Dow surged on hopes of China stimulus and Gaza war ceasefire

Wall Street Futures slipped Monday on fading hopes of an early & deeper Fed rate cut after Fed Chair Powell gave a less dovish or rather than a hawkish interview on the weekend. 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 2% target.

Also Wall Street will make fresh record highs by June-July’24 on hopes of an imminent rate cuts cycle, which will boost Biden/Democrats on the prospect of another election win. But this time Trump/Republicans will have an edge due to the growing incumbency wave. And if Trump again wins the White House, then it may be negative for Wall Street (anti-China, anti-EU, trade/cold war policies, fiscal austerity), but pro-Russian policies may help the end of the Ukraine war as well as the Gaza war; we may also see some tax cut stimulus effort by Trump if elected.

But all policies will depend upon whether Trump or Biden can win the trifecta (White House, House and Senate) for a majority government; otherwise, a minority government at the White House may continue to affect U.S. policies in the absence of bipartisan politics/agreement between Democrats and Republicans. The U.S. needs to deploy substantial infra stimulus and another fiscal stimulus to increase the supply capacity of the economy to match the growing demand for durable price stability and also to stimulate the economy rather than too much emphasis on ‘easy Helicopter money’ (monetary stimulus, direct grants/subsidies etc).

In the early Tuesday Asian Session, Dow Future got some boost as the Chinese stock market surged on hopes & hypes of targeted fiscal & monetary stimulus to bring the economy/stock market from growing/lingering property crisis, subdued external trade, weak domestic demand and FPI outflows. The risk-on sentiment was further boosted as Chinese President Xi reportedly intervened, seeking a report from the financial regulator.

Also, Chinese DIIs (PPT-Plunge Protection Team) were very active for the last few days after the Chinese stock market plunged to multi-year lows recently. The gains came after Beijing took more steps to stem a stock rout, including broadening trading restrictions on certain investors (selling restriction) and a pledge by Chinese sovereign wealth funds to increase its holdings of exchange-traded funds (ETF). On Tuesday, China also relaxed home-buying curbs in Beijing's Tongzhou district.

On Tuesday, Fed’s Mester said:

·         Does not believe the US is moving to only large bank model

·         I see progress in getting banks ready to use discount window

·         We are not going to create a CBDC unless asked by Congress

·         The size of community banks will have to grow over time

·         Monetary policy is in a good place. Fed can cut later this year

·         So far Red Sea trouble hasn’t rattled supply chains

·         Higher productivity levels may change the wage-inflation calculus

·         Inflation may be more persistent than expected

·         It would be a mistake to cut rates prematurely

·         Wage gains still too high for getting to 2% inflation

·         The Fed can lower rates later this year if the economy performs as expected

·         When the Fed cuts rates, it will likely be at a gradual pace

·         I expect the Fed to gain the confidence to cut later this year

·         I expect to see rate cuts later this year

·         I still lean toward three rate cuts for 2024

·         The Fed should not rule out asset sales for balance sheet

On Tuesday, Fed’s Kashkari said:

·         We're not all the way there yet on inflation

·         Inflation has come down very quickly, and the labor market is very strong, it's a conundrum

·         We've made a lot of progress on inflation

·         A recession is not my base case

·         I don't want to say we're done yet, but fingers crossed

·         The recent inflation data has been surprisingly positive. We are not quite there on year-over-year inflation data, but 3-month and 6-month data are there

·         With the benefit of hindsight, we were late raising rates

·         We do not think about politics, or the election when we set interest rates--We are politically independent

·         I am skeptical of why the US would need a central bank digital currency

·         The yield curve is not a reliable indicator of recession, because disinflation isn't mostly caused by the Fed

·         Most of the disinflationary gains have come from the supply side

Market wrap:

On Tuesday, Wall Street Futures were boosted by hopes & hypes of Chinese stimulus and a permanent Gaza War ceasefire coupled with lower bond yields amid a solid US3Y bond auction. Also, mixed Fed jawboning helped; although Mester sounded less dovish, Kashkari sounded more dovish than expected as he said the 3M/6M rolling average of core inflation is now near 2% targets, although 12M is still far away.

On Tuesday, Wall Street was boosted by materials, real estate, healthcare, industrials, consumer discretionary, energy, utilities, banks & financials, and consumer staples, while dragged by techs and communication services.  Tech-heavy NQ-100 slumped as chip makers plunged led by Nvidia. Dow was dragged by Amgen, Salesforce, Verizon and Microsoft.

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

Whatever may be the narrative, technically Dow Future (38550), now has to sustain over 39000 levels for a further rally to 39200/39500 levels in the coming days; otherwise, sustaining below 38850 levels may again fall to 38400/38200*-38000/37300 levels in the coming days.

Similarly, NQ-100 Future (17648) now has to sustain over 18000 levels for further rally; otherwise, sustaining below 17950-17750 may again fall to 17375-16390 in the coming days.

Also, technically Gold (XAU/USD: 20356) now has to sustain over 2045-2055 for a further rally to 2065-2085-2105/2120 and 2130/2152 levels; otherwise sustaining below 2040-2035, may again fall to 2020-2010-2000-1990-1975-1960/1940 in the coming days.