Dow surged on hopes of a soft landing and an early Fed pivot

·         Gold soared on lingering uncertainty about the Gaza war trajectory after preliminary ceasefire talks failed and Hezbollah fired a barrage of rockets at IDF

·         Gold was also boosted by expansionary economic policy by Harris as part of her election manifesto, and China’s new higher import quota

·         All focus now may be on Powell’s comments at the Jackson Hole Symposium on 23rd August, whether the Fed gain enough confidence to launch the much-awaited rate cut cycle from Sep’24 or wait for Dec’24

On Thursday, Wall Street Futures surged on fading hopes of an imminent recession after an upbeat US retail sales report and soft jobless claims report. But on early Friday, Wall Street Futures slipped, while Gold surged over $2500 levels (a fresh life time high) on fading hopes of an imminent Gaza war ceasefire even after 2nd day of the Doha peace summit without Hamas, which is now accusing Doha mediators of straying away Biden’s six stage ceasefire proposal.

Also, both Hamas and Hezbollah & Co are now ‘attacking’ Israel (barren places) with a deluge of rockets/Drones/Missiles. Also, US & Co is trying to convince Israel to an immediate ceasefire or else face another Iran ‘attack’. The market is concerned that Iran may launch its drone attack on Israel by Sunday/early Monday Asian session if Israel does not agree with the ceasefire proposal. As per the latest report from TOI, the US presented an updated ceasefire proposal and aims to finalize the deal when mediators regroup next week, while Hezbollah said holding off on a retaliation attack while talks unfold.

Gaza war trajectory

Late Friday, U.S. President Biden warned Israel and other actors not to take steps that could undermine the ceasefire and hostage release deal that his administration is trying to finalize in the coming days. Biden said in a statement:

“Earlier today, I received an update from my negotiating team on the ground in Doha and directed them to put forward the comprehensive bridging proposal presented today, which offers the basis for coming to a final agreement on a ceasefire and hostage release deal. I spoke separately with Amir Sheikh Tamim and President Sisi to review the significant progress made in Doha over the past two days of talks, and they expressed the strong support of Qatar and Egypt for the U.S. proposal as co-mediators in this process.

Our teams will remain on the ground to continue technical work over the coming days, and senior officials will convene again in Cairo before the end of the week. They will report to me regularly. I am sending Secretary Blinken to Israel to reaffirm my iron-clad support for Israel’s security, continue our intensive efforts to conclude this agreement, and underscore that with the comprehensive ceasefire and hostage release deal now in sight, no one in the region should take action to undermine this process.”

A senior Israeli official said that progress was indeed made in Doha on several controversial aspects of the hostage deal being negotiated. However, the official notes that this progress was only between Israel and the mediators, while it’s still unclear how Hamas will respond to these new arrangements. The Israeli PMO said Israel hopes mediators’ pressure on Hamas will lead to a deal, while Hamas is now questioning the true intention of US & Co for a cease-fire.

A senior US official dismisses a series of statements made by Hamas officials both on-record and anonymously in which they expressed disapproval of how the hostage talks went in Doha over the last two days:

·         I know there are a lot of public statements from Hamas right now. I wouldn’t take anything too seriously

·         Hamas is under significant pressure to reach an agreement given the severity of the humanitarian situation in Gaza

·         Should Hamas say no, think about what they’re doing to the people of Gaza

·         While Hamas didn’t participate in person in the Thursday and Friday meetings, its representatives are already in Doha and were able to engage with Qatari and Egyptian mediators over the past two days

·         All three mediating countries believe that the final bridging proposal submitted on Friday by the US closes just about all remaining gaps between the parties

·         This proposal is based on the one Israel submitted on May 27. That latter offer served as the framework for the speech Biden gave on May 31 in which he revealed key elements of that framework

·         On July 3, Hamas submitted its response to the Israeli proposal, which included some unacceptable amendments and others that were the basis for further discussion

·         What we’ve done is taken the gaps that remain and bridged them in a way that a deal is now ready to close

·         There is still more work to do and working groups from both sides will be convening in the coming days to talk about issues, such as the list of hostages and prisoners being released and the sequencing of those releases. Much of the last two days was spent discussing these issues known as the “keys.”

·         The top officials who met in Doha over the past two days will reconvene in Cairo toward the end of next week, aiming to finalize the deal

·         The bottom line after two days in Doha-- we wanted to get this process back on track. We very much have done that. The consensus of all the participants here over the last 48 hours is that there’s a new spirit here to drive this to a conclusion

·         Referencing some of the Palestinian security prisoners who Israel will have to release as part of this deal, the senior US official acknowledges that some aspects of it are “heart-wrenching.”

·         However, he says the primary reason to move forward with the deal is to save the lives of the hostages in Gaza. “If you continue to negotiate for months and months and try to get a perfect deal… you risk having no hostages left to save

·         The official clarifies that the hostage release deal would be conducted in a way that “ensures Israel’s security interests

On July 27, Israel then issued a paper with a series of “clarifications,”; other Qatari, Egypt, and Hamas negotiators have criticized the text by the Israeli PM as a series of new demands that significantly hampered efforts to reach a deal. These included a demand for Israel to remain indefinitely in the Philadelphi Corridor between Egypt and Gaza and the establishment of a new mechanism to prevent armed Palestinians from traveling from southern to northern Gaza.

On late Friday, the U.S confirmed Secretary of State Blinken's Sunday Israel trip aimed at finalizing the hostage deal:

“Secretary of State Antony J. Blinken will travel to Israel on August 17 to continue intensive diplomatic efforts to agree to a ceasefire and release of hostages and detainees through the bridging proposal presented today by the United States, with support from Egypt and Qatar. This proposal would achieve a ceasefire in Gaza, secure the release of all hostages, ensure humanitarian assistance is distributed throughout Gaza, and create the conditions for broader regional stability. Secretary Blinken will underscore the critical need for all parties in the region to avoid escalation or any other actions that could undermine the ability to finalize an agreement.”

Further, as per TOI reports, Israel will send another delegation to Cairo on Sunday to try and close the remaining gaps in the hostage talks before another high-level summit is held in Doha toward the end of next week. The two biggest obstacles remain the continued presence of Israeli troops along the Philadelphi Corridor between Egypt and Gaza and preventing the transfer of armed Palestinians to the northern Strip. These were two of the key new demands PM Netanyahu added last month, insisting that the IDF be allowed to remain in the Philadelphi Corridor and that a mechanism be created to prevent Hamas from reconstituting in northern Gaza. As for the Israeli demand, the U.S. has made clear that it will not accept the establishment of a new mechanism amid fears this would take weeks to implement.

On the issue of the Philadelphia Corridor, some solutions have been crafted, which the mediators hope will be enough to convince Israel. At the Rafah Crossing, in particular, the idea is to have a Palestinian force stationed there that is not Hamas. Netanyahu has long objected to the Palestinian Authority formally returning to the crossing or other parts of Gaza, but it’s unlikely that an alternative exists. Where mediators are closer to reaching solutions after the Doha summit are on the number of living hostages who will be released in the first phase of the ceasefire; the names of the Palestinian prisoners Hamas would like to see released, the number of vetoes Israel will have over these names and the number who will be sent to exile outside of the West Bank and Gaza; and the mechanism for implementing the hostage-prisoner exchange.

As far as the US is concerned, the latest proposal being crafted by the mediators will be presented in the form of “take it or leave it’, and there will be no additional discussions. Israel will have to decide whether it wants a hostage deal and ceasefire in Gaza or if it will instead face attacks from Iran and Hezbollah, which risk dragging the entire region into a much bigger war.

Mediator Qatar has informed Hamas of all the developments from the past two days of negotiations, but the terror group has yet to publicly say how it plans to proceed. Several officials in the group have issued statements to the press, expressing disapproval of the way the talks went in Doha, but it is still not clear what the official Hamas position is. In the meantime, the Israeli security establishment believes that progress in the hostage talks puts off attacks from Iran and Hezbollah, but the IDF remains ready for such retaliatory strikes nonetheless.

Late Friday, Iran’s UN mission hints an extension of Gaza talks to further delay the threatened attack on Israel. Asked if Iran will continue to hold off on retaliating against Israel now that the Gaza ceasefire-hostage talks have been extended, Iran’s mission to the UN in New York says “We hope so.” Iranian Foreign Minister Bagheri meanwhile said he was updated by his Qatari counterpart Thani about Friday’s negotiations in Doha.

In a statement posted to X (Twitter), Bagheri said he told Thani that Israel can’t be trusted while calling “to use all means” to force an end to Israel’s offensive in Gaza against Hamas. A statement from the Qatari foreign ministry says the two “stressed the need for calm and de-escalation in the region” and that al-Thani “reiterated Qatar’s commitment to supporting all regional and international efforts aimed at achieving regional and international security and stability.”

Meanwhile, Israeli airstrikes have continued in Central & Southern Gaza and selected part dos Lebanon, targeting specific Hezbollah top leaders, while Hezbollah, and also Hamas fired a series of rockets and drones in northern /southern Israel, injuring several Israeli soldiers and sparking fires in open areas. On early Saturday, Hezbollah also attacked IDF positions in Northern Israel with a barrage of 50 rockets in response to an IDF strike in southern Lebanon’s Nabatieh overnight, which according to local authorities killed at least 10 people. The IDF said the target was a Hezbollah weapons depot.

On early Saturday, a Hamas official said:

·         Optimism for ceasefire-hostage deal is ‘illusion’

·         Israel is sabotaging chances for a deal, and Washington is backing these efforts in disguise, creating false hopes

·         We are not on the cusp of an agreement or real negotiations, but rather the imposition of American dictations

On early Saturday, the US President Biden said:

·         I am optimistic about the prospects for a hostage-ceasefire deal—it’s now in sight, but it’s far from over

·         As of an hour ago, it’s still in play. I’m optimistic. It’s far from over. There’s a couple more issues. I think we’ve got a shot

·         Asked when a ceasefire deal would start if an agreement is reached: “That remains to be seen.”

Overall, the US (Biden admin) is trying its best to seal a permanent or at least a temporary (till Dec’24/Nov’24) Gaza war ceasefire deal before the US election by putting pressure on both Israel and Hamas either to take or leave the deal and face peace or further bloodshed, even a wider regional conflict/war involving Iran, Hamas, Houthi, Hezbollah, Syria and Israel. Also, both Hamas and Israel are under huge pressure domestically for an immediate ceasefire & hostage deal, while the Biden admin is also under pressure for its war-savvy foreign policy and may lose Muslim or even Jewish votes along with the support of peace-loving younger and Native American voters, who are not core supporters of Democrats/Republicans.

If Trump wins this time, Israel may not get so much US support in continuing this Gaza war, approaching almost 1 year and turned into the US a genocide-like situation. On Friday, Trump said: “I Told Netanyahu 'Win Fast' because the Killing has to stop”.

Thus we may see at least a temporary Gaza war ceasefire by August end, just two months ahead of the US Presidential election (Nov’24). It also seems that the new Hamas Chief Sinwar is ‘manageable’ better than his hardliner predecessor Haniyeh, killed by IDF/Mossad in July, although it’s believed Sinwar was the ‘mastermind’ for the heinous terrorist operation on the Israel-Gaza border music festival event (7th Oct’23).

In an early Monday Asian session, Hamas rejected the latest hostage deal proposal, blaming Israeli PM Netanyahu for setting new conditions and demands to thwart talks and prolong the Gaza war. Hamas said that the latest US-backed proposal is aligned with Israel’s demands, pointing at the insistence that the IDF remain in the Philadelphi Corridor, the Rafah Crossing, and the Netzarim Corridor. Hamas also blamed Netanyahu for introducing new conditions around the release of security prisoners. “We hold Netanyahu fully responsible for thwarting the mediators’ efforts and obstructing an agreement,” Hamas says, adding that the prime minister is responsible for the lives of the hostages held by Hamas. Hamas also stressed that it continues to stand by its July 2 proposal.

Israel may demand an international presence at the Rafah border crossing. As per the TOI report, the IDF has presented Israel’s political leaders with various options for solving the issue of control of the Philadelphi Corridor along the Gaza-Egypt border to prevent illegal arms import by Hamas. The report also suggested Israel is insisting that there be an international presence at the Rafah border crossing, separating between the Gazan and Egyptian sides of the crossing. This is because while Hamas has used tunnels beneath the border, “the vast majority” of its arms were brought into Gaza at the Rafah border crossing itself. The US's “bridging proposal” was conveyed to Israel and Hamas on Friday; it is stated that the Palestinian Authority would run the Rafah border crossing, with remote Israeli oversight.

In early Monday, the US Secretary of State Blinken met with Israeli President Herzog before meeting PM Netanyahu; both put the blame squarely on Hamas for the failure to reach a hostage deal. Blinken said ongoing talks ‘maybe the last’ chance for hostage deal:

·         A decisive moment, probably the best, maybe the last opportunity to get the hostages home, to get a ceasefire, and to put everyone on a better path to enduring peace and security

·         It’s time for it to get done. It’s also time to make sure that no one takes any steps that could derail this process. So we’re looking to make sure that there is no escalation, that there are no provocations, that there are no actions that in any way could move us away from getting this deal over the line, or for that matter, escalating the conflict to other places and greater intensity

·         It is time for everyone to get to ‘yes’ and not look for any excuses to say ‘no’

Fed rate cut trajectory

Now from geopolitics to economics, on Friday the UM (University of Michigan) flash data shows US consumer sentiment (confidence) rose to 67.8 in Aug’24 from 66.4 sequentially, above market consensus of 66.9 and the first increase in five months, but still far lower than pre-COVID (Feb’20) high around 101.

Meanwhile, both the year-ahead and the five-year inflation expectations were unchanged at 2.9% (four-month low) and +3.0% (five-month high), respectively.

 

The UM said:

“Consumer sentiment was essentially unchanged for the fourth consecutive month, inching up 1.4 index points. With election developments dominating headlines this month, sentiment for Democrats climbed 6% in the wake of Harris replacing Biden as the Democratic nominee for president. For Republicans, sentiment moved in the opposite direction, falling 5% this month. Sentiment of Independents, who remain in the middle, rose 3%. The survey shows that 41% of consumers believe that Harris is the better candidate for the economy, while 38% chose Trump. In comparison, between May and July, Trump had a 5-point advantage over Biden on the economy.

Overall, expectations strengthened for both personal finances and the five-year economic outlook, which reached its highest reading in four months, consistent with the fact that election developments can influence future expectations but are unlikely to alter current assessments. Survey responses generally incorporate who, at the moment, consumers expect the next president will be. Some consumers note that if their election expectations do not come to pass, their expected trajectory of the economy will be entirely different. Hence, consumer expectations are subject to change as the presidential campaign comes into greater focus, even as consumers expect that inflation is still their top concern to continue stabilizing.

Year-ahead inflation expectations came in at 2.9% for the second straight month. These expectations ranged between 2.3 to 3.0% in the two years before the pandemic. Long-run inflation expectations came in at 3.0%, unchanged from the last five months. These expectations remain somewhat elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.”

Overall, US consumer sentiment improved slightly as Democrat supporters were boosted after Biden’s exit and Harris’ entry against Trump, while Republican supporters are now on the back foot to some extent as it may not be a free run for Trump (after senile Biden’s exit from the Presidential run).

The U.S. may be heading for a hung Parliament-like situation amid the increasing approval rating of Harris (Democrats) against Trump (Republicans); i.e. after Biden’s exit, young & energetic moderate Harris may beat hardliner & aging Trump, who is too much occupied with various controversies and criminal cases. But even if Trump loses to Harris, Republicans may retake the Senate and may continue to dominate the House also. If there is a hung Parliament-like situation without any Trifecta for either Trump or Harris, we may see political & policy paralysis in the US; i.e. 2017 Trump tax cut may expire by 2025.

Recent economic data showed Japan's economy expanded faster than expected in the second quarter with higher wages and higher revenue, as well as signs of stabilization in China, such as slowing drops in property values and higher-than-expected retail sales.

The economic data led to optimism when US inflation data showed that core consumer prices in July increased at the weakest rate since 2021, clearing the way for the expected Fed rate cut from next month (Sep’24). Traders are currently fully pricing in a -25 bps rate cut in September and -100 bps of easing by Dec’24; i.e. the market is now expecting -25 bps rate cuts each in Sep’24 and Nov’24 and further -50 bps in Dec’24 against Fed’s projections of only -25 bps.

On Thursday (15th August), Fed’s Bostic said:

·         Open to a rate cut in September as inflation cools

·         Warned Fed against delaying policy easing

·         I'm open to something happening in terms of us moving before the fourth quarter

·         Bostic also expressed caution over signs of cooling in the labor market, urging the central bank to be conscious of its mandate of maintaining full employment and saying that he is open to the idea of cutting rates by increments of half a point, not just a quarter point if the labor market weakens faster than

·         The Fed is satisfied with the overall disinflation process, but despite lots of progress in disinflation, the Fed wants to see more progress:

The first thing I think is inflation is getting back to target in an orderly way. And I have, geez, a lot more confidence that inflation’s sustainably on its way to 2%, which is a very good thing. The top-line (PCE) numbers had been falling consistently before the CPI had fallen nicely, and the CPI numbers the first time since March of 2021, had been below 3%, so lots of progress, and that’s very positive

·         On Fed’s patience/Confidence: The Fed needs to be more confident about the overall disinflation process before going for the rate cuts cycle:

“Well, I think you have to remember our target’s 2%, not 2.9 or 3.2. There’s still a way to go, and things can happen on that road. So, I think it’s in all of our interests to be cautious and vigilant to make sure that the next reading doesn’t take us in a different direction. So patience, I’ve been talking about patience for a long time. I think I was on your show about a year ago, and was saying that we’re going to have to wait this out and just be patient because if we rush, go too soon, and then have to raise rates again, that will be, you know, my directors and my board members tell me that’s the nightmare scenario. So I want to make sure that we avoid that.”

·         On rising unemployment number:

 

“Well, it’s a factor. You know, when I talk about the labor market, the phrase I use is “weakening, but not weak.” By historical standards, the unemployment rate of even 4.3% is pretty low. Now what you said is true. It’s come off of a 3.4% level, so that’s a lot of weakening.

But when I talk to businesses, what they tell me is, that although they’re not looking to hire a lot of workers, they’re not in layoff mode either. Their outlook or that demand is going to stay strong, and that the workforce they have today is going to be one that will sustain. So it’s still tight out there. I mean, I try to remind people, that right before the pandemic happened, everyone was saying labor markets are tight, and how can we continue to have a strong economy if we can’t find workers? We’re kind of in that space again.”

·         On the Fed’s more focus on inflation rather than employment right now: Inflation is still above the Fed’s target/comfort levels despite satisfactory disinflation, while unemployment, although rising, is still within the Fed’s comfort levels and historically below the red line:

“I do (about employment). You know, the thing that I’m most concerned about at this point is that we have dual mandates, and both of them need to get to their target. Inflation is moving in the right direction. Employment might be moving in the wrong direction. And so the thing I’m most concerned about is that this weakening that we’ve seen accelerates in such a way that jobs stop being produced, and then that might lead to more disruption and pain in the labor force. What I would say right now, though, is I’m pretty pleased that that’s not what we’re seeing now, and that’s the important thing. Consumers, by and large, are continuing to spend. And so the demand for product is good, and firms and businesses feel like they got to keep their workers, because they’ve got some demand to meet.”

·         Although inflation is now almost stable, pre-COVID price levels may not come back again unless there is a severe deflation; but real wages are now positive, and thus purchasing power is also increasing for the general public:

“Well, I say it just the way you said. Price levels are not likely to come back down. But the most important thing in all of this is that wages are growing faster than inflation, so families’ pricing power and purchasing power are increasing with every month, and over time, the prices won’t feel like so much of a sticker shock relative to the amount of money people will have in their pocketbooks. So that’s the part that I think is important. It’s just going to take some time for that wage dynamic to play out, and once that does, I think people will start to, like, level into a new equilibrium.”

·         Fed’s rate action/policy stance is not dependent on the political/election calendar, but economic calendar; if required Fed will take rate action based on its judgment even if in the election month; The Fed is politically neutral:

“I don’t, because I’m not going to talk about it. So, there isn’t a reminder that needs to be made. No, it’s really interesting. If you look back over the history of the Fed, even in the last 20 years, the Fed has done actions in election years … close to the election date itself. And so for me, I think that’s a reminder that we have a history of doing the right thing at the right time or the thing that we think is right at the right time, and I’ve got an obligation to abide by that, and to continue that tradition moving forward.”

·         Whether Sep’24 is a live meeting or not: Every meeting is a live meeting including September; The Fed is expected to have a good set of numbers (economic data) and have an interesting conversation about rate cuts in Sep’24 or thereafter:

“Every meeting is a live meeting. I’m hopeful that the numbers are going to come in quite positive, and we’ll have an interesting conversation about whether we should be moving off of our policy stance. And then we’ll just see sort of where that goes.”

Bostic's latest comments are a step ahead of his comments earlier this week where he said he wants to see "a little more data" before he's ready to support lowering rates but overall, he may be also not in a hurry to cut rates and arguing for more patience (wait & watch).

On Thursday (15th August), the St. Louis Fed’s President Musalem said:

·         Election years can bring uncertainty, and that can affect economic confidence

·         Models suggest interest rates going forward are likely to be higher than pre-pandemic

·         I don't think recent volatility has had a macro impact yet

·         The risks of easing too early or too much could be costly

·         We just have to be confident that the inflation trend is secure

·         The news has been very encouraging on inflation over the past three months

·         I don't think the Fed is behind the curve, the economy is doing very well

·         I don't see a recession in the next few quarters

·         I see GDP growth as between 1.5% to 2% over the second half of this year

·         The economy has been growing very well; data does not support the idea of a recession

·         The time may be nearing for a change in the policy rate

·         The balance of risks on inflation and the jobs market has shifted

·         The labor market is no longer a clear upside risk to inflation

·         Recent data has bolstered my confidence in inflation

·         There are signs of labor market cooling, but layoffs remain low

·         The labour market is no longer overheated

·         There is more disinflation work to do

·         Absent further shocks, inflation seems to have returned to a path consistent with 2% over time

·         Monetary policy is moderately restrictive

On late Friday, Fed’s Goolsbee said:

·         I have concerns that we set this level of interest rate more than a year ago and inflation, and the labor market are cooling faster than expected. I think we should take a step back and think about that

·         I have concerns for 2024, we have crosscurrents

·         The impact of past hikes may not be fully realized

·         Lately, business contacts say that they can't pass on higher prices to consumers than before

·         Some things are flashing yellow

·         If we move to less restrictiveness, it will ease some of these credit conditions

·         Credit conditions seem tight

·         Unemployment is up, and that's a caution sign

·         Small business defaults are up; now it's getting a little cautionary

·         Some things are flashing yellow

·         You don't want to tighten any longer than you have to, this is not what an overheating economy looks like to me

·         We want the job market to stabilize, there are concerns it'll weaken more

·         GDP is still pretty strong and there are pockets of strength in the economy

·         Some leading indicators of recession are flashing warning

·         When the labor market starts to turn, it tends to worsen fast

The new Chicago Fed President Goolsbee may be sounding now most dovish and seeking the start of the Fed rate cut from Sep’24 rather than Dec'24, while most other senior Fed policymakers are batting for more patience (wait & watch) to be almost 100% confidence about disinflation/inflation trajectory so that it could sustainably result in the targeted price stability without causing hard landing.

Although, Goolsbee may not be talking randomly, and maybe a part of a well-planned & coordinated Fed strategy to keep the market/bond yield under control (back door YCC) and to also keep the market ready for any policy action in Sep’24. The market is now expecting not only a rate cut in Sep’24 @-25 bps, but also the same for Nov’24 and Dec’24; i.e. cumulative -75 bps rate cut in H2CY24 against Fed’s dot-plots/projections of -25 bps.

Looking ahead, all focus may be also on Fed Chair Powell’s comments on 23rd August on the economic outlook at KC Fed's Jackson Hole annual Economic Symposium, which is historically famous for any change in policy stance. Fed never goes for any policy action without keeping the market in full discounting/confidence and as present market implied probability is now almost fully discounting Sep’24 and also Nov & Dec’24 @-25 bps.

 On Wednesday, the WSJ Fed watcher Timiraos is out with his take on today's CPI:

·         September rate cut is 'close to a lock'

On Wednesday (14th Aug), US President Biden said after the July inflation report:

·         More work to do on inflation, but we are making real progress

·         Large corporations are not doing enough to lower prices

·         Prices are still too high

Conclusions:

We may see better/improved/upbeat US job data for not only August but also for Sep and October and a moderate inflation report (ahead of Nov’24 US election) to justify Bidenomics. Fed is not in a hurry to start the rate cut cycles of 11 QTR cuts without evaluating data for a few more months in totality. Thus Fed may not only evaluate inflation and employment data for July and August but also for September and October/ November before launching the much-awaited rate cut cycles from Dec’24 QTR end.

Despite the market now suddenly panicking for a hard landing for the ‘terrible’ NFP/BLS job report for July, if we consider the increasing number of multiple job holders, higher number of temporary layoffs, and an unusual addition in labor force due to one-time seasonal factor), the overall nature of US labor market is still strong enough for Fed to continue its wait & watch stance to gain more disinflation pace and required full confidence to launch the series of rate cuts from Dec’24 rather than Sep’24.

But even if the Fed responds to the present market panic and begins cutting rates from Sep’24 instead of Dec’24, it will make no significant difference in reality (Real Street) but may boost the sentiment of Wall Street by ensuring financial stability first. In that scenario, even if the Fed cuts the rate by -25 bps each (no question of -50 bps pace), it will continue the pace of 4 rate cuts each in 2025-26 and one QTR/HLY cut in 2027.

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump 2.0.

Although the market is now almost discounting the start of Fed rate cuts from Sep’24, considering overall pace of disinflation, Fed may continue its wait & watch stance till at least Dec’24 and may continue to indicate on 31st July FOMC/policy meeting that Fed is gaining incrementally higher confidence for overall disinflation process till Q2CY24, but still it’s not enough for launching the rate cut cycle in Sep’24 as Fed may want to be more confident after having actual data for another QTR. If Q3CY24 average US Core inflation (CPI+PCE) indeed goes around +2.9%; i.e. below the +3.0% ‘confidence’ line, then the Fed may officially indicate the start of the 11-QTR rate cut cycle from Dec’24 QTR till Dec’27 (two half yearly rate cuts in 2027).

The Fed will get the Sep’24 core inflation report by mid-late Oct’24 and accordingly may indicate the rate cut from Dec’24, just ahead of the Nov’24 election to keep both Democrats and Republicans happy; the Fed may indicate the start of a rate cut in Oct’24 (just ahead of the Nov’24 election) Fed talks and may start cutting rates from Dec’24 (just after the Nov’24 election), keeping Wall Street near life time high with some healthy corrections.

But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Market wrap:

On Friday, Wall Street Futures edged up on fading hopes of a hard landing despite orderly disinflation, and hopes & hypes of an imminent Gaza war ceasefire and fading concern of an imminent Iran-Israel duet. The market is now expecting an early Fed pivot from Sep’24 rather than Dec’24. Wall Street was boosted by banks & financials, utilities, techs, communication services, consumer staples, consumer discretionary, materials, and healthcare, while dragged by industrials, energy and real estate. Scrip-wise, Wall Street was dragged by Caterpillar, Microsoft, Amgen, United Health, Amazon, IBM, 3M and P&G, while boosted by Boeing, Cisco, Verizon, McDonald’s, JPM, Goldman Sachs, American Express, Nike, Intel, Coca-Cola, Walmart, Apple, and Walt Disney.

On Friday, Gold soared above $2500 on lingering suspense about the Gaza war trajectory, lower USD/higher Yen, expansionary economic policy by Harris as part of her election manifesto, and China’s new higher import quota for Gold. On Friday Gold spiked above $2500 after Hezbollah fired over 50 rockets to Israel.

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

Whatever the narrative, technically Dow Future (39300) has to sustain over 39900 for any further rally to 40100/40500-41050/41450* and 41675*/41950-42100*/42700 in the coming days; otherwise sustaining below 39800/39550, DJ-30 may again fall to 39200 and 39000/38800-38600/38300-38000 in the coming days.

Similarly, NQ-100 Future (18300) has to sustain over 18800-19000 for any further recovery to 19300/19600-19750/19950 and 20150*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 18700/18500-18200/18000 it may further fall to 17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5300), now has to sustain over 5450 for any further recovery to 5475/5525-5605/5675 and rally further to 5725/5750*-5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5425/5400-5350/5300 may further fall to 5250/5200-5175/5100* and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2400) has to sustain over 2425-2440 for a further rally to 2455*/2490-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2420-2410, may fall to 2395/2385-2370/2360 and 2350*/2340-2320/2300-2290/2275* and 2235/2210-2160/2110 in the coming days (depending upon Fed stance, Gaza/Ukraine war trajectory and US election outcome).