Gold, Oil surge as Iran may attack Israel soon; Dow slips

·         Fed comments show Fed may not be in a hurry to launch the much-awaited rate-cut cycle before evaluating economic data for the next few months

On Monday, Gold and oil surged on the concern of an imminent attack by Iran on Israel; Wall Street futures (stocks) were under stress. As per reports by TOI, Iran has prepped missile, and drone units just like it did before the April’24 ‘staged’ attack on Israel; but neither Israel nor the US can predict the exact timing of the retaliation attack that Iran has threatened for the killing of Hamas leader Haniyeh in Tehran last month (to satisfy domestic political compulsion). But this time Iran has promised something bigger than the April attack when it fired around 300 missiles and drones at Israel in mid-April (after sharing all the technical details/likely trajectories with Qatar/US/Israel)- most of which were downed by Israel and its allies, but some indeed landed on isolated/barren Israeli territories (around Gaza strip).

A senior Israeli official stressed: “The Iranians openly signal (on the ground) their determination to carry out a significant attack in addition to their public statements that the attack will exceed the one they carried out in April. Iranian public statements do not reflect any retreat.”

On Monday, the White House spokesman Kirby also warned Iran, proxies could launch a ‘significant set of attacks’ on Israel this week:

·         We share the same concerns and expectations that our Israeli counterparts have with respect to potential timing here. Could be this week

·         We have to be prepared for what could be a significant set of attacks

·         The US has increased its regional force posture in recent days

·         We don’t want to see Israel have to defend itself against another onslaught like they did in April. But, if that’s what comes at them, we will continue to help them defend themselves

·         It is difficult to ascertain at this particular time if there’s an attack by Iran or its proxies what it could look like

·         The president is confident that we have the capability available to us to help defend Israel should it come to that---nobody wants to see it come to that

·         But the timing of any attack could affect Gaza hostage-ceasefire talks, currently scheduled to resume on August 15; everyone needs to show up for talks on Thursday

·         Israel has confirmed that it will send a delegation to the talks, while Hamas has refused to attend

Although various NATO/G7 countries are requesting Iran to abandon the idea of a revenge attack, Iran seems determined to launch any staged attack to satisfy domestic political compulsion. On Monday, after a call with the German chancellor, Iran's president said Tehran has ‘right to respond’ to attacks. New Iranian President Masoud Pezeshkian says his country has “the right to respond” to any aggression, after German Chancellor Scholz urged de-escalation, given soaring tensions with Israel.

The Iranian Prez Pezeshkian said:

·         While emphasizing diplomatic solutions to issues, Iran will never give in to pressure, sanctions, and bullying and considers it has the right to respond to aggressors in accordance with international norms

Overall, IDF is on high alert for Iran, and Hezbollah attacks (which are already happening); but we may also see some serious initiatives for the Gaza war ceasefire after the ‘much anticipated’ Iran retaliation. The new Hamas Chief Sinwar is now seeking the full implementation of Biden’s six-stage ceasefire proposal by Israel. Thus after the weekend or by late August, there may be a permanent Gaza war ceasefire.

Now from geopolitics to economics, on Saturday (10th August), Fed’s Governor Bowman said:

·         A rate cut may be appropriate if inflation continues to decline

·         Fiscal Policy and Immigration Pose Inflation Risks

·         Inflation remains uncomfortably above the target

Fed’s Governor Bowman said in a prepared speech on Update on the Economic Outlook, and Perspective on Bank Culture, M&A, and Liquidity:

Economic and Monetary Policy Outlook

“Before discussing my thoughts on bank regulatory matters, and in light of our recent Federal Open Market Committee (FOMC) meeting, I will begin by sharing my current views on the economy and monetary policy.

Over the past two years, the FOMC has significantly tightened the stance of monetary policy to address high inflation. At our July meeting, the FOMC voted to continue to hold the federal funds rate target range at 5-1/4 to 5‑1/2 percent and to continue to reduce the Federal Reserve's securities holdings.

After seeing considerable progress last year, we have seen some further progress in lowering inflation in recent months. The 12-month measures of total and core personal consumption expenditures (PCE) inflation, which I prefer relative to more volatile higher-frequency readings, have moved down since April, although they have remained somewhat elevated and stood at 2.5 percent and 2.6 percent in June, respectively. The progress in lowering inflation during May and June is a welcome development, but inflation is still uncomfortably above the Committee's 2 percent goal.

Despite the recent good data reports, core PCE inflation averaged an annualized 3.4 percent over the first half of the year. And given that supply constraints have now largely normalized, I am not confident that inflation will decline in the same way as in the second half of last year. More importantly, prices continue to be much higher than before the pandemic, which continues to weigh on consumer sentiment. Inflation has hit lower-income households hardest since food, energy, and housing services price increases far outpaced overall inflation over the past few years.

Economic activity moderated in the first half of this year after increasing at a strong pace last year. Gross domestic product (GDP) growth moved up in the second quarter, following a soft reading in the first quarter, while private domestic final purchases (PDFP) increased at a solid pace in both quarters. During the first half of 2024, PDFP slowed much less than GDP, as the slowdown in GDP growth was partly driven by volatile categories such as net exports, suggesting that underlying economic growth was stronger than GDP indicated. Unusually strong consumer goods spending last year softened in the first quarter of this year, largely accounting for the step-down in PDFP growth.

Although consumer spending strengthened in the second quarter, consumers appear to be pulling back on discretionary items and expenses, as evidenced in part by a decline in restaurant spending since late last year. Low- and moderate-income consumers no longer have savings to support this type of spending, and we've seen a normalization of loan delinquency rates as they have risen from historically low levels during the pandemic.

The labor market continues to loosen, as the number of available workers has increased and the number of available jobs has declined—showing signs that the labor market is coming into better balance. After slowing in the second quarter, payroll employment gains eased to a more modest pace in July, even as job openings are being filled by the increased immigrant labor supply.

The latest labor market report shows that the unemployment rate stood at 4.3 percent in July. Although notably higher than a year ago, this is still a historically low unemployment rate. In addition, the ratio of job vacancies to unemployed workers has declined to its pre-pandemic level. We are also seeing a slowing in wage growth, which now stands at just under 4 percent as measured by the employment cost index. However, given the trend of productivity, wage gains are still above the pace consistent with our inflation goal.

My baseline outlook is that inflation will decline further with the current stance of monetary policy. Should the incoming data continue to show that inflation is moving sustainably toward our 2 percent goal, it will become appropriate to gradually lower the federal funds rate to prevent monetary policy from becoming overly restrictive on economic activity and employment.

But we need to be patient and avoid undermining continued progress on lowering inflation by overreacting to any single data point. Instead, we must view the data in their totality as the risks to the Committee's employment and price-stability mandates continue to move into better balance. That said, I still see some upside risks to inflation.

First, as I noted earlier, much of the progress on inflation last year was due to supply-side improvements, including easing supply chain constraints; increases in the number of available workers, due both to increased labor force participation and strong immigration; and lower energy prices.  It is unlikely that further improvements along this margin will continue to lower inflation going forward, as supply chains have largely normalized, the labor force participation rate has leveled off in recent months below pre-pandemic levels, and significantly higher U.S. immigration over the past few years may decrease going forward.

Geopolitical developments could also pose upside risks to inflation, as the recent surge in container shipping costs originating in Asia suggests that global supply chains remain susceptible to disruptions, which could put upward pressure on food, energy, and commodity prices. There is also the risk that additional fiscal stimulus could add momentum to demand, impeding further progress on reducing inflation.

Finally, there continues to be a risk that the increased immigration could lead to persistently high housing services inflation. Given the current low inventory of affordable housing, the inflow of new immigrants to some geographic areas could result in upward pressure on rents, as additional housing supply may take time to materialize.

There are also risks that the labor market has not been as strong as the payroll data have been indicating, but it also appears that the recent rise in unemployment may be exaggerating the degree of cooling in labor markets. The Q4 Quarterly Census of Employment and Wages (QCEW) report implies that job gains have been consistently overstated in the establishment survey since March of last year, while the household survey unemployment data have become less accurate as response rates have appreciably declined since the pandemic.

Moreover, the rise in the unemployment rate this year largely reflects weaker hiring, as job searchers entering the labor force are taking longer to find a job, while layoffs remain low. It is also likely that some temporary factors contributed to the soft July employment report. The rise in the unemployment rate in July was centered on workers experiencing a temporary layoff, who are more likely to be rehired in coming months, and Hurricane Beryl likely contributed to weaker job gains, as the number of workers not working due to bad weather increased significantly last month.

In light of upside risks to inflation and uncertainty regarding labor market conditions and the economic outlook, I will continue to watch the data closely as I assess the appropriate path of monetary policy. Increased measurement challenges and the frequency and extent of data revisions over the past few years make the task of assessing the current state of the economy and predicting how it will evolve even more challenging. I will remain cautious in my approach to considering adjustments to the current stance of policy.

It is important to note that monetary policy is not on a preset course. In my view, we should consider a range of possible scenarios that could unfold when assessing how the FOMC's monetary policy decisions may evolve. My colleagues and I will make our decisions at each FOMC meeting based on the incoming data and the implications for and risks to the outlook, with a focus on the dual-mandate goals of maximum employment and stable prices.

By the time of our September meeting, we will have seen a range of additional economic data and information, including one employment and two inflation reports. We will also have a wider view of how developments in broader financial conditions might influence the economic outlook. In particular, equity prices have been volatile recently but are still higher than at the end of last year.

I will continue to closely monitor the data and visit with a broad range of contacts as I assess economic conditions and the appropriateness of our monetary policy stance. As I noted earlier, I continue to view inflation as somewhat elevated. With some upside risks to inflation, I still see the need to pay close attention to the price-stability side of our mandate while watching for risks of a material weakening in the labor market. My view continues to be that restoring price stability is essential for achieving maximum employment over the longer run.”

Conclusions:

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 Monday, Wall Street Futures closed mixed as blue-chip DJ-30 stumbled around -140 points, while broader S&P-500 and tech-heavy NQ-100 were almost flat amid fading hopes of dual stimulus in early 2025. Although the Fed may launch a rate cuts cycle from Dec’24 or even Sep’24, there may not be a Trump 2.0 Trifecta this time. Even if Trump wins the White House for the 2nd time, the lack of a simple majority in the House and Senate may not permit Trump to extend/deepen his tax cut and deregulation policy as well as a big-bang infra stimulus. Wall Street Futures were also under stress due to escalating geo-political tensions between Iran and Israel, while Gold and Oil surged.

On Monday, Wall Street was dragged by real estate, communication services, consumer staples, industrials, banks & financials, materials, healthcare, and consumer discretionary, while boosted by techsm energy, and utilities. Script-wise, Wall Street was dragged by Boeing, P&G, Intel, Cisco, Travelers, IBM, Goldman Sachs, Merck & Co, Amgen and Caterpillar, while boosted by United Health, Walmart, Apple, McDonald’s, Nike and Microsoft.

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

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).

Technically Oil (78.30) now has to sustain over 75.00 for any recovery to 78.50/80.50-82.00/85.00-88.00-90.00/91.00-95.00; otherwise sustaining below 74.50, oil may further fall to 73.00 and 72.00-70.00 in the coming days.