Gold slumped on hotter US core inflation, but the Dow recovered

Wall Street Futures got some boost early Tuesday on techs after closing Monday mixed amid mixed US NFP/BLS job reports and dragged by Boeing and NVIDIA (AI chip makers). But Wall Street Futures were also undercut by negative Asian cues early Tuesday European session on the concern of BOJ’s ‘exit’ jawboning. Fed is now preparing the market for an eventual rate cut cycle of 75-100 bps in H2CY24.

Although the market was expecting an earlier & deeper Fed rate cut of 150 bps from March/May’24, various Fed policymakers including Chair Powell are now carefully jawboning the market in a well-planned (co-ordinated) manner to control inflation expectations and also bond yields for the intended soft & safe landing of the Wall/Real street (economy) ahead of Nov’24 U.S. Presidential election. The market is now expecting Fed rate cuts from June and also the start of QT tapering from June’24. But the Fed may start QT tapering from March’24 and close the same by June’24 before going for rate cuts from July’24.

On Tuesday, all focus of the market was on U.S. core CPI inflation for February as it may influence the Fed for any rate action/policy stance in March/subsequent months. Although the market is already discounting a pause on 22nd March, but Fed may still evaluate core CPI data for February along with the 2023 average and 6M rolling average for policy stance in H1CY24.

On Tuesday, the BLS data showed the annual (y/y) US core inflation (seasonally not adjusted core CPI) eased to +3.8% in Feb’24 from +3.9% sequentially, above the market consensus of +3.7% and the lowest almost at 3-years. In Jan’23, the annual core CPI was +5.6%.

In Feb’24, the US core CPI was boosted by the shelter index, accounting for over two-thirds of the total 12-month increase. The shelter index increased by +5.7% in February, slowing from a 6% rise in January. Prices also softened for recreation (+2.1% vs +2.8%) and personal care (+4.2% vs +5.3%), but continued to rise significantly for motor vehicle insurance (+20.6%, as in January) and medical care (+1.4% vs +1.1%).

The U.S. Core service inflation (w/o energy service) also eased to +5.2% in Feb’24 from +5.4% sequentially and Jan’23 reading of +7.2%, 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 Tuesday, the BLS data showed the sequential (m/m) US core CPI (seasonally adjusted) rose +0.4% in Feb’24, unchanged from +0.4% in Jan’24, above market expectations of +0.3% advance, and the sharpest increase in sequential core CPI inflation since Apr’23. In Feb’24, the sequential core CPI was boosted by shelter, airline fares, motor vehicle insurance, apparel, and recreation, while dragged by household furnishings and medical care services to some extent.

Overall, the average of US core CPI was around +4.8% in 2023 against +6.2% in 2022, while the 6M rolling average is now around +4.0% (y/y). The annualized rate of 6M rolling average of sequential (m/m) core CPI is also around +3.8%.

As per core CPI data trend, the US core PCE inflation may also increase by around +0.4% in Feb’24, resulting in an annual rate of around +2.9% and a 6M rolling average of around +3.1%. The 6M rolling average of US core inflation (PCE+CPI) is now around +3.6%.

Also, the annual inflation (total CPI) rate in the US rose to +3.2% in Feb’24 from +3.1% sequentially and higher than median forecasts of +3.1%. In Feb’24, the US CPI was boosted by higher energy costs, while dragged by lower food costs to some extent along with shelter, new vehicles and medical care. Also, the cost was steady for apparel and continued to decline for used cars and trucks, while prices continued to rise sharply for transportation.

On a sequential (m/m) basis, the U.S. CPI rose +0.4% in Feb’24 from +0.3% in Jan’24, in line with the market expectations of +0.4% and sharpest increase in 5-months led by shelter and fuel/gasoline. Overall, the 6M rolling average of total CPI is now around +3.3% against +4.1% average in 2023.

Overall, the US core inflation is cooling and by Dec’24, the average reading may be around +3.0%.

Conclusions:

The 6M rolling average of US core inflation (PCE+CPI) is now around +3.6%. Fed may cut 75-100 bps in H2CY23 if the 6M rolling average of core inflation (PCE+CPI) indeed eased further to +3.0% by H1CY24.

As per Taylor’s rule, for the US:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(4.50.00-2.00) =0+2+2.50=4.50% (for 2024)

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation for CY23

Fed may announce a plan for QT tapering in the March meeting and close the same by June before going for rate cuts from July’24. Fed, the world’s most important central bank may not continue QT and rate cuts at the same time, which is contradictory.

Ahead of the Nov’23 U.S. Presidential election, White House/Biden/Fed/Powell is more concerned about elevated inflation rather than the labor market; prices of essential goods & services are still significantly higher than pre-COVID levels, which is creating some incumbency wave (dissatisfaction) among general voters against Biden admin (Democrats).

Thus Fed is now giving more priority to price stability than employment (which is quite robust) and not ready to cut rates early as it may again cause higher inflation just ahead of the election. Fed may hike only from July’24, which will ensure no inflation spike just ahead of the Nov’24 election (as any rate action usually takes 6-12 months to transmit in the real economy), while boosting up both Wall and Real/Main Street.

Overall, the Fed’s mandate is to ensure price stability (2% core inflation), and maximum employment (below 4% unemployment rate) along with financial/Wall Street stability as well as lower borrowing costs for the government. As the US is now paying almost 15% of its tax revenue as interest on debt, the Fed will now not allow the 10Y US bond yield above 4.50-5.00%. Thus some Fed policymakers like Goolsbee are trying to balance hawkish talks by sounding less hawkish /dovish in conjunction with overall less dovish/hawkish Fed talks to control the overall market (Wall Street), inflation expectations, and the most vital bond yield. It’s a well-planned jawboning strategy by the Fed in synchronization with ECB, BOE, and BOC to control the overall financial market and bring down inflation towards targets without causing an outright recession; i.e. soft & safe landing.

Fed may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps; every major central bank including ECB, BOE, and BOC has to follow ‘King Fed/USD’, whatever may be the narrative (synchronized global rate cuts amid a synchronized easing in core inflation). In any way, as the Fed is not in a hurry to cut rates in H1CY24, expect generally hotter than expected US labor market data and gradual easing of core inflation data to suit the Fed narrative. The White House/Biden admin will also be happy going for the election supported by a strong economy, robust labor market, and cooling inflation almost at the 2% target.

Market wrap:

On Tuesday, Wall Street Futures and gold wobbled soon after core CPI data. Gold stumbled from around 2180 to 2152 after hotter-than-expected core CPI data but soon recovered to almost 2178 as so-called super core CPI dropped more than expected in February, although the annual rate continues to be sticky & elevated. In this way, overall, core CPI is cooling, but the rate of disinflation may be slower than Fed expectations. Thus Fed may not be in a hurry to cut rates before July (H2CY24). Subsequently, Gold again stumbled to almost 2150. Also softer than expected auction of 10Y UST affected the risk sentiment as bond yield surged.

But Wall Street Futures recovered on a tech boost; tech-savvy NQ-100 and broader SPX-500 surged over +1%, while blue-chip DJ-30 jumped over +200 points. Wall Street was boosted by techs, communication services, consumer discretionary, consumer staples, healthcare, industrials, and banks & financials, while dragged by utilities, real estate, energy and materials. Oracle, Nvidia, Meta and Microsoft jumped. 3M's stock rose after announcing that Brown, the former CEO of L3Harris Technologies, was its new CEO. However, Boeing continued its decline, losing 4.3% for a third straight session due to security issues and production problems; may face criminal cases this time. Southwest Airlines tumbled after guidance warning as it would reassess its 2024 financial forecast due to Boeing's delivery delays this year.

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

Whatever may be the narrative, technically Dow Future (39500), now has to sustain over 39700 levels for a further rally to 39800/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39650-39450/39400-39300/39200 may again fall to 39000-38600 and  38400/38200*-38000*/37300 levels in the coming days

Similarly, NQ-100 Future (18475) now has to sustain over 18700 levels for a further rally towards 18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, sustaining below 18650/18450-18350/300-18250/200 may fall to and 17300-16830-16750-16550 in the coming days.

Also, technically Gold (XAU/USD: 2158) now has to sustain over 2210 for any further rally to 2225/2250-2275/2300; otherwise sustaining below 2205/2200-2195/2190, may again fall to 2160/2130-2100/2080-2060/2039 and 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card.