of the Gaza war's temporary pause/ceasefire. But on early Thursday European session, Gold again recovered, while Wall Street Futures slipped on intensifying Gaza war, especially the reported/alleged violent attack’ on Gaza’s al-Ahil hospital by IDF/Israel army. As per the Red Crescent of PA/Gaza, Al-Ahil Hospital in the Gaza Strip was under siege by Israeli tanks. The Red Crescent organizations said that their teams are unable to move to reach and treat the injured. As a reminder, last month, an explosion, which Israel denies responsibility for, hit the hospital, killing at least 500.

On the other side, Israel continues to claim that Hamas is using Hospitals, Schools, and even worship places as secret underground terror infra. The Israeli army claimed to have found a tunnel, and weapons in al-Shifa Hospital allegedly a part of the Hamas command & control center. IDF also found a vehicle with weapons inside the Hospital complex. Israeli PM Netanyahu said: “We have strong indications that captives were held at al-Shifa, which is one of the reasons we entered the hospital-- If they were, they were taken out---I think the less I say about it, the better---“.

Meanwhile, the U.S. is asking Israel to care for civilians, while expanding Gaza military operations. The U.S. State Department said in a prepared statement Thursday:

“We have had a conversation with them to impress upon them that as they continue to look at expanding military operations or ground operations in other parts of Gaza, they need to ensure that there are humanitarian corridors for civilians, there’s protection for civilians, there are human pauses so that civilians can get themselves out of harm’s way and that we can get humanitarian assistance into them and there are ultimately places where they can be safe. That is an active, ongoing conversation between our government and the government of Israel”.

Overall, both the U.S. and Israel are now under immense pressure from all corners for an immediate pause/ceasefire in the Gaza war to pave the way for a safe humanitarian corridor and the release/exchange of captives (by both Hamas and Israel). But both the U.S. and Israel are not ready for an immediate ceasefire in the Gaza war as overall conditions are favorable for them to secure/control the Gaza city completely. Israel is also not ready to withdraw its military from Gaza unless a permanent credible government takes charge and guarantees no terror activities from Gaza.

On Thursday, some focus was also on U.S. jobless claims (seasonally adjusted), which serves as a proxy for the unemployment trend/overall labor market conditions. The U.S DOL flash data shows the number of Americans filing initial claims for unemployment benefits (UI-under insurance) increased to 231K in the week ending 11th November from 218K in the previous week, above market expectations of 220K and the highest in nearly 3 months.

The 4-week moving average of initial jobless claims, a better indicator to measure underlying data, as it removes week-to-week volatility, also increased to 220.25K on the week ended 11th November from 212.50K in the previous week.

The 4-week moving average of initial jobless claims was around 225K on average for Jan’17-Jan’20 pre-COVID period.

The continuing jobless claims in the U.S., which measure unemployed people who have been receiving unemployment benefits for a while/ more than a week or filed for unemployment benefits at least two weeks ago (under UI), increased to 1865K in the week ending 4th November, from 1833K in the previous week, above the market expectations 1847K. The advance seasonally adjusted insured unemployment rate was 1.3% for the week ending 4th November from 1.2% the previous week. The advance numbers of seasonally adjusted insured unemployed persons were around 1865K for the week against 1822K for the previous week and the highest since late Nov’21.

The continuing jobless claims of all types are also a proxy for the total number of people receiving payments from state unemployment programs, i.e., the overall trend of unemployed persons (insured). The latest continuing jobless claims are quite elevated which may be an indication of some softening in the labor market amid a difficult macroeconomic and geopolitical (external trade) environment coupled with higher borrowing costs and the deluge of tech layoffs (amid generative AI narrative).

Overall, as per seasonally unadjusted insured continuing jobless claims under all categories (UI) of around 1617K (2-week rolling average) and assuming average uninsured employees/self-employed (not getting any UI benefit) of around 5000K (?), estimated unemployed persons would be around 6617K in Nov’23 against 6506K sequentially. Further, if we assume the labor force is around 168000K, the unemployment rate would be around 3.9% in Nov’23 from 3.9% sequentially. The estimated number of employed persons would be around 161383K in Nov’23, an addition of around +161K sequentially against -348K contraction in Oct’23 (as per Household survey). But as the latest U.S. continuing jobless claims are now approaching 1850K, the headline unemployment rate may scale above 4.0% in Nov’23.

On Thursday, Fed’s Mester said:

·         Whether further hikes are needed depends on the economy

·         I am expecting growth to slow below the trend

·         My contacts see the economy slowing, not significantly

·         No data suggests things are going off a cliff in the economy

·         I don't have a recession in my forecast

·         I would be concerned if inflation progress stalls

·         High yields indicate policy transmission working

·         It's been a strong and resilient economy but we have still seen inflation move down

·         Term premiums played a role in the rise in Treasury yields

·         We need to see more evidence inflation is on way to 2%

On Thursday, Fed’s Cook said:

·         Risks are two-sided

·         I believe that a soft landing is possible

·         The Fed's rate hikes and balance sheet runoff have tightened US financial conditions and helped reduce inflation

·         There's a risk that continued demand momentum could slow the pace of disinflation

·         Risks are two-sided, we must balance the risk of not tightening policy enough against the risk of doing too much

·         Small business conditions, the housing sector, and lower-income households may be signaling broader stress ahead.

·         I am attentive to the risk of renewed global economic shocks, including geopolitical and muted growth in China and Europe

Conclusion

Fed will be on hold with a hawkish stance in December too and hold the repo rate at present +5.50% at least till Aug’24; by then, the U.S. core inflation should fall below +3.0% on a sustainable basis, and in that scenario, Fed may go for -0.50% rate cut each in Sep’24 and Dec’24; i.e. cumulative -100 bps rate cut in H2CY24 to keep real rate around +1.50%, in line with present level (repo rate at +5.50%; average core inflation for 2023 around +4.0%).

Market wrap:

On Thursday, Wall Street Futures were boosted by hopes of an early Fed cut after higher-than-expected jobless claims, indicating a +4% unemployment rate in Nov’23; Gold also jumped. Dow Future was also affected by a plunge in Wall Mart amid subdued guidance on weak consumer spending in the coming days.

US President Biden said he still thinks Chinese Communist Party Chairman Xi is a dictator. Wall Street Futures eventually slid on intensifying the Gaza war and the disappointing outcome of the Biden-Xi meeting. China's Foreign Ministry, on Biden, saying China’s President Xi is a dictator: Such rhetoric is extremely wrong and irresponsible political manipulation. On the other side, Xi said China firmly opposes this, while Xi said:

·         China is ready to be a partner and friend of the US

·         The door of US-China relations cannot be shut.

·         I have no plans for China's military action against Taiwan in coming years

·         The US should stop arming Taiwan

The US Commerce Secretary Raimondo said:

·         The US economic relationship with China can contribute to global stability

·         The US wants robust trade with China on a reciprocal and fair basis

·         US Defense Department Spokesman Kirby: China influences Iran and we certainly would like to see them use it.

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

Whatever the narrative, technically Dow Future (35040), now has to sustain over 35200 for a further rally to 35350/35500-35650/35850 in the coming days; on the other side, sustaining below 35150, Dow Future may again fall to 34800/34650-34120/34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (15870), now has to sustain over 16100 for a further rally; otherwise sustaining below 16050, may again fall to around 16100-14140 in the coming days.

Also, technically Gold (XAU/USD: 1981) now has to sustain over 1975 for any further rally to 1980/1995-2008/2012 and 2063-2085 for a further rally to 2022/2038-2055/2085; otherwise sustaining below 1970, may further fall to 1955/1932-1923 and 1908/1904-1895/1885 and 1850/1810 in the coming days (if there was a Gaza war ceasefire).