Gold surged up on softer US ISM MFG PMI; Dow slips, Nasdaq up

·         But the S&P Global MFG PMI was hotter; Gold was also helped by fading hopes of an imminent Gaza war ceasefire; Nvidia/AI chip helped Nasdaq

On Friday, Wall Street Futures, bonds, and Gold got some brief boost on hopes of an early Fed pivot after a softer US core PCE inflation report but stumbled soon as the overall disinflation process may not be fast enough for the Fed to get enough confidence to cut the rate cut cycle even by Dec’24. But Wall Street Futures again surged on hopes & hypes of an early ceasefire in the Gaza war after US President Biden offered a feasible ceasefire plan so that both sides (Israel-Hamas) could have a face-saving exit. Subsequently Gold and Silver tumbled further as months of elevated geopolitical risks eased to some extent, although it remains to be seen the actual action & reaction.

On early Monday European session, Gold further slips to around 2315 but eventually recovered to around 2330 by the early US session as it now seems both Israel and Hamas may not be in a mood to accept Biden’s latest 3-phase ceasefire proposal.

As per reports:

Israeli PM Netanyahu immediately seemed to undermine the deal amid domestic political compulsions. On Saturday, his office said Israel’s main demands have not changed, and that there would be no permanent ceasefire – which the deal stipulates is to be negotiated in the second stage – until Hamas is destroyed. Far-right members of Netanyahu’s governing coalition reacted more aggressively, threatening to collapse the government if the deal was accepted. On the flip side, Israeli opposition figures and families of Israeli captives called on Netanyahu to accept the deal, while opposition leader (Centre-Left) Lapid has offered to prop up Netanyahu’s government if the right-wing parties leave to save the deal. On Monday, Israeli Defence Minister Gallant reiterated to the US Israel’s commitment to dismantling Hamas in the framework of any deal.

On Monday, Israeli PM Netanyahu said:

·         We will destroy Hamas, Biden’s version of the hostage deal incomplete

·         Claims Israel will stop fighting before Hamas is toppled and hostages are freed are ‘incorrect’; official says proposal didn’t originate with Israel

·         The claim that we agreed to a ceasefire without our conditions being met is incorrect

·         There were gaps between that proposal and Israel’s stance

·         The proposal that Biden presented is incomplete

·         The war will stop to bring hostages back, and afterward, we will hold discussions. There are other details that the US president did not present to the public

·         Israel can stop the war for six weeks, but not end it permanently

·         Iran and all of our enemies are watching to see if we capitulate

As per reports, Israel is not comfortable with the phase-2 clause of Biden’s ceasefire deal: “All the processes on which there is agreement in Phase 1 of the deal, including the cessation of military activities by both sides and the other summaries, will continue in Phase 2, as long as the negotiations on implementing Phase 2 continue.” Israel is concerned that if the negotiations continue in a way that is not genuine, and there are manipulations, then the fighting can’t resume. Although, later Biden noted that, “If Hamas fails to fulfill its commitments under the deal, Israel can resume military operations.”

Amid all these Israeli narratives, Hamas, for its part, says it is ready to engage ‘positively and constructively’ to the proposal, but needs an official written ceasefire proposal, which Biden/US proposed from Israel also. As per WSJ, Sinwar has told Arab mediators he’s in no hurry to end the war and sees Israel becoming an international pariah. Hamas wants a deal that is unambiguous and will not allow Israel to resume the war after the release of hostages — which Jerusalem has said it will indeed do. As per WSJ reports, Sinwar indicated that he is in no hurry to end the war, believing that it is drawing Israel into a quagmire that is turning the country into an international pariah while reviving the Palestinian national cause.

As per WSJ, by contrast, Hamas’s other political leaders in exile are eager to end the war provided a deal guarantees the group’s survival and grants it a continued role in governing Gaza, something which (control of Gaza by Hamas), Israel is not ready to accept. Hamas is growing confident it can survive the Israeli offensive due to the growing global pressure over the IDF’s operation in Gaza.

On Monday, Gold got some boost, while Wall Street Futures slipped on fading hopes of an imminent Gaza war ceasefire, but both reversed to some extent after a late night report indicates some progress as Biden is now desperately seeking at least a temporary Gaza war ceasefire ahead of Nov’24 Presidential Election, which will also keep oil in control.

On Monday, some focus of the market was also on ISM Manufacturing and S&P Global Manufacturing PMI, both of which came softer than expected, which boosted Gold to some extent on hopes of an eaely Fed pivot but also undercut Wall Street Futures on the concern of stagflation.

The ISM Manufacturing PMI edged lower to 48.7 in May from 49.2 in April and below forecasts of 49.6. The reading showed another contraction for the manufacturing activity as demand was soft again, output was stable, and inputs stayed accommodative. A decline was seen for new orders, inventories and backlog of orders. Also, production slowed. On the other hand, employment rebounded and prices rose at a slower pace as most commodity-driven costs continued to climb but at weaker rates.

The ISM comments about US Manufacturing PMI for May:

·         The best way to describe the month was sluggish, stable, stagnant, stalled, and sometimes heard on the factory floor when orders weren’t exactly rolling in

·         The report wasn’t a disaster by any means, though the composite PMI reading of 48.7 percent indicated contraction for a second straight month, extinguishing hope that March’s expansion was the start of a growth cycle. If this is a bump in the road on the way to a recovery, things won’t smooth out until demand picks up and companies have clarity on monetary policy from the U.S. Federal Reserve (Fed)

·         The former; i.e. demand has been a front-and-center issue for some time. The latter sentiment strengthened in May, as companies are hesitant to invest in orders, inventories, and capital expenditures until there is relief, or at least certainty, on interest rates. Geopolitical tensions around the globe and the U.S. presidential campaign add to such hesitancy

·         Five months into the year, the lack of a benefit from a rate cut has become a headwind. A monetary easing has not occurred, and our panelists’ companies and their customers are reluctant to make any kind of commitments until they see some kind of action

·         ISM’s Semiannual Economic Forecast from December, in which manufacturing survey respondents projected an 11.9% increase in capital expenditures (CAPEX) across the sector this year. In May, that figure dropped to 1%

·         Much of the data elicited another S-word: sobering

·         The New Orders Index fell to 45.4 percent, its lowest level since May 2023 (42.9 percent). The Production Index (50.2 percent) has indicated resiliency amid slow demand, in big part because companies worked off order backlogs from the coronavirus pandemic over-ordering. That well is drying, with the Backlog of Orders Index at 42.4 percent

·         There has likely been a plateau. I don’t see a decline yet, but with new orders slow and customers holding their order books close to the vest, if that continues, there’s not a lot of collective backlog left. At some point, that production number will have to go down, and that means a revenue decline, which leads to other factors that we’re hoping not to see

·         The Employment Index returned to expansion at 51.1 percent, ending a seven-month stay in contraction territory and the highest reading since August 2022 (54.4 percent). However, hiring remains “cautious; for every respondent comment on adding staff, there was one on reducing headcount

·         There might have been a seasonal factor at play, with people graduating college and starting jobs. In this environment, 51 percent don’t feel much different than 48 percent. Given the uncertain demand, there isn’t any significant hiring activity

·         The Prices Index registered 57 percent, down 3.9 percentage points compared to April. Which commodities like fuel, natural gas, aluminum, and plastics remain inflationary pressures

·         Semiannual Economic Forecast sentiment in May suggests that manufacturing companies have already absorbed most of their projected price increases for the year

·         At the start of this year, a lowering of interest rates was expected to provide a boost to a manufacturing recovery; however, as that wait continues, so does the sector’s state of inertia

·         Without some kind of movement from the Fed on the monetary side, we’re probably sitting where we’re going to sit for some time

 

Overall, ISM blamed the lingering US manufacturing recession-like scenario on to lack of sufficient demand on the ground and tepid CAPEX due to higher borrowing costs amid the Fed’s lingering hawkish hold stance ahead of the US election in Nov’24. On the other side, US employment remains robust after a temporary bleep last month, while goods inflation may also pop up again despite the decreasing pricing power of manufacturers.

On the other side, the final data of S&P Global US Manufacturing PMI was revised higher to 51.3 in May from the flash estimate of 50.9 and 50.0 in April. The latest PMI reading signaled a modest improvement in the health of the US manufacturing sector, the fourth in the past five months. New orders returned to growth, supporting a faster expansion in production. However, the rate of increase in total new business was softer than that seen for new export orders.

U.S. manufacturing firms reported signs of improving demand in Europe, alongside growth in new orders from Asia, Canada, and Mexico. Meanwhile, business confidence picked up and positive expectations regarding the future of the sector contributed to the hiring of additional staff, a renewed rise in purchasing activity and a build-up of stocks of finished goods. On the price front, the rate of input cost inflation quickened to the fastest in just over a year, with firms raising their selling prices in response.

The S&P Global comments about US Manufacturing PMI in May:

“It was pleasing to see new orders return to growth in May following a blip in April. Although modest, the expansion in new work bodes well for production in the coming months. Manufacturers cited confidence in the future as a factor contributing to increases in employment, purchasing activity and finished goods stocks. Cost pressures continued to build, however, with inflation on that front the strongest in just over a year. Although output prices rose at a slower pace in May, this is unlikely to be sustainable should cost burdens ramp up further in the months ahead”.

The S&P Global and ISM manufacturing survey data and comments for May are contrasting to some extent, but both are hovering around the 50.0 boom/bust red line, indicating the US manufacturing sector is not in good health, indicating a stagflation-like scenario.

There are some historical differences in methodology and sample size between ISM and S&P Global PMI surveys:

The ISM PMI is based on a survey of approximately 300 supply management professionals across the US. These professionals are involved in a broad range of industries within the manufacturing sector. The S&P Global PMI surveys a larger sample of over 800 companies in the manufacturing sector, providing a broader base of data.

The ISM PMI is a composite index derived from five equally weighted components: New Orders (30%); Production (25%); Employment (20%); Supplier Deliveries (15%); Inventories (10%) and Survey Questions. ISM Respondents are asked whether business conditions are improving, deteriorating, or staying the same for various aspects of their operations. The ISM survey uses equal weights for its components, which can highlight different aspects of manufacturing activity.

The S&P Global PMI is also a composite index but derived from five different components: New Orders; Output; Employment; Suppliers' Delivery Times; Stocks of Purchases and Survey Questions. Similar to ISM, S&P Global respondents also indicate changes in business conditions but often provide more granular detail and regional breakdowns. The S&P Global uses its proprietary methodology to weight these components, which might differ slightly from the equal weighting of the ISM survey.

Although the S&P Global PMI data is broader and may be more scientific than ISM, the latter has more influence on the US financial market; but the Fed now looks into both reports closely for any policy stance and overall health of the US economy. However, the ISM PMI is still considered a leading indicator of economic activity, often providing early signals of changes in the economic cycle due to its proximity to the US GDP trajectory (?).

In contrast, while the S&P Global PMI is also valuable and offers broader international comparability, it does not have the same historical depth or market impact within the US context as the ISM PMI. This long-standing reputation and its significant influence on market behavior and policy decisions contribute to the ISM PMI being viewed as more important for the US economy. The S&P Global PMI survey covers more big-size US manufacturing sectors than ISM.

Thus on Monday, despite hotter than expected S&P Global Manufacturing PMI, the US market reacted more to the contrasting/opposite softer than expected ISM Manufacturing PMI data at least briefly, but soon reversed as the U.S. is ultimately a service-oriented economy, while manufacturing contributes only around 11% of the GDP and 8.4% of the labor force, mainly from defense and aerospace; i.e. industrial goods rather than consumer items.

Market impact:

On Monday, Wall Street Futures were mixed as blue-chip DJ-30 slipped around -115 points (after recovering over 300 points from a session low in the last hour of trading amid reports of Gaza war ceasefire progress after initial obstacle. Also, mixed US Manufacturing PMI report by ISM and S&P Global helped. Broader SPX-500 edged up +0.1%, while tech-heavy NQ-100 surged +0.5%, led by NVIDIA/AI chip boost.

On Monday, Wall Street was boosted by techs, healthcare, communication services, and consumer discretionary, while dragged by energy (lower oil), utilities, industrials, materials, banks & financials, real estate, and consumer staples to some extent. Script-wise, Wall Street was boosted by Boeing, Merck & Co, Amazon, Salesforce, Apple and Amgen, while dragged by Chevron, Dow Inc, Travelers, Caterpillar, Intel, American Express, IBM, Visa, Verizon, Visa and Microsoft. Nvidia jumped after unveiling next-generation AI chips, whereas rivals Intel and AMD slid. Meme stock GameStop soared following a new Reddit post from 'Roaring Kitty' revealing a $116M buy position in the video game retailer.

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

Whatever may be the narrative, technically Dow Future (38821) 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 (18592) has to sustain over 18700 for a further recovery to 18800/189000-19000/ 19100 and a further rally to 19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18600 may again fall to 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Also, technically Gold (XAU/USD: 2340) has to sustain over 2330 for any recovery to 2355/2365*-2375/2385 and further rally to 2400/2425-2435/2455* and 2475-2500; otherwise sustaining below 2325, may further fall to 2315/2300-2290/2275* and further to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.