US stocks surged on NVIDIA earnings and soft Fed talks boost

On Wednesday, Wall Street Futures and Gold slipped to some extent after FOMC minutes showed the Fed may not go for any rate cuts in H1CY24, but soon recovered as overall FOMC minutes are in line with market expectations. January FOMC minutes show the Fed’s unease over premature cuts. Overall the market is now gradually discounting 75-100 bps rate cuts in 2024 from June-July’24 and the Fed is preparing the market for the same, most probably going for rate cuts from July’24 and by 75 bps unless there is an unusual deflation/dis-inflation and some serious concern about employment situation. Additionally, Wall Street Futures were also boosted by NVIDIA amid earnings beat.

Late Wednesday, after the closing of the US cash market, NVIDIA published the much-awaited earnings/report card for Q4CY24:

·         Revenue $22.18 est. $20.41b

·         Data center revenue $18.48, est. $17.21b

·         Gaming revenue $2.98, est. $2.72b

·         Automotive revenue $281m, est. $272.1m

·         Sees 1Q revenue $24b, plus or minus 2%, est. $21.9b

·         Sees 1Q adjusted gross margin 77% plus or minus 50 bps

·         Generative AI has hit the tipping point

·         Data center sales to China declined significantly

·         EPS $5.16 vs EST $4.61; against $4.02 sequentially and $0.88 yearly

Nvidia soared after the latest report card revealed that demand for AI computing hardware is growing. Nvidia jumped after data revealed that demand for artificial intelligence computing hardware is growing. Nvidia's major customers include Amazon, Meta, Microsoft, and Google, which account for roughly 40% of its revenue as they rush to invest in AI computer technology.

Late Wednesday, global rating agency S&P Global said about the US economy:

·         We have not changed our 2024 outlook for monetary policy

·         We believe the Federal Reserve will cut its policy rate by 25 basis points at its June meeting, with cuts totaling 75 basis points by year-end

·         US economic expansion exceeded our expectations throughout the second half of 2023

·         Beyond favorable year-end base effects, economic activity in the first quarter of 2024 has been running warmer than we anticipated

Meanwhile, China is trying hard to normalize diplomatic/trading relations with the West as China means business/trading. On Thursday, China’s Foreign Minister Wang Yi said:

·         Europe's rational perception of China is increasing, believes China's development is in line with the logic of history, and that Europe should not be afraid of it, let alone reject it

·         A positive outlook on strengthening China-EU exchanges and deepening practical cooperation

·         'De-risking' won't end cooperation, 'reducing dependence' won't reduce trust

The market is now also discounting an eventual BOJ ‘exit’ from Apr’24:

·         BoJ to End Negative Interest Rates (selective reverse repo) in April, Majority of Economists Predict

·         76% of economists predict the Bank of Japan will end its yield curve control policy in April, while 24% believe it will end later

·         90% of economists predict that wage growth at all Japanese firms will exceed this year's levels in the next fiscal year, compared to 77% in January poll

·         BoJ Governor Ueda says trend inflation in Japan is increasing and will make the appropriate monetary policy decision

·         BoJ Governor Ueda: Service Prices Rising Moderately

·         BoJ Governor Ueda Expects Strengthening of Positive Cycle with Tight Labor Market and Higher Wages, Household Income

·         BoJ Governor Ueda: Desirable for forex to move steadily based on fundamentals

·         BoJ Governor Ueda: FX rates influenced by multiple factors

·         BoJ Governor Ueda warns 1% interest rate hike could trigger 40 trillion yen valuation loss on JGB holdings

·         Japan's finance minister says there is no 'defense line' in the exchange rate

·         Japan PM Kishida: We need to attain wage hikes exceeding price increase

On Thursday, USD was under stress on hawkish jawboning by BOJ, better than expected PMI data from EU/UK, and also hawkish ECB minutes for January:

·         The latest developments in economic activity and inflation are consistent with the current monetary policy stance

·         There had been further progress on all three elements of the reaction function

·         We are confident that monetary policy was working

·         All members agreed with the proposal by ECB’s Lane to maintain the three key ECB interest rates at their current levels

·         There had been further progress on all three elements of the reaction function

·         Schnabel saw a rapid easing of finance conditions pared back

·         It was affirmed that further progress needed to be made in the disinflationary process

·         Officials were confident that monetary policy was working

·         The broad consensus among members that it was premature to discuss rate cuts

·         Measures of underlying inflation had passed their peak

·         The risk of cutting the policy rates too early was still seen as outweighing that of cutting rates too late

·         There was solid evidence that monetary policy was being transmitted to financial markets, financing conditions, and credit conditions

·         Uncertainty remained about the timing of the peak impact

·         Members signaled that continuity, caution, and patience were still needed

·         While the probability of a 25 basis point cut in April still stood at around 60%, a first cut was now fully priced in only for June

·         March inflation projection for 2024 is likely to be lowered

·         The risks to reaching the inflation target were seen as broadly balanced or at least becoming more even

·         Financial market loosening might be premature and could derail or delay a timely return of inflation to target

·         Officials saw only limited indications of a wage turnaround

·         Officials deemed the disinflationary process as fragile

·         The broad consensus that it was premature to discuss rate cuts

On Thursday, Fed’s Jefferson said:

·         I expect slower growth in spending and output in 2024

·         The imbalance between labor demand and supply has narrowed

·         Continuing strength in spending is an upside risk to his forecast

·         Progress on inflation reflects supply and demand factors, as well as Fed policy tightness

·         The Fed needs to remain vigilant and nimble, and should not be surprised if an unexpected shock occurs

·         I remain cautiously optimistic about progress on inflation and will review the totality of data in assessing policy

·         January CPI data is disappointing, shows the path down likely to be bumpy

·         Fed staff estimates show the PCE price index rose 2.4% over the 12 months ended in January

·         Three key risks are too resilient consumer spending stalling inflation progress, employment weakening, and geopolitical risks remaining elevated

·         As the labor market cools, I expect core services inflation will continue to moderate

·         It is possible to bring down inflation without a substantial increase in unemployment

·         It will likely be appropriate to begin cutting policy rate later this year

·         I am cautiously optimistic about inflation progress

·         CPI shows path down for inflation likely to be bumpy

·         In considering the impact of the real Federal Funds rate, the focus is on how policy is influencing the balance of supply and demand

·         The labor market seems to be rebalancing in a way that is allowing lower inflation without unemployment

·         The recent rise in productivity suggests the supply side is healing from the pandemic, perhaps potential GDP growth has risen

·         The labor market can change quickly in ways that policymakers can't anticipate

·         The Fed wants to move in a way that would not lead to stops and starts in policy and increase policy uncertainty

·         Over time household balance sheets will normalize and drive less consumption

·         I will be looking at the totality of data in making rate-cut calls, and want to see evidence that inflation is sustainably headed to target

·         I am not looking at one particular indicator. I need a body of evidence that would weigh in the direction of a rate cut

On Thursday, Fed’s Harker said:

·         I want to avoid a premature rate cut, data will drive Fed actions

·         Once we start cutting rates I want steady and slow easing

·         Rate cut timing possible in the second half of the year

·         We are close to cutting, just give us a couple of meetings

·         Commercial real estate (CRE) will challenge banks

·         The Fed can hold here on rates for now, no rush to cut

·         Future Fed actions will be driven by data

·         If markets loosen financial conditions too much, the Fed will have to weigh that

·         I am most focused on the job market, it will determine when to cut

·         A May rate cut is possible, I won't take it off the table. A May rate cut is not the current forecast. A couple of more months of data could convince me about inflation

·         We may be near the point of cutting rates but unsure of when it will happen

·         The rise in layoffs is not a sign of recession arriving

·         I am concerned by a rise in credit-related delinquencies

·         Consumer spending remains strong

·         The disinflation trend has picked up, the Fed is in the last mile of heading to 2%

·         Recent CPI data shows uneven progress in lowering inflation

·         Still wants more confidence inflation moving back to 2%

·         Financial market liquidity remains abundant

·         The greatest risk is that the Fed cuts rates too early

·         Supports slowing before halting balance sheet contraction (QT)

·         US GDP continues to be strong

·         There are multiple signs labor market coming into a better balance

On late Thursday, Fed’s Cook said:

·         I believe the risks to achieving employment and inflation goals are moving into better balance after being weighted toward excessive inflation

·         I would like to have greater confidence that inflation is converging to 2% before beginning to cut the policy rate

·         We should continue to move carefully, maintaining a degree of policy restriction needed to sustainably restore price stability while keeping the economy on a good path

·         At some point, as we gain greater confidence that disinflation is ongoing and sustainable, that changing outlook will warrant a change in the policy rate

·         The risk of persistently high inflation appears to have diminished but has not disappeared

·         I see an eventual rate cut as adjusting policy to reflect a shifting balance of risks

·         I believe our current monetary policy stance is restrictive

·         I am now weighing the possibility of easing policy too soon and letting inflation stay persistently high versus easing policy too late and causing unnecessary harm to the economy

·         I intend to monitor incoming data closely for signs disinflation process is continuing

·         The disinflationary process has been and may continue to be, bumpy and uneven, as highlighted by last week's CPI & PPI

·         Core services ex-housing inflation should keep easing over time as consumers increasingly resist price increases labor costs grow more slowly

·         Housing services inflation should keep slowing this year as slower observed rent increases pass into official data

·         The forecast of 12-month PCE inflation converging to the 2% target over time still seems reasonable as the baseline outlook

·         Consumer spending growth may face headwinds from deteriorating household balance sheets

·         Growth in total labor income has slowed to a near pre-pandemic rate of about 5% a year, which should contribute to moderating consumption

·         Consumer spending generally has continued to show strong momentum in recent months

·         The labor market demand and supply appear in better alignment

·         Strong supply-side recovery has contributed importantly to the recent disinflation

·         The behavior of inflation expectations helps underpin my growing confidence that inflation will continue to ease

·         Core goods inflation looks likely to converge to a modestly negative pre-pandemic trend

·         The post-pandemic world could likely be characterized by greater volatility of supply

·         There is potential for Red Sea shipping disruptions to affect supply more than they have so far

·         I want more confidence that inflation is converging to 2% before cutting rates

Conclusions:

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 are 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.

Bottom Line:

Fed, ECB may also cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps (synchronized global rate cuts amid a synchronized easing in core inflation); every major central bank including PBOC has to follow ‘King Fed/USD’, whatever may be the narrative.

Market wrap:

On Thursday, Wall Street Futures jumped on NVIDIA and others earnings boost, less hawkish Fed talks and softer than expected composite/SERVICE PMI, and hotter than expected continuing jobless claims. Wall Street was boosted by techs, consumer discretionary, banks & financials, industrials, healthcare, materials, consumer staples, real estate, and energy, while dragged by utilities. Dow Jones was dragged by Intel, Verizon, Walgreens Boots, Nike, and Boeing, while Boosted by Microsoft, IBM, Apple, Micron, and NVIDIA. Advanced Micro Devices (AMD) and Broadcom, two additional chipmakers that are projected to profit from AI growth, both set new marks.

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

Whatever may be the narrative, technically Dow Future (39140), now has to sustain over 39300 levels for a further rally to 39500/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39250/200-39150/39000-38950/38600 levels may again fall to 38400/38200*-38000*/37300 levels in the coming days.

Similarly, NQ-100 Future (18040) now has to sustain over 17400 levels for any recovery to 18300-18200 and further towards 18500/18675-18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, 17290/17250 and 16750-16550 in the coming days.

Also, technically Gold (XAU/USD: 2025) now has to sustain over 2035-2055 for any further rally to 2067/2085-2100/2125-2130/2175; otherwise sustaining below 2030, may again fall to 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card.