Nasdaq slid on Nvidia/tech & BOJ woes; Dow flat, Gold surged

·         On early Wednesday, Wall Street Futures recovered on less hawkish BOJ hike ahead of Fed; Gold further surged on killing of Hezbollah and Hamas leaders by IDF

On Monday, Wall Street Futures were mixed/almost flat with the S&P 500 and the Nasdaq 100 each closing +0.1% higher, while the Dow closed -49 points lower, buoyed by support from heavyweight techs that helped trim losses from the previous week ahead of key earnings reports. Microsoft, Apple, Alphabet, and Amazon recovered ahead of Q2CY24 report cards, while Tesla jumped on analyst upgrade. Techs were under pressure amid subdued report card/business update, Trump 2.0 possibility (more cold/tech war with China) and an imminent launch of Fed’s eleven QTR rate cuts cycle, helping rotation from techs to real economy stocks.

Stimulus-addicted Wall Street was also buoyed by hopes & hypes of dual stimulus early 2025: Fed’s rate cuts (monetary stimulus) and Trump’s tax cuts, deregulation and infra spending (fiscal stimulus). Wall Street and Gold were also wobbled on hopes & hypes of an imminent Gaza war ceasefire and escalating geopolitical tensions between Israel and Lebanon based Hezbollah.

On Tuesday, Gold surged in the US session from around $2383 to almost $2409 after Israel launched an airstrike in Lebanon’s capital Beirut, specifically targeting a building, which may have the Hezbollah Commander Shukr, responsible for the alleged rocket attack in a football ground a few days ago, killing several innocent kids. But, eventually, it’s not clear whether Shukr is alive or not, but Hezbollah also promised an appropriate measured response with escalating the whole situation. Later IDF confirmed Hezbollah Senior Commander Shukr Killed in the air strike.

Now from geo-politics, on Tuesday, ahead of Fed (late Wednesday) and BOJ (early Wednesday), BOJ floated an idea that it may hike rate by +0.25% along with QE tapering against present market consensus +0.10%. Japan's finance ministry and cabinet office are expected to accept BOJs rate hike, although it may be negative for the government and PSU finances, it may be good for Japanese banks.

On Tuesday after the BOJ rate hike/normalization talks, JGB 10Y bond yield surged over +1.10%, while USDJPY slumped to almost 152.00 (from 162 a few weeks ago amid BOJ active intervention). On the other side, due to very low interest back home, Japan is the exporter of capital globally, main source of carry trade, tech and other startups. Thus NQ-100, which was already under pressure due to subdued Nvidia report card, tumbled further along with overall Wall Street.

In any way, BOJ may also go for higher than expected QE tapering along with +0.10% rate hike instead the ‘unthinkable’ +0.25% also. Last week, Motegi, a senior ruling party official in Japan, urged the BOJ to more clearly communicate its plan to normalize monetary policy through steady rate hikes, adding that excessive yen declines were negatively impacting the economy. Japan’s PM Kishida also said that the normalization of the BOJ’s monetary policy would support Japan’s transition to a growth-driven economy (from decades of deflation). But normalization of BOJ’s ultra-loose bazooka may be still hugely negative for the global financial market, especially for EMs.

On Tuesday, BLS/JOLTS (Job Openings and Labor Turnover Summary) flash data shows the number of job vacancies/openings in the U.S. decreased to 8184K in June from 8230K sequentially, and above market expectations of 8000K.

US NFP Job Openings: June’24

On the last business day of June, the number of job openings was almost unchanged at around 8200K and was down by 941,000 over the year. The job openings rate held at 4.9% in June. Job openings were increased in accommodation and food services (+120K) and in state and local government, excluding education (+94k). The number of job openings decreased in durable goods manufacturing (-88K) and in Federal government (-62K).

US NFP job Hirelings: June’24

The number of hires was little changed at 5341K in June but was down by 554K over the year. The hires rate, at 3.4%, changed little in June.

US NFP Job Separations: June’24

Total separations include quits, layoffs and discharges, and other separations. Quits are generally voluntary separations initiated by the employee. Therefore, the quits rate can serve as a measure of workers’ willingness or ability to leave jobs. Layoffs and discharges are involuntary separations initiated by the employer. Other separations include separations due to retirement, death, disability, and transfers to other locations of the same firm.

The number of total separations in June changed little at 5095K. This measure was down by 544K over the year. The total separations rate was little changed at 3.2% in June. Total separations decreased in state and local government education (-51K) and in arts, entertainment, and recreation (-39K).

In June, the number of quits was little changed at 3.3 million but was down by 434,000 over the year. The quits rate was unchanged at 2.1% in June. Quits decreased in construction (-64K) and in state and local government education (-55K).

In June, the number of layoffs and discharges changed little at 1.5 million, and the rate decreased to 0.9%. Layoffs and discharges decreased in finance and insurance (-26K). The number of other separations was little changed in June at 314K.

 

After the latest revisions in June, the YTM rolling average of NFP job openings to all unemployed persons (H/H survey) ratio is now around 1.29 against the 2023 average of 1.54, the 2022 average of 1.87, and the pre-COVID level of 1.25; The June’24 ratio was around 1.20.

In 2022, the U.S. economy was suffering from an acute shortage of labor force due to various structural as well as cyclical issues including unfavorable demography, shrinkage of workforce after COVID, early retirements, legal immigration issues, lack of properly skilled workers, outsourcing, and an increasing number of multiple job holders/gig workers/freelancers. In 2023, the US labor market was rebalanced to some extent as immigration increased/normalized after the lifting of all COVID-related restrictions. Overall, in 2024, one open job is available for 20 workers (laborers), 18 workers in 2023 and 15 in 2022.

Overall, the US labor market may be still running at goldilocks pace, while average core inflation may have to fall more for Fed’s full confidence about launching the cycle pf 11 QTR rate cuts. Thus Fed may like to maintain wait & watch stance till Dec’24 as it has to evaluate actual data for Q3CY24, which would be fully available by Oct’24.

Conclusions:

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).

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 impact:

On Tuesday, Wall Street Futures closed mixed as tech heavy NQ-100 stumbled around -1.50%% to its lowest in nearly two months; broader SPX-500 tumbled almost -1.00%, while blue-chip DJ-30 closed almost flat supported by banks & financials ahead of Fed. On Tuesday, Wall Street Futures were dragged by techs, consumer staples, consumer discretionary and materials, while boosted by energy, banks & financials, real estate, utilities, industrials, communication services and healthcare. Script-wise, Wall Street was dragged by Merck & co, P&G, Intel, Nvidia, Microsoft, Apple, Alphabet, Amazon, Caterpillar, Walmart, Salesforce, IBM and Verizon, while boosted by Travelers, Goldman Sachs, JPM, McDonald’s, Chevron, American Express, United Health and Boeing.

On early Wednesday, Gold surged more on escalating Gaza war geopolitical tensions as Hamas leader Haniyeh assassinated in Tehran missile strike by IDF after the killing of Hezbollah leader a few hours ago. But Wall Street Futures recovered to some extent after techs short covering, buy back boost by HSBC and less hawkish hike by BOJ.

On Friday, BOJ hiked only overnight reverse repo rates by +0.15% to +0.25% (uncollateralized overnight call rate at CDF) as highly expected. The BOJ kept its repo rate unchanged at +0.30% and announced the QE tapering by 50% to around JPY 3T/month from present QE rate JPY 6T/M; the QE tapering figure was less than expected.

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

Whatever the narrative, technically Dow Future (40848) has to sustain over 41200 for any further rally to 41400/41500-41700*/41800 and 41950/42000*-42700 in the coming days; otherwise sustaining below 41100/40900-40700/40500, DJ-30 may again fall to 40400/40200-40000/39900 and further 39800/39600-39400/39200 and 39000/38800-38600/38300 in the coming days.

Similarly, NQ-100 Future (19173) has to sustain over 18800 for any recovery to 19300*/19600-19750/19950 and 20150*/20600-20800/21050 for a further rally 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 (5498), now has to sustain over 5400 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: 2385) has to sustain over 2400/2410-2430/2440 for a further rally to 2455*/2490-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2395/2390-2385/2360-2350*/2340, may further fall to 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).