Wall Street closed mixed on mixed economic data; Gold slips

On Monday, Wall Street Futures and gold slip on fading hopes of an early Fed rate cut in 2024 as the market focuses more on Chair Powell’s written remarks Friday. Now all focus is on US NFP/BLS job data to be released on 8th December, core CPI data on 12th December and finally Fed MPC day 14th December SEP/DOT PLOTS to gauze Fed’s projections of core inflation and rate actions/cuts in 2024.

Fed is expected to continue the hawkish hold stance on 14th December too and hold the repo rate at +5.50% till at least June’24. If core CPI indeed falls below +3.0% and Fed is confident that average core CPI would be around +3.0% in H2CY24, then Fed may gradually cut rates by -1.00% in H2CY24 for a repo rate at +4.50%, which will translate a real repo rate around +1.50% (4.50-3.00) - in line with present restrictive policy stance to bring core CPI back to below +2.00% by Dec’25.

Most of the Fed policymakers now prefer a hawkish hold stance; i.e. maintaining the possibility of another +25 bps rate hike if it appears that core inflation is not cooling as fast as expected. Also, most of the Fed policymakers are now not thinking about any rate cuts in early 2024 to ensure tighter financial conditions and lower inflation expectations. But as the Fed is already talking about (discussing) rate cuts and core inflation is cooling quite fast, the market is now expecting -100 bps Fed rate cuts cumulatively in H2CY24; i.e. -25 bps each in July-September-November and December (if U.S. core CPI indeed falls around +3.0% in H1CY24 on an average). The present Fed repo rate is at +5.50%, while the average core CPI was around +5.40% in H1CY23 and expected +4.0% in H2CY23. Thus the real repo rate would be around +1.50% (5.50-4.00) by Dec’23.

On Tuesday, some of the focus of the market was also on JOLTS job openings data for October which the Fed watches keenly for the underlying health of the labor market (as a leading indicator). JOLTS data shows U.S. job openings (private + public) have fallen to the lowest since Mar’21.

On Tuesday, BLS/JOLTS (Job Openings and Labor Turnover Summary) flash data showed the number of job vacancies/openings in the U.S. decreased to 8733K in October from 9350K in September, below market expectations of 9300K, and the lowest since Mar’21. In October, U.S. job openings decreased in health care and social assistance (-236K), finance and insurance (-168K), and real estate and rental and leasing (-49K). On the other hand, job openings increased in information technology/techs (+39K).

The 3M rolling average of JOLTS job openings to unemployed person ratio is now around 1.34 against the 2022 average of 1.87 and pre-COVID level of 1.25. The U.S. economy is still 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. But now the labor market may be cooling.

Fed is now looking for at least a 1.25 ratio of job openings/unemployed persons consistently as a sign of the labor market cooling. The 3M rolling average data is showing some cooling in the labor market amid higher borrowing costs for businesses and also the resolution of immigrant workers' issues after COVID. JOLTS job opening survey data is one of the preferred labor market indicators for the Fed to gauge the underlying strength of the labor market (as a leading indicator). U.S. labor force supply has now increased to 167628K from Feb’20 (pre-COVID) level of 164458K as there are no COVID-related issues now; thus immigrant labor force increased. Also workers now no longer require being at home, taking care of parents and other members of the family as COVID is over.

On Tuesday, ISM flash data shows U.S. Services PMI increased to 52.7 in November from 51.8 sequentially, above the market expectations of 52.0. The latest ISM reading pointed to stronger growth in the U.S. services sector, amid faster increases in business activity/production (55.1 vs 54.1) and employment (50.7 vs 50.2). At the same time, new orders remained strong (55.5, the same as in the previous month) and inventories rebounded (55.4 vs 49.5) while price pressures slowed slightly (58.3 vs 58.6). Also, the backlog of orders reversed (49.1 vs 50.9) and the Supplier Deliveries Index increased (49.6 vs 47.5), indicating that supplier delivery performance was faster.

The ISM noted:

·         Respondents’ comments vary by both company and industry.

·         There is continuing concern about inflation, interest rates, and geopolitical events

·         Rising labor costs and labor constraints remain employment-related challenges

 

Market wrap:

On Tuesday, Wall Street Futures closed mix) closed mix on mixed economic data; i.e. hotter than expected ISM service PMI and colder than expected JOLTS job opening data. Blue chip DJ-30 slipped -89 points, while tech-heavy NQ-100 gained +0.3% and broader SPX-500 edged down -0.3% Gold slips from 2040 to 2009 levels. Wall Street was boosted by techs (lower bond yield), consumer discretionary, and communication services/social media companies, while dragged by energy (oil made multi-month low), materials (subdued Chinese economy and Moody’s downgrade of Chinese outlook to negative from positive), industrials, utilities, consumer staples, banks & financials, real estate and healthcare. Dow Jones was boosted by Apple, Walmart, Microsoft, United Health and Caterpillar, while dragged by P&G, Goldman Sachs, 3M, Intel and Boeing.

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

Whatever may be the narrative, technically Dow Future (36176), now has to sustain over 36100 levels for a further rally of 37050-37350 in the coming days; on the other side, sustaining below 336050/36000 may further fall to 35350-35250, and may again fall to 35000-34800/34650-34120/34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (15900) now has to sustain over 16200 for a further rally to 16700-16800 zones; otherwise sustaining below 16150/100-16050, may again fall to around 15100-14140 in the coming days.

Also, technically Gold (XAU/USD: 2019) now has to sustain over 2030 for any further rally to 2050/2075-2125/2150 areas.; otherwise sustaining below 2025, may further fall to 2010/2005-2000/1995, and further to 1985/1975-1960/1950 and 1928/1908-1895/1885 and 1850/1810 in the coming days (if there was a permanent Gaza war ceasefire and Fed sounds more hawkish than being expected ON 14th December).