Fed may pause in Nov’24 as US core disinflation stalled in Q3

·         The latest elevated initial jobless claims may be due to a temporary distortion for Hurricane Helene

·         The US average core inflation (CPI+PCE) would be around +3.0% against an unemployment rate of 4.1% by Sep’24

·         Fed needs to bring down average core inflation to around +2.0%, keeping the unemployment rate around 4.0% or even below it, but not above 4.5% to ensure a soft landing

·         At the present run rate, average US core inflation may come down to around +2.0% only by Q4CY26

Wall Street Futures led by DJ-30 and SPX-500 are now trading around life lifetime high (LTH) on hopes & hypes of a soft landing (after blockbuster US NFP/BLS job report) and soft core inflation reading, which may keep the Fed for at least a -25 bps rate cut in Nov’24 followed by another -25 bps in Dec’24. Also, techs helped led by Apple, Tesla and Nvidia. Stimulus-addicted Wall Street Futures also got a boost on Chinese stimulus last week, but also undercutting in the current week after a ‘disappointed’ Chinese stimulus briefing by NDRC as it becomes almost clear China is not interested in flooding the economy with stimulus like the US (helicopter money policy) and stick to limited targeted stimulus to preserve price stability and fiscal discipline.

On Thursday, some focus of the market was on U.S. inflation data for Sep’34 as it may influence the Fed's decision for any jumbo/normal rate cut action/overall policy stance change on 8th Nov’24. On Thursday, the BLS data (NSA) showed the annual (y/y) US core CPI inflation increased by +3.3% in Sep’24 from +3.2% sequentially; i.e. ticked up and above with the market consensus of +3.2% and just above the lowest over three years (since Apr’21), but still substantially over Dec’19 (pre-COVID) levels of +2.3% (Fed’s price stability targets for core CPI).

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 6M rolling average was around +3.3% (y/y) in Sep’24, edged down from the prior +3.4%, while the 3MRA was around +3.2% and still substantially above the Fed’s 2.3-2.0% targets. 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 +3.3% or +3.4%; i.e. the US core disinflation pace may have slowed down or even stalled in Q4CY24 too.

The US core CPI needs to go down at least 1.0%  from present levels of +2.3 for the Fed’s price stability target of core CPI inflation around +2.3% and also to core PCE inflation around +1.5% from present levels of +2.7% so that overall average core inflation remains around +2.0% (2.3+1.5/2=1.9%~2.0%). 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 Thursday, the BLS data (SA) showed the sequential (m/m) US core CPI increased +0.3% in Sep’24 from +0.3% in the preceding month; i.e. unchanged, but above the market expectations of +0.2%. 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.

Overall, the 6MRA of US sequential core CPI was +0.2%, while the 3MRA was +0.3% and the 2024-YTM average was +0.2% against +0.3% in 2023 and +0.5% in 2024.

As per historical and present trend/rate, if the average sequential core CPI rate (NSA) remains around 0.2-0.3% in rest of CY24, CY25 and 0.2-0.1% in CY26, then the annual core CPI average would be around +2.3% by Dec’26; i.e. Fed may not achieve price stability targets of core CPI inflation around +2.3% on a durable basis before Dec’26 unless there is an unusual deflation/recession trend.

The U.S. Core service inflation (w/o energy service) edged down to +4.7% in Sep’24 from +4.9% sequentially, but still substantially above pre-COVID Dec’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).

In Sep’24, the US Shelter inflation edged down to +4.9% from +5.2% sequentially, but still substantially above pre-COVID (Dec’19) levels of +3.3%.

In Sep’24, the BLS data 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 Dec’19 (pre-COVID price stability) levels of +1.7%. In Sep’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. But shelter/rent inflation also edged down to +4.9% in Sep’24 from +5.2% sequentially, which is a relief for the Fed/market (as it eased below +5.0% sticky levels after Mar’22.

On Thursday, the BLS data (NSA) showed the annual (y/y) US total CPI inflation edged down to +2.4% in Sep’24 from +2.5% sequentially, above the median forecasts of +2.3%, and the lowest since Mar’21. In Sep’24, the US CPI was dragged by Energy products (mainly due to gasoline, and fuel oil), while boosted by energy services (electricity and piped NG), foods, and transportation.

Overall, the 6M rolling average (6MRA) of US CPI was +2.6% in Sep’24 against +3.1% in the prior month. 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; also there is 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, and thus ahead of the US election, both Democrats and Republicans are now grilling Fed/Powell for still elevated inflation, almost +20% high from pre-COVID levels, which has become an election issue.

On Wednesday, the BLS data (SA) showed the sequential (m/m) US CPI edged up at +0.2% in Sep’24 from +0.2% in the prior month (unchanged) and above market expectations of +0.1% advance. In Sep’24, the sequential US was boosted by the index for shelter rose 0.2%, and the index for food increased 0.4%; together, these two indexes contributed over 75% of the monthly increase. In addition, prices went up for medical care (0.4%), motor vehicle insurance (1.2%), apparel (1.1%) and airline fares (3.2%). In contrast, prices were declined for energy (-1.9%) and recreation (-0.4%).

Overall, the 6MRA of US sequential CPI was +0.1%, while the 3MRA was +0.2% and the 2024-YTM average was +0.2% against +0.3% in 2023 and +0.5% in 2024.

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 condition. After the recent unemployment rate surge above the 4.0% ‘orange’ line, the Fed is now focused more on the unemployment mandate, rather than price stability. Although now the Fed needs to lower both the unemployment rate and average core inflation (CPI+PCE) by around -1.0% for its price stability +2.0% core inflation on a durable basis, the Fed considers 4.0% unemployment rate on an average as longer-term sustainable minimum unemployment, while aspires to bring the unemployment rate to historically low 3.5%.

On Thursday, the U.S DOL flash data showed the number of Americans filing initial claims for unemployment benefits (UI-under insurance) surged to 258K in the week ending 5th Oct’24 from 225K in the previous week, and above the market expectations of 230K. This is the highest level in the initial jobless claims in the last 14 months on higher temporary layoffs amid Hurricane Helene. In the U.S., Initial jobless claims refer to the number of people who have filed for unemployment benefits with their state's unemployment agency for the first time during a specific reporting period, typically every week.

The 4-week moving average of initial jobless claims, a better indicator to measure underlying data, as it removes week-to-week volatility, also surged to 231K for the week ended 5th Oct’24 from 224.25K in the previous week.

Overall, the 6MRA of US initial jobless claims was around 235.217K, while the 2024-YTM average was around 222.688K against the 2023 average of 222.688K; 2022 average 213.429K and pre-COVID 2019 average of 217.218K; i.e. the US initial jobless claims is now almost at par with pre-COVID times.

The continuing jobless claims (UI) in the U.S. rose to 1861K in the week ending 28th Sep’24, from 1819K in the previous week, and higher than the market expectations of 1830K. The 4-week moving average was 1832K, from the previous week's average of 1827.500K. The advance seasonally adjusted insured unemployment rate for the related week was unchanged at 1.2%. Overall, insured US continuing jobless claims are now above +1000K from pre-COVID (Feb’20) levels of 1760K. The continuing jobless claims number is a proxy for the advance numbers of seasonally adjusted insured unemployed persons for the week. The continuing jobless claims in the U.S. 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).

Overall, the 6MRA of US continuing jobless claims was around 1833.540K, while the 2024-YTM average was around 1814.344K against the 2023 average of 1743.392K; 2022 average of 1474.175K and pre-COVID 2019 average of 1674.727K; i.e. the US continuing jobless claims is now elevated compared to pre-COVID times.

Overall, as per seasonally unadjusted continuing jobless claims under all categories (UI) of around 1832K in Sep’24 and assuming average uninsured employees (not getting any UI benefit) of around 4580K (usually 2.5 times of monthly continuing jobless claims), estimated unemployed persons was around 6835K in Sep’24. Assuming a +150K addition of the labor force in Sep’24 (after an unusual addition of +420 K in July due to some exceptional factors against average R/R +200K), the headline unemployment rate should come around 4.1% in Sep’24.

Conclusions:

After Sep’24, the 6MRA of US core inflation (CPI+PCE) should be around +3.0%, the unemployment rate of 4.1% against a target of +2.0% (core inflation-price stability) and 3.5% (aspired unemployment rate). But the Fed also makes it quite clear that it regards even a 4.0% average unemployment rate; i.e. 96% employment rate as maximum sustainable employment for the longer/medium term.

As per the current run rate, US average core inflation may come down to +2.0% levels on a sustainable basis by Dec’26. Thus Fed has to dial back restrictive rates carefully and go for rate cuts at normal -25 bps every other meeting (QTR end), so that US core inflation (PCE+CPI) gradually comes down to targets, keeping the unemployment rate around 4.0% or even below it; but not above 4.5% to ensure a soft landing.

Fed Chair Powell and most also other Fed policymakers almost poured cold water on further jumbo rate cuts (-50 bps) and indicated normal 25 bps rate cuts in the coming days unless the unemployment rate unexpectedly surges (say above the 4.5% red line). Moreover, Powell indicated another 25 bps rate cut in Nov’24 may not be assured unless the unemployment rate unexpectedly jumps in September. As per some reports, Powell may have penciled the policy path slightly above the median in the Sep’24 dot-plots.

The Next Fed meeting would be on 7th November and before that Fed may have official access to only one inflation and employment situation report for September only. Thus unless there is an unusual surge in the unemployment rate or an unexpected drop in core CPI, the Fed may pause. The US average (6MRA) core inflation (CPI+PCE) may have already stalled in Q3CY24 at around +3.2%, while the 6MRA (average) unemployment rate is around 4.1% as per available data. Thus the Fed may go for a pause and cut 25 or 50 bps in Dec’24 based on actual Q3CY24 and 6MRA data and outlook thereof.

Bottom line:

The projected Fed rate cut of -50 bps by Dec’24 not be assured as US core disinflation may have stalled in Q3CY24, while unemployment remains around 4.0%; Fed may cut -25 bps in Dec’24 after pausing in Nov’24.

Market Impact:

On Thursday, Wall Street Futures were almost flat amid hopes & hypes of bigger Fed rate cuts despite less dovish Fed talks, FOMC minutes, and core CPI inflation data as the latest initial jobless claims were slightly hotter than expected. On Friday, Wall Street Futures surged buoyed by JPM earnings; banks & financials surged.

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

Whatever the narrative, technically Dow Future (42500) has to sustain over 42700 for any further rally to 42900/43050-43250/43500* and 43700/44000-44500/44800 in the coming days; otherwise sustaining below 42600/650, DJ-30 may again fall to 42400/42300-42100/42000 and 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20400 for a further rally to 20600/20700-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20350/300, NQ-100 may again fall to 20000/19750* and 19600/19350-19100/18900 and further 18750/18550-18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5780), now has to sustain over 5850 for any further rally to 5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5825/800, may again fall to 5725-5675/5625-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also, technically Gold (XAU/USD: 2625) has to sustain over 2655 for a further rally to 2675*/2700-2725/2750 in the coming days; otherwise sustaining below 2650/2645, may again fall to 2625 and 2595/2590-2585/2575, may again fall to 2560*/2540-2530/2515 and 2495/2480-2470*/2425 and further 2415/2400-2390/2375 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory).