Industrial metals, Dow surged on Chinese infra stimulus plan

·         To get out of deflation, China is now providing targeted fiscal stimulus to boost domestic demand rather than relying too much on exports

On Wednesday apart from US inflation (CPI/Core CPI) data, some focus of the market was also on US retail sales as consumer spending is the backbone of the US economy and the Fed also watches this data closely for an assessment of overall economic activities. On Wednesday, the CB flash data (SA) showed U.S. retail sales for Mar’24 were around $705.180B against 705.057B sequentially (+0.02%) and 684.397B yearly (+3.04%); i.e. the U.S. retail sales was almost flat sequentially (m/m), lower than the market consensus of +0.4% rise, and +3.0% annually (y/y) in Apr’24.

The US retail sales were adjusted for several past years in Apr’24 based on the annual retail trade survey. Before the revision, the 2023 and 2024 (MTD) average retail sales were around $695.251B and $704.024B, while after revision, they became around $692.280B and $701.596B respectively; i.e. revised downwards to some extent.

Overall, after the latest positive revisions the average retail sales is now around $701.597 in 2024 (MTD) against the 2023 average of $692.280B. The current 2024 (MTD) US retail sales nominal growth is now around +2.3% against the 2023 rate of +3.6%; although cooled, but remained strong,  despite higher borrowing costs and higher cost of living as the labor market is still robust, while the lagging effect of huge fiscal stimulus (COVID) is still there. Adjusted inflation (CPI), the underlying real retail sales has contracted around -1.19% in 2023 against +3.03% in 2022. In 2024 (YTM), the real retail sales contracted by around -1.47%; i.e. real US retail; sales are still negative.

 

In Apr24 US retail sales flash data, 7 out of 13 categories posted increases. Some slowdowns were seen in sales at non-store retailers, sporting goods, hobby, musical instrument, & book stores, motor vehicles & parts dealers, and furniture stores. On the other hand, sales were up at gasoline stations, clothing stores, and electronics and appliances stores. Excluding food services, auto dealers, building materials stores and gasoline stations, the so-called super core retail sales which are used to calculate GDP, edged higher by 0.2%. The U.S. Retail sales are adjusted for seasonality but not for price changes (inflation).

 

Overall, although US retail sales are cooling to some extent, it’s still hot enough for the Fed to keep a restrictive rate (higher) for longer to produce more slack in the economy so that demand comes down to some extent and try to balance with the present constrained capacity of the economy, pulling inflation down to around +2.0% on a sustainable basis.

On Friday, Fed’s Governor Bowman said:

·         I am monitoring data to assess if the policy is sufficiently restrictive

·         Inflation's decline in the latter half of last year was temporary

·         We have not yet seen further progress on inflation this year

·         US economic activity may have moderated, but consumer services spending is still strong and business investment has strengthened

·         Progress on the labor market rebalancing has slowed

·         Focusing on issues like climate change could distract bank management and supervisors

·         I will remain cautious in rate change decisions, I am willing to hike if inflation progress stalls or reverses

·         Inflation is to remain elevated for some time

·         Fed is monitoring data to assess if the policy is sufficiently restrictive

On Friday, Fed’s Mester said:

·         Downside risks to growth and hiring have fallen

·         Risks to the inflation side of the Fed mandate have increased

·         A strong economy means the Fed risking little to hold policy in place

·         It will take longer to gain confidence inflation is moving toward 2%

·         Monetary policy is well positioned as the Fed reviews more data

·         The current restrictive policy will help lower inflation

·         Labor market conditions are strong

·         I welcome the CPI data as a sign of cooling inflation

·         It will take longer to gain confidence inflation moving towards 2%

·         The US fiscal path is not sustainable and must be brought under control

On Friday, Atlanta Fed’s President Bostic said:

·         I am pleased with the inflation progress in April but the Fed is not yet there

·         The Fed has to be patient and vigilant

·         There is still a lot of pricing pressure in the economy

·         I am hearing businesses say they are at the limits of pricing power and not able to fully pass through input costs

·         Firms can't 100% pass-through prices, the economy is slowing

·         It could be appropriate to reduce rates toward year-end

·         My outlook right now is for a continued fall in inflation, which would make it appropriate to reduce rates later in the year, but nothing not locked in

·         I expect inflation to fall slowly, continued economic momentum

·         The US economy is still quite resilient and robust

·         I don't see a recession

·         One data point is not a trend, remains resolute, vigilant on inflation

·         Fed will get to 2%, won't 'move the goalposts'

On Friday, the IMF spokesperson said:

·         Recent US inflation data is higher than we would like to see and a reminder of bumps in the road to bring down inflation

·         When asked about new US tariffs on Chinese imports: The US would be better served by maintaining open trade policies vital to its economic performance

·         The decline in inflation since the mid-2022 peak has been most welcome

·         Recent US data reinforces the need for the Federal Reserve to remain cautious and data-depending when deciding monetary policy in the coming months

·         WH Economic Advisor Brainard: China's industrial capacity and exports in some sectors are so large they can undermine the viability of investments in the US

·         WH Economic Advisor Brainard: A new cycle of Chinese policy-driven overcapacity and export surges could have adverse consequences for US workers

Bottom line: Summary

·         Overall, the Fed is now changing its tone and gradually preparing the market for no rate cuts in 2024, especially from Sep’24 to avoid any political controversy just ahead of Nov’24 US election as Powell has to again face another highly probable Trump tantrum from Jan’25

·         Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may/may not cut rates in Dec’24; Fed may revise dot-plots in June meeting.

·         At present, Fed’s Mar’24 dot-plots show: 75 bps rate cuts each in 2024, 2025, 2026, and -50 bps in 2027 for a neutral repo rate of +2.75%

·         But the Fed may now show the June’24 dot-plots as -100 bps rate cuts each in 2025, 2026, and -50 bps in 2027 for terminal neutral repo rate +3.00%

·         Another scenario: Fed may also cut -50 bps in Dec’24 or even in Jan’25 after the Nov’24 US election to avoid any political controversy and also to assess overall inflation and employment data for the whole of 2024

·         Fed is now quite confused about the rate cut narrative from H2CY24 as the disinflation pace was almost stalled in Q1CY24, ahead of the Nov’24 election, while the unemployment rate and bond yields are ticking up;

·         Average US inflation is now higher by over 20% from pre-COVID (Jan’20) levels, while under normal conditions, it should be around +8%; higher cost of living is creating some anti-incumbent wave against Biden admin before Nov’24 election; thus both White House and Fed are now prioritizing to keep inflation under control and not ready to risk of surging inflation by cutting rates just ahead of the election

Market impact:

On Friday Wall Street Futures closed almost flat neat the life time high on hopes & hypes of an early Fed pivot amid softer US inflation and retail sales report, which may induce the Fed to start the much-awaited rate cut cycle from Sep’24 rather than Dec’24 or Mar’25. Gold also surged. Risk trade got a further boost on talks of an imminent Chinese stimulus for housing/infra; metals led copper, silver and also gold soared.

Also, improved Chinese industrial growth output data helped the overall metal sector. On Friday, economic data showed Chinese industrial production grew more than expected in April, while retail sales and fixed asset investment rose less than anticipated. China’s unemployment rate also fell to 5% in April from 5.2% in March.

On Friday, China kicks off its $138B ultra-long bond issuance (in LCU) to fund infra capex to bring the economy out of a long slumber. China will begin issuing 30-year bonds on May 17, 20-year bonds on May 24, and 50-year bonds on June 14. China is also taking various targeted stimulus measures to boost domestic consumer spending to compensate for lingering weakness in external trade and a slowdown in the overall economy.

China is now in a deflation-like scenario as the overall demand of the economy is lagging far behind huge capacity. Thus China is now providing targeted stimulus to boost domestic consumption instead of relying too much on external/global (US/EU) consumption in a fragmented world, especially after COVID. China pays only around 6% of its core tax revenue as interest on public debt, much lower than the US 15% and thus has adeq2uate fiscal space to go for additional targeted deficit spending (fiscal stimulus).

On Friday, Wall Street was boosted by energy, materials (Chinese stimulus), banks & financials, communication services, consumer discretionary, healthcare, industrials, and utilities to some extent, while dragged by techs, consumer staples, and real estate. Scrip-wise, Wall Street was boosted by China/export savvy companies like Caterpillar, Boeing, and also JPM, Walmart, Chevron, Goldman Sachs, United Health, American Express, and Amazon, while dragged by Amgen, Intel, Verizon, Honeywell, and Microsoft. Reddit soared after the company announced a content partnership with OpenAI. In contrast, Meme stocks slumped for a third session led by GameStop and AMC.  For the week, the S&P 500 added 1.4% and the Nasdaq advanced 1.9%, both marking a fourth consecutive winning week, which would be a first since February. The Dow booked its 5th consecutive positive week in a row, with a 0.9% gain for the period.

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

Whatever may be the narrative, technically Dow Future (40132) has to sustain over 40400 for a further rally to 40500/40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 40350-40200 DJ-30 may again fall to 39700/39200-38900/38500 and 39100/37400 in the coming days.

Similarly, NQ-100 Future (18640) has to sustain over 18900 for a further rally to 19100/19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18850-18750, may again fall to 18350/18100-18000/17900 and 17800/17700-17600-17500 and further 17400/17300-17100/17000* in the coming days.

Also, technically Gold (XAU/USD: 2415) has to sustain over 2445 for a further rally to 2455-2475/2500; otherwise sustaining below 2440-2435, may again fall to 2398/2372-2353/2335 and 2310/2300-2290/2370 in the coming days.

Also, technically Silver (XAG/USD: 31.48) has to sustain over 32.50 for a further rally to 35.50/36.00-37.50/43.50 and even 50.00 levels; otherwise sustaining below 32.25-32.00, may again fall to 30.00/28.00-27.00/25.90 and 24.90-23.50-21.80 in the coming days.