Gold, Dow stumbled from soft CPI high on Fed’s hawkish hold

·         Fed projected a 25 bps rate cut in 2024 vs earlier projection of 75 bps but also projected 100 bps rate cuts each in 2025-26 against earlier 75 bps

Wall Street was almost flat after mixed US NFP report Friday and ahead of all-important US inflation data, followed by the Fed meeting, June SEP/dot-plots late Wednesday. On early Wednesday US session (before the Fed), all focus of the market was on U.S. core CPI inflation for May as it may influence the Fed for any rate action/policy stance change 12th June dot-plots after just a few hours. Although the market is already discounting a pause for the June meeting, the Fed will still evaluate core CPI data for May’24 along with the 2023 average and 6M rolling average for change of any policy stance required in H2CY24. The market was still broadly discounting -75 bps rate cuts partly in late H2CY24, starting from Sep’24.

On Wednesday, the BLS data (NSA) shows the annual (y/y) US core CPI inflation edged down to +3.4% in May’24 from +3.6% sequentially, below the market consensus of +3.5% and at the lowest over three years (since Apr’21).

In May’24, the annual US core CPI was continuously boosted by the heavy-weight shelter index, which increased by +5.4% but also eased from +5.5% sequentially. Core CPI was also boosted by medical care, used cars & trucks, and education, while dragged by airline fares, new vehicles, communication, recreation, and apparel.

The U.S. Core service inflation (w/o energy service) was unchanged at +5.4% in May’24 from +5.4% sequentially and Jan’23 reading of +7.2%, but it’s still substantially above pre-COVID average levels of 2.8%. Fed is now closely focusing on core service inflation, which is still quite elevated and sticky.

On Wednesday, the BLS data (SA) showed the sequential (m/m) US core CPI increased +0.2% in May’24 from +0.3% in the previous month, below market expectations of +0.3% and the slowest increase in sequential core CPI inflation in eleven months (June’23). The Fed needs a +0.2% (~0.15%) average sequential core CPI rate on a sustainable basis for its +2% annual core inflation target on a sustainable basis.

Overall, the average of US core CPI eased to around +3.7% in 2024 (YTM) against +4.8% in 2023 against +6.2% in 2022, while the 6M rolling average is now around +3.7% (y/y), eased from the prior +3.8%. The annualized rate of 6M rolling average of sequential (m/m) core CPI is now around +3.7%, still substantially above the Fed’s +2.0% targets.

The 2024 (YTM) core CPI is now around +3.7% against +4.8% in 2023; the 6M rolling average of core CPI is now around +3.7%. As per core CPI data trend, the US core PCE inflation may also increase by around +0.2% in May’24, resulting in an annual rate of around +2.7%  against +2.8% sequentially and a 6M rolling average of around +2.8%. In that scenario, the 6M rolling average of US core inflation (PCE+CPI) will be now around +3.3% in May, eased from earlier +3.4% sequentially.

On Wednesday, the BLS data (NSA) shows the annual (y/y) US CPI inflation edged down to +3.3% in May’24 from +3.4% sequentially, below the median forecasts of +3.4%, and the lowest in three months. In May’24, the US CPI was eased by food, shelter, transportation, apparel, new vehicles, and used cars & trucks, while boosted by energy.

On Wednesday, the BLS data (SA) showed the sequential (m/m) US CPI was unchanged at +0.0% in May’24, eased from +0.3% in Mar’24 and below market expectations of +0.1% advance. In May’24, the sequential core CPI was buoyed by shelter and food, while dragged by energy.

Overall, the 6M rolling average of US CPI is now around +3.3% against +4.1% in 2023 and still substantially above the Fed’s target of +2.0%; officially US Congress has given Fed price stability mandate as 2% 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.

Overall, US core inflation was softer than expected or even earlier trend of -0.10% pace to -0.20% per month in May and the 6M rolling average of US core inflation (CPI + PCE) may come around +3.3% in May. But it’s still above the minimum 3% threshold levels that the Fed may feel confident enough and give a definitive rate cut cycle signal to prepare the market well in advance.

Looking at the trend/pattern of overall US core inflation data, the Fed may provide a rate cut signal in its next quarterly (Q3) September meeting (ahead of the Nov’24 election) as by then average US core inflation (CPI+PCE) should fall below +3.0% red line and Fed may start the rate cut cycle from Dec’24 (Q4CY24), just after the Nov’24 election, so that both Democrats (Biden admin) and Republicans (Trump admin?) will be happy and Powell may be on the safe side from high probable Trump tantrum (if Trump indeed wins the Nov’24 election).

On Wednesday, the Fed went for the hawkish hold as it projected a -25 bps rate cut in 2024 against earlier March dot plots of -75 bps, but also projected higher rate cuts by -100 bps each in 2025 and 2026 (against earlier -75 bps) and kept 2027 projected rate cut of -50 bps unchanged; i.e. Fed has shifted the -50 bps rate cuts deficit for 2024 to 2025 and 2026 evenly. Thus the overall stance of the Fed may be termed as less hawkish than originally seemed/expected.

Market impact:

On Wednesday, Wall Street, Gold stumbled from a softer-than-expected US CORE CPI high after the Fed’s hawkish hold, but the overall impact was quite limited as the Fed shifted 50 bps rate cuts deficit for 2024 to 2025-26. Now Fed will start the rate cuts cycle from Dec’24, just after the Nov’24 US election to keep both Democrats and Republicans happy and continue -25 bps rate cuts for the next eight quarters each in 2025-26 @-25 bps and then close the rate cut cycle after cutting -25 bps twice in June and Dec’27 (H1/H2) for a terminal rate +2.75% against pre-COVID terminal rate +2.50%. The market was expecting at least -50 bps Fed rate cut in 2024 (Nov+Dec’24) before Fed and May inflation data; but after softer inflation data, the Market also gave a higher probability of Sep’24 rate cut; i.e. ahead of the Fed, the market was discounting almost -75 bps (three) rate cuts.

On Wednesday, wall Street closed mixed as DJ-30 lost around -35 points, while SPX-500 surged +0.8% and NQ-100 surged +1.5% as techs jumped. Wall Street was also boosted by industrials, consumer discretionary, real estate, materials, communication services, and banks & financials, while dragged by energy, consumer staples, utilities and healthcare. Script-wise, Wall Street was boosted by Apple, Home Depot, Microsoft, Goldman Sachs, Caterpillar and Amgen, while dragged by Nike, Salesforce, Verizon, Visa, Boeing, JPM, Chevron, P&G, Merck & Co, Coca-Cola, United Health and Intel.

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

Whatever may be the narrative, technically Dow Future (38700) has to sustain over 39100 for any recovery to 39200//39300*-39400*/39700 and 39800/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 39000-38900 may further fall to 38750/38550-38450/38250 and 38100/37900*-37600/37400 in the coming days.

Similarly, NQ-100 Future (19000) has to sustain over 19200 for a further rally to 19300-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 19100-19000/18800 may again fall to 18700-18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Also, technically Gold (XAU/USD: 2290) has to sustain over 2285-2275 for any recovery to 2310/2320 -2330/2355/2365*-2375/2385 and further rally to 2400/2425-2435/2455* and 2475-2500; otherwise sustaining below 2270-2265 may further fall to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.