Gold, Dow, Bonds stumbled on hawkish Fed talks; techs tumbled

·         Trump may face hurdle in election as ailing & senile Biden set to exit the race, paving the way for younger/smarter/experienced VP Harris to fight

·         Fed will scrutinize Q3CY24 core inflation data before taking any final decision about rate cut and may not cut before Dec’24

·         Trump also does not want a rate cut in Sep’24, just before the Nov election; Trump now wants a higher for a longer stance to crush inflation

Wall Street closed mixed Wednesday amid mixed US economic data, mixed Fed talks, and mixed sectoral movement as techs plunged the renewed concern of US tech restrictions on China. The Biden admin has told allies that it is considering imposing the most severe trade restrictions possible if companies like Tokyo Electron and ASML continue to provide China with advanced semiconductor technology. The US is also considering additional sanctions against specific Chinese chip companies linked to Huawei. Techs plunged on the concern that the US might impose stricter restrictions on Chinese access to US trade and semiconductor technology.

Earlier Wall Street Futures soared on hopes & hypes of a dual stimulus boost from early 2025 led by the Fed’s likely rate cuts (eleven) cycle from Dec’24 or even Sep’24 and Trump 2.0/Trumponomics Optimism; i.e. continuation of Trump’s tax cut policy along with any additional corporate tax cut (from present 21% to 15%). Gold also jumped to a fresh lifetime high of almost 2482 early Tuesday as all these tax cuts; i.e. fiscal stimulus and also the Fed’s monetary stimulus may add to the US fiscal deficit & public debt, resulting in more devaluation of LCU (USD) and inflation. Also escalated geopolitical tensions over the Gaza war (Israel-Hezbollah/Iran) have boosted Gold despite some progress on a permanent ceasefire ahead of Nov’24 US election.

In Brief, Trump may be positive for USD/US bond yields and mixed for Equities (higher borrowing costs, China/EU trade tantrum, nationalistic trade policies, and tax cuts), and also positive for Cryptos to some extent; but overall, there may be limited ability for a monumental change in policies by Trump and even Biden due to various checks & balances in the US political & policy system. Trump may not get a trifecta this time if Biden withdraws and some other ‘younger’ Democrat candidate Like VP Harris-unlike his first two years (2016-18). Trump’s policies are seen as inflationary due to attempted tax cuts, tighter immigration, and higher import tariffs (import taxes), but tax cuts and deregulation (if any) are positive. Also, Trump may impose an additional 60% tariff on China (?), while China can respond by letting the yuan fall against the USD; both Chinese exporters and US importers/consumers would be happy.

Overall, tax revenue decreased under Trump (after TJCA-2017), but in the longer term, US tax revenue to normal GDP ratio is around 17%, while the public debt interest/tax revenue ratio increased from around 7% pre-COVID to almost 15% in FY23 (post-COVID) and poised to scale 20% by FY25 due to increasing borrowing and interest rate/bond yield/coupon rate amid elevated inflation. This is a red flag as China and EU’s ratio is around 5.5-6.5%.

All these mean that the US is on an unsustainable path of higher fiscal deficit, higher debt (growing more than normal GFP), higher currency devaluation, higher interest/borrowing cost, and higher inflation. Thus despite USD being the global reserve currency of the world and preferred trade currency, always in demand is getting a boost as a haven/inflation hedge physical/digital asset. Moreover, EM central banks like India/RBI, China/PBOC, etc are actively buying Gold as a part of their strategy to diversify from USD to avoid being trapped in a US/EU sanction for any geopolitical issue (like the Russia-Ukraine war).

Trump 2.0 may be negative for US bonds and positive for bond yields amid higher fiscal deficit and higher inflation (due to nationalistic trade war policies). Trump 2.0 may be also positive for the USD due to protectionism, but at the same time, Trump has also said he wants policies in place for a weaker USD to promote US exports. Moreover, Vance, who is 39 years old and almost four decades younger than Trump, 78, provides new impetus to Republican attempts to increase their appeal to the working class, which used to be a pillar of the Democrats in battleground states like Pennsylvania, Wisconsin, and Michigan. Vance is also playing for weak USD. Trump 2.0 may be positive for US gun manufacturers, oil companies, and private prisons, while negative for EV/solar and marijuana industries.

On Thursday (18th July), Trump said in the RNC conclave:

·         Aims to lower prices and promote affordability in the US

·         Plans to Lower Energy Costs

·         To End the Inflation Crisis and Lower Rates

·         We unite more determined than ever despite the attack

After Fed’s Chair Powell indicated Fed is now getting more confidence about disinflation after getting Q2CY24 data. Powell pointed out the 3M/QTR rolling average of core CPI, which was +3.4% in Q2CY24 vs +3.8% in Q1CY24 vs +4.0% in Q4CY23. The pace of disinflation was +0.4% in every quarter in 2023, which slowed to +0.2% in Q1CY24, but again got the targeted pace of +0.4% in Q2CY24. Thus after getting no additional confidence in Q1CY24, the Fed is again getting additional confidence about the overall disinflation trajectory.

Thus the market is now expecting the start of eleven Fed rate cuts cycle from Sep’24 rather than Dec’24 and stimulus-savvy Wall Street soared on hopes & hypes of dual stimulus from 2025 (Fed’s rate cuts-monetary stimulus and Trumps’ tax cuts + infra spending-fiscal stimulus). But Trump may face ‘competition’ in the Nov’24 election if Biden opts out and VP Harris comes in against him. Also, Trump disagrees with a September Fed rate cut - wants rates higher for longer. Trump also said he has no plans to fire Fed Chair Powell before the end of the term. Trump also questions the US duty to defend Taiwan from China.

On 12th July (Friday), Atlanta Fed’s President Goolsbee said:

·         On US CPI report - This is what a path to 2% inflation looks like

·         It doesn't feel like the beginning of a recession

·         Financial conditions are pretty restrictive

·         The reason to tighten policy would be if the economy is overheating

·         We are not overheating

·         The labor market is cooling but still strong

·         As inflation falls, leaving Fed policy rate steady means the Fed is tightening policy

·         The June CPI report was excellent; improvement in shelter inflation profoundly encouraging

·         In real-rate terms, we have tightened substantially

·         The cooling job market is an area of concern

·         The labor market has been cooling to better balance

·         The inflation fight is not done, but I feel a lot better

·         We've had multiple months of better inflation data

·         I feel a lot better about multiple months of improvement in CPI

On 11th July (Thursday), Fed’s Musalem said:

·         The economy may be shifting into a higher interest rate regime compared to pre-pandemic

·         I want to see more improvement in supply conditions

·         The current unemployment rate is still low despite the recent rise

·         I don't see a recession as likely, I see around 20% odds

·         I don't think recession risks are high right now

·         I see the economy growing between 1.5% and 2% this year

·         The disinflation process is ongoing

·         High interest rates are pressuring parts of the economy

On 16th July (Tuesday), Fed’s Daly said:

·         The economy looks to be on a path where 1 or 2 rate cuts this year would be more or less the appropriate path

·         It is likely some policy adjustments will be warranted

·         More information is needed before making a rate decision

·         Sees a policy adjustment over the coming term

·         Does Not Provide Time-Based Guidance on Rate Cuts

·         Sees growing confidence in nearing 2% inflation goal

·         Sees positive inflation data, but not at target yet

On 17th July (Wednesday), Fed’s Barkin said:

·         No single 25-basis-point interest rate cut matters one way or the other; the issue is when to change the narrative

·         The US labor market remains quite healthy

·         The recent housing inflation data was encouraging

·         I have been very encouraged that disinflation is broadening and I hope it continues

·         I am still looking for a bit more evidence that disinflation will be sustained

·         I am sure the US central bank will debate at the July policy meeting whether it is still appropriate to describe inflation as elevated

·         I am looking for low inflation to sustain and broaden; I am starting to see the broadening

·         Remarkable how strong consumer spending has remained

·         Current policy is restrictive; the labor market has cooled

·         We are not fully there on services and shelter inflation

·         I am watching the unemployment rate carefully, but also open to the idea that the policy is not as restrictive as thought

·         Monetary policy impacts may be slower to be felt than before

·         Firms are still trying to test their pricing power, though that is not a permanent state

·         Clearly on the back end of inflation

·         Inflation over the last quarter has come back down

·         Firms are reluctant to let people go, and some sectors are still short on labor supply

·         It's remarkable how strong consumer spending has remained

·         Expectations of a recession as needed to slow inflation have not played out

·         Fed will debate whether inflation is still "elevated"

On 17th July (Wednesday), Fed’s Waller said:

·         The Fed needs to maintain the current labor market conditions

·         The labor market is in the sweet spot, firms have the workers they want

·         The exact timing of the rate cut doesn't matter a lot

·         The time to cut rates is getting closer based on analysis of potential scenarios

·         Wage growth has continued to slow and is now consistent with the rate needed to support inflation running at 2% in a sustained way.

·         The current data is consistent with a soft landing and even less of a trade-off in terms of unemployment.

·         I will be looking for data over the next two months to buttress this view

·         Every month, personal consumption expenditures inflation needs to see a bit more evidence that it will be sustained

·         Recent inflation data makes me more confident the Fed will achieve inflation goal

·         Moderate consumption growth may continue in the second half of the year because personal income data holding up

·         Right now I see more upside risk to unemployment than has been seen for a long time

·         Labor supply and demand have finally come into a rough balance

·         The third scenario, but with low probability, is a significant resurgence in inflation in the second half of the year

·         The second and probably more likely scenario is uneven inflation data ahead that still shows progress; that would make a rate cut shortly more uncertain

·         The optimistic scenario is more good inflation data, which could mean interest rate cuts in the not-too-distant future

·         The Fed is getting closer to the time when a cut in policy rate is warranted

·         The time to cut policy rate is getting closer based on analysis of potential scenarios

·         There are tensions between tight US labor markets and availability of labor and the desire of firms to shift supply chains

·         The exact timing of the rate cut doesn't matter a lot

·         In real-rate terms, we have tightened substantially.

On 17th July (Wednesday), Fed’s Williams said:

·         The current policy is appropriate until I see more data

·         The past 3 months are closer to the disinflation trend the Fed wants

·         The labor market remains strong

·         We have to keep watching how the inflation trend progresses

·         The underlying inflation trend is more back on track to 2%

·         An interest-rate cut could be warranted in the US in the coming months

·         The Fed will learn a lot between July and September

·         There is a decision ahead of us on lowering rates

·         The labor market isn't weak

·         We are seeing broad-based declines in inflation

·         More data will help provide confidence in inflation

·         The current rate stance is appropriate to achieve goals

On 17th July (Wednesday), Fed’s Kugler said:

·         I am watching data incredibly closely given it can weaken fast

·         Inflation expectations especially in the long run have stayed pretty constant and seem anchored

·         The Fed does not want the labor market to cool too much

·         I am cautiously optimistic that inflation is returning to 2%

·         On services and housing, there has been progress with wage moderation, and also progress on housing as well

·         Disinflation is back on track

·         Inflation has continued to trend down, despite a few bumps at the start of this year.

·         Inflation remains above the US central bank's target

·         Supply and demand are gradually coming into better balance

·         The labor market has seen substantial rebalancing

·         Continued labor market rebalancing suggests inflation will continue to move toward the 2% target.

·         It will be appropriate to begin easing monetary policy later this year if economic conditions continue to evolve favorably.

·         Upside risks to inflation and downside risks to employment have become more balanced

·         If the labor market cools too much, it will be appropriate to cut interest rates sooner rather than later.

·         If incoming data does not provide confidence that inflation is moving toward the 2% target, it may be appropriate to hold rates steady a little longer

On 17th July (Wednesday), the Fed’s latest Beige Book noted:

·         Prices increased at a modest pace overall, with a couple of districts noting only slight increases

·         Expectations for the future of the economy were for slower growth over the next six months due to uncertainty around the upcoming election, domestic policy, geopolitical conflict, and inflation

·         Economic activity maintained a slight to modest pace of growth in a majority of districts this reporting cycle

On 18th July (Thursday), the NYT/ABC/AXIOS reported:

·         Biden has begun to accept he may not be able to win in November. He hasn't yet made his mind up

·         Biden is more open to hearing calls to exit the race

·         Biden has asked for polling on how Harris would do

·         End-Game Looms: Pelosi, Jeffries, Schumer Told Biden He Can't Win And Is Hurting Party Too

·         Several top Democrats say Biden will exit, possibly this weekend

·         Top democrats see Biden dropping out as soon as this weekend

Conclusions:

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. 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 impact:

On Thursday/Friday, Wall Street Futures, Gold stumbled on fading hopes of an early Fed rate cut from Sep’24. Also, Trump 2.0 and Trumponomics may not be assured if ‘ailing senile’ Biden is opted out and smarter/younger/experienced Harris is set to fight against Trump.

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

Whatever the narrative, technically Dow Future (40500) has to sustain over 40700 for any further rally to 41000/41300-41500/41800 and 41950/42000*-42700 in the coming days; otherwise sustaining below 40650, DJ-30 may again fall to 40400/40200-40000/39900 and further 39800/39600-39400/39200 and 39000/38800-38600/38300 in the coming days.

Similarly, NQ-100 Future (20600) has to sustain over 21050 for a further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 21000/20900-20700/20300 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 (5680), now has to sustain over 5750 for any further rally to 5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5700/5600-5575/5550 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: 2410) has to sustain over 2435 for a further rally to 2455*/2475-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2425/2390-2375/2355, may further fall to 2320/2300-2290/2275* in the coming days.