Wall Street almost flat on hawkish Fed talks; Gold, Oil surged

·         Gold and oil surged on the concern of growing geopolitical tensions between Israel-Lebanon/Hezbollah (Iran proxy); Fed may not cut before Dec’24

Wall Street was almost flat for the last few days of the week on fading hopes of an early Fed rate cut by Sep’24 amid hawkish Fed talks and mixed US economic data. On Thursday, Wall Street Futures were also under stress on upbeat GDP data, especially hotter-than-expected core PCE data for Q1CY24. But Gold and Oil got some boost on the concern of growing geopolitical tensions between Israel-Lebanon/Hezbollah (Iran proxy). The geopolitical tension between Israel and Lebanon has intensified significantly over the past few days.

The Gaza war situation has been escalating due to increased cross-border attacks involving Israel and Hezbollah, the Iran-backed militant group based in Lebanon. However diplomatic efforts to de-escalate the situation have faced challenges. Israel PM Netanyahu said he is ready to wind down Gaza operations to battle Hezbollah in the north (with Lebanon border). The US Defence Secretary Austin said Hezbollah's provocations threaten to drag Israel-Lebanese people into war. The escalated Gaza war geopolitical tension has boosted Gold and Oil despite hawkish Fed talks and fading hopes of a Fed rate cut from Sep’24.

On 25th June, Fed Governor Cook said in an article: Moving Toward Better Balance and Implications for Monetary Policy

·         I care about both sides of the dual mandate Congress gives us, maximum employment and price stability. When inflation was well above target and the unemployment rate was historically low, we prioritized restoring price stability. Over the past year, inflation has slowed, and labor market tightness has eased, such that the risks to achieving our inflation and employment goals have moved toward a better balance

·         I think now is a good time to assess how the economy has evolved after rates have held steady at a restrictive level for nearly a year

·         Inflation: As the U.S. and global economy recovered from the pandemic, rebounding demand came up against still-constrained supply, and inflation rose to the highest level in many years. In the past two years, 12-month inflation in the PCE price index has fallen from a peak above 7 percent to 2.7 percent in April, and it likely moved a bit lower in May based on consumer and producer price data

·         However, after rapid disinflation in the second half of last year, progress has slowed this year

·         Some price components have improved. Food and energy price increases moderated significantly over the past two years as global commodity supplies recovered from the shock of Russia's February 2022 invasion of Ukraine

·         When excluding often-volatile food and energy costs, 12-month inflation in core goods prices is down from 7.6 percent in early 2022, returning to the trend of slightly negative inflation observed before the pandemic. The increased availability of computer chips and other material inputs led to a recovery in motor vehicle production and, along with restraint in aggregate demand, likely reduced supply–demand imbalances for durable goods, more generally

·         Inflation in services, a spending category that accounts for about two-thirds of household budgets, has slowed significantly, though it remains noticeably above pre-pandemic rates. Specifically, housing services inflation has eased quite gradually, as it takes time for the moderation of increases in market rent—what a landlord charges a new tenant—to show through to broader measures of shelter costs. One possible explanation is that landlords raise rents for existing tenants only gradually over several years and are still moving those rents closer to the market rate

·         Outside of housing, 12-month services inflation slowed over last year from above 5 percent to below 3.5 percent but has stalled near that rate this year. That is still about 1 percentage point above the average pace during the two years before the pandemic. Some of the largest contributors to recent service inflation are imputed prices, including portfolio management fees that are affected by equity price increases. Other components of service inflation that are more reflective of supply and demand conditions in the economy have continued to ease. Prices of hotel stays, airline tickets, and restaurant meals are illustrative

·         I expect that the longer-run disinflation trend will continue as interest rates weigh on demand. Anecdotal reports, including from the Fed's Beige Book, suggest consumers are pushing back on price increases. Several national retailers have announced plans to lower prices on certain items, and there is increasing evidence that higher-income shoppers are trading down to discount stores. Two other important factors supporting this trend are well-anchored long-term inflation expectations and short-term inflation expectations falling back to near pre-pandemic levels

·         I forecast that three- and six-month inflation rates will continue to move lower on a bumpy path, as consumers' resistance to price increases is reflected in the inflation data. I expect 12-month inflation will roughly move sideways for the rest of this year, with monthly data likely similar to the favorable readings during the second half of last year

·         Beyond that, I see inflation slowing more sharply next year, with housing-services inflation declining to reflect the past slowing in rents on new leases, core goods inflation remaining slightly negative, and inflation in core services excluding housing easing over time

·         Labor Market: Turning to the other side of our dual mandate, the labor market has largely returned to a better alignment between supply and demand. Many indicators suggest the job market is roughly where it was before the pandemic—tight but not overheated. The unemployment rate was a still-low 4 percent in May, but it has gradually risen over the past year since touching a more than half-century low of 3.4 percent in April 2023. Last month's rate was also modestly above readings just before the pandemic took hold

·         Layoffs remain low, and payroll growth has been solid so far this year, adding an average of 248,000 jobs a month, essentially matching last year's pace

·         Labor supply has expanded, partly reflecting a rise in immigration. Labor force participation has broadly rebounded from pandemic lows---

·         With more workers entering the economy, the monthly job gains needed to keep the unemployment rate steady likely have risen from just under 100,000 to nearly 200,000

·         Although these estimates are uncertain, such a breakeven pace may be a bit higher than the true pace of recent job gains, when taking into account data from the Quarterly Census for Employment and Wages. These data suggest that payroll job gains were overstated last year and may continue to be so this year. Thus, even the robust payroll numbers are consistent with a tight, but not overheating, labor market

·         Signs of better balance in the labor market have come into focus. For example, the ratio of job vacancies to unemployment has fallen from a high of 2.0 in mid-2022 to 1.2 in April, in line with its pre-pandemic level

·         Wage growth is outpacing inflation but is also moderating

·         Economic Activity:

·         Turning to the broader picture, the U.S. economy has rebounded robustly since the short but deep pandemic recession

·         Overall, gross domestic product (GDP) growth eased in the first quarter from the rate at the end of last year. However, much of the first-quarter weakness was in net exports and inventories, noisy components from which I do not take many signals, while growth in private domestic final purchases remained solid. Going forward, I expect economic growth to remain near the rate of potential growth, somewhat above 2 percent, which is boosted by the increase in the size of the labor force

·         American consumers have driven the current expansion, bolstered by strong income growth. But recent data, including first-quarter household spending and retail sales for April and May, suggest that growth is slowing

·         And, in April, the total amount of credit card balances and other types of revolving consumer debt declined for the first time since 2021. Signs of strain continue to emerge among consumers with low-to-moderate incomes, as their liquid savings and access to credit have increasingly become exhausted. Credit-card delinquency is on an upward trend, and the rate at which auto loans are transitioning into delinquency is at a 13-year high. These rates are not yet concerning for the overall economy but bear watching

·         Offsetting some of the slowing in consumer spending, investment spending for equipment and intangibles, such as intellectual property and software, has been strong this year. After growing at about only a 1 percent pace last year, equipment and intangibles spending grew at a more than 4 percent annual rate in the first quarter. If that strength continues, it has the potential to increase productivity over time

·         Productivity growth is one factor that could change the path of both expansion and inflation. Last year's GDP growth of 3.1 percent came alongside more moderate employment gains, implying strong productivity growth. The economy may have benefited from investment undertaken in response to strong demand when the labor market was tight. Productivity growth is volatile and difficult to measure, but if it remains strong, then a faster pace of economic growth might not be inflationary

·         While the pace of gains may have cooled from last year, I still lean toward optimism on innovation and productivity. Looking ahead, I see the adoption of artificial intelligence (AI) technology as a potentially significant source of productivity growth, keeping in mind that breakthroughs, such as effective generative AI, will take time to fully reach their potential and disseminate throughout the economy and for complementary investment to bear fruit

·         Monetary Policy: Considering the full view of economic data available at the time, my colleagues on the FOMC and I decided to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent when we met earlier this month. I believe our current monetary policy stance is restrictive, putting downward pressure on aggregate demand in the economy

·         With disinflation continuing, albeit at a slower pace this year, and the labor market has largely normalized, I see the risks to achieving our employment and inflation goals as having moved toward better balance. Given our data dependence, we will closely monitor incoming information to determine the future path of policy

·         Returning inflation sustainably to our 2 percent target is an ongoing process and not a fait accompli. In considering how restrictive policy is, I look at a broad range of indicators from financial and credit markets. For instance, the two-year real rate, derived from Treasury Inflation-Protected Securities, or TIPS, remains around 2.7 percent, up from an average of about 1/2 percent in a couple of years before the pandemic, while the 30-year mortgage rate is around 7 percent

·         Meanwhile, banks have significantly tightened credit standards over the past two years. In particular, small businesses some small banks, and community development financial institutions are experiencing diminished access to credit.

·         Many of these businesses also face short-duration loans that need to be refinanced at higher interest rates. With rising delinquencies, a number of low-to-moderate-income households are also likely experiencing diminished access to credit. On the other hand, the largest firms and the largest banks do not report a lack of access to funding. Larger firms, like many homeowners, were able to lock in low interest rates for longer terms a few years ago before rates rose

·         Of course, the economic outlook is always uncertain. One way to address such uncertainty is to consider a range of scenarios and not just the baseline forecast. One scenario is the possibility that persistently high inflation durably increases inflation expectations. While this appears less likely than a year or two ago, I am very attentive to the evolution of inflation expectations. Such a risk would imply keeping monetary policy restrictive for longer. Another scenario would be that the economy and labor market weaken more sharply than expected in my baseline forecast. In that case, monetary policy would need to respond to such a threat to the employment side of the dual mandate

·         Considering the balance of risks related to these scenarios, I believe that our current policy is well-positioned to respond as needed to any changes in the economic outlook. With significant progress on inflation and the labor market cooling gradually, at some point, it will be appropriate to reduce the level of policy restriction to maintain a healthy balance in the economy. The timing of any such adjustment will depend on how economic data evolve and what they imply for the economic outlook and balance of risks.

·         I am aware things can change rapidly in the jobs market

·         It is a good idea to pay attention to the distribution of Fed dots over the median

·         We know there are problems with commercial real estate, commercial real estate issues loom larger for smaller banks

·         It will be a challenge to push productivity beyond the long-term average

·         There's ample evidence that monetary policy is restrictive

·         The Fed is watching the unemployment rate, but it's still at a low level

·         There's been a long-standing shortage of housing

·         It is defensible to include owners’ equivalent rent in CPI.

·         Current policy is well positioned, attentive to inflation expectations

·         The financial system is not currently positioned to unusually amplify any future shock

·         Monthly job gains needed to keep the unemployment rate steady likely have doubled to nearly 200,000

·         I expect economic growth to remain near the rate of potential growth, somewhat above 2%.

·         Rising credit card and auto loan delinquencies are not yet concerning but need watching

·         I lean toward optimism on innovation, and productivity, allowing a faster pace of non-inflationary growth

·         Progress on inflation has slowed, but I expect the disinflation trend to continue

·         The risks to achieving inflation and employment goals have moved toward a better balance

·         The job market is tight but not overheated

·         The policy would also need to respond to a sharper-than-expected weakening of the economy and the job market

·         I am fully committed to the 2% inflation target

·         Inflation has slowed, and the labor market tightness has eased

·         The timing of any policy adjustment will depend on economic data and its implications for the outlook and the balance of risks

·         I am very attentive to inflation expectations

·         A rise in inflation expectations would imply keeping monetary policy restrictive for longer

·         I expect 3 and 6-month inflation rates to move lower on a bumpy path

·         Current policy is well-positioned to respond to the economic outlook

·         I see 12-month inflation moving sideways for the rest of this year, and slowing more sharply next year

·         At some point, it will be appropriate to cut rates

·         The Fed has the tools to adjust if there's an unexpected shift in unemployment

·         The Fed is watching the unemployment rate, but it's still at a low level

·         There are challenges in measuring housing inflation

On Tuesday, Fed’s Daly said:

·         Contacts say AI is reducing costs; it can be a deflationary force

·         The US economy has been remarkably resilient

·         Excess consumer saving has been largely exhausted, we should see spending slowing

·         It's very clear monetary policy is restrictive

·         US stock market rallies reflect enthusiasm for the future

·         There's no evidence that stagflation or recession is in our future

·         Preemptive cutting is something you do when you see risks, but right now the labor market is good

·         At this point, the risks to inflation and the employment mandate are in better balance

·         The bumpiness of inflation data so far this year has not inspired confidence

·         Recent inflation readings are more encouraging, but it's hard to know if we're on track to sustainable price stability

·         Restrained demand, not improved supply is likely needed to get inflation to the 2% goal

·         At this point, we have a good labor market, not a frothy one

·         We are nearer to a point where benign outcomes in the labor market could be less likely

·         Policy has to be conditional, we need to exhibit care

·         If there are gradual declines in inflation and slow labor market rebalancing, then the Fed can normalize policy over time

·         If inflation falls more slowly than expected, the policy rate must stay higher for longer

·         If inflation falls rapidly or the labor market softens more than expected, lowering the policy rate would be necessary

·         We must fully restore price stability without a painful disruption to the economy

·         The bumpiness of inflation data so far this year has not inspired confidence

·         We have made a lot of progress on inflation, but there is still work to do

·         Inflation is not the only risk

On Thursday, Fed’s Bostic said:

·         Inflation is moving in the right direction, interest rate cut likely in Q4

·         The Fed can achieve 2% inflation with a job market that remains tight by historical standards

·         Service businesses say pricing power is eroding

·         I penciled in four quarter-percentage-point rate cuts for 2025; the Fed is on a long-term arc

·         I want to be certain inflation will return to 2% before an initial cut that should be seen as the first in a series, that is a reason for patience

·         The share of goods rising 5% or more has fallen below 20%

·         Inflation remains the chief concern, businesses say they see no cliff ahead for the job market

On Thursday, Fed’s Bowman said:

·         I remain cautious in weighing future Fed rate changes

·         Easier financial conditions could drive up inflation

·         Upside risks to inflation persist

·         I expect only modest progress on lower inflation this year

·         I am concerned by the decline in the number of US banks

·         The economy is strong but activity has moderated

·         The lack of new bank creation will create financial issues

·         If inflation moves toward 2%, an eventual rate cut is on the table

·         The Fed is not at a point yet where it can consider a rate cut

·         Inflation should ease with the current Fed policy-setting

·         Monetary policy is currently restrictive

·         I am still willing to raise rates again if inflation doesn’t ease

On Thursday, IMF's Managing Director Gergiev said:

·         The boost in US consumer spending from the COVID-era wealth may be subsiding and easing inflation pressure

·         The IMF's forecast for US inflation is slightly more optimistic than the Fed's forecast

·         US Fed should hold rates until at least late 2024

·         US Core PCE this year is around 2.5%, back to target mid-2025

·         The US has a pressing need to reverse the continuing increase in debt-to-GDP ratio

·         The US economy has proven to be robust, dynamic, and adaptable to changing global conditions, exceeding expectations

·         US general government debt will exceed 140% of GDP by 2032 under current policies

·         The US needs to reduce annual deficits by around 4% of GDP relative to the current baseline to put Debt-GDP ratio on a downward trajectory

·         The US should eliminate a range of tax expenditures and reform entitlement programs; divert some savings to programs to alleviate poverty

·         IMF revises 2024 US real GDP forecast to 2.6% from 2.7% in the April world economic outlook

·         US Personal Consumption Expenditures inflation is expected to return to the 2% target by mid-2025

·         The Federal Reserve should wait until at least late 2024 to reduce the policy rate

Bottom line:

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may almost confirm the same by Sep’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24. 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 stability); Fed may not allow core real bond yield (10Y) above +1.0%.

Market impact:

On Thursday, Wall Street Futures were almost flat on fading hopes of an early Fed pivot; but Gold and oil surged on increasing Gaza war geopolitical tensions as Israel may attack Hezbollah at the Lebanon border, which may eventually involve Iran indirectly/directly.

On Thursday, Wall Street was boosted by real estate, consumer discretionary, communication services, energy, utilities, and industrials, while dragged by consumer staples, materials, banks & financials, healthcare and techs. Script-wise, Wall Street was boosted by Salesforce, Boeing, Amazon, 3M, JPM, Travelers, United Health, Honeywell, Apple, Amgen, Chevron, Caterpillar, Intel, Microsoft, Alphabet, Meta and Netflix while dragged by Visa, Goldman Sachs, Merck, American Express, Walmart, IBM and P&G.

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

Whatever may be the narrative, technically Dow Future (39400) has to sustain over 39500 for any further rally to 39800/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 39450-39400 may again fall to 39200/39000-38900/38600 and further fall to 38400/38200-38100/37900* and 37600/37400 in the coming days.

Similarly, NQ-100 Future (20250) has to sustain over 20500 for a further rally to 20700-21050 in the coming days; otherwise, sustaining below 20450/2035020300/20250 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5560), now has to sustain over 5650 for any further rally in the coming days; otherwise, sustaining below 5625/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2340) has to sustain over 2375-2385 for a further rally to 2395/2400 and further to 2410/2425-2435/2455* and 2475-2500; otherwise sustaining below 2370/2360-2345/2320, may further fall to 2290/2275 and may further fall to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.