Wall Street flat on less dovish Fed talks and upbeat GDP data

On Tuesday, Wall Street Futures and gold surged on dovish talks by Fed’s Waller, indicating an early rate cut in 2024; subsequently, the market was expecting a rate cut from June’24. Also, Wall Street Futures were boosted by an extension of the Gaza war pause till Wednesday. But Gold is also getting a boost and scaled 6-months high on lingering uncertainty about the permanent ceasefire and the eventual trajectory of the Gaza war as Israel is continuously vowing to resume the fighting to eliminate Hamas with greater vengeance once the temporary truce ends (after handover/exchange of all eligible captives by both sides).

The market is now concerned that a longer Gaza war with huge sufferings/killings of Palestine civilians including children/women may force Iran, Lebanon, Qatar, Egypt and other sympathetic Arab countries/proxies to involve in the war against Israel directly/ indirectly.

In any way, on Wednesday, Wall Street Futures were also boosted by hopes of a further extension of the Gaza war pause for another 4-day from Thursday to Sunday (3rd December). But the most complex and difficult part of the negotiations to bring this Gaza war to a permanent end remains elusive so far. The Israelis have made it clear that there’s no way they will go for that permanent ceasefire without eradicating Hamas. Hamas on the other hand is looking for guarantees from the key parties of this temporary ceasefire agreement (Qatar, Egypt, and the US) even after the release of all Israeli hostages, which they picked up on 7th October.

On Wednesday, Israeli PM Netanyahu said Israel to return to fighting after the hostage return phase, while an Israeli Official said “Any additional ceasefire agreement would be conditional on the release of all women and children hostages”.

Now the only option for a permanent ceasefire and durable peace agreement is a complete surrender of Hamas rather than the continuation of this uneven fighting and the process of political settlement (democracy) with a two-state solution. The UN should be allowed to keep a peacekeeping force in Gaza/Palestine to ensure peace/stability and also to ensure no further attacks by Hamas like terrorist organization, targeting Israel.

Also, Qatar, Egypt, Lebanon, Syria, Yemen, and Iran should take such responsibility to ensure the safety of Israel from Hamas, Hezbollah and Houthi-like terrorist organizations/proxies. Although Israel’s aim is now to ‘finish’ Hamas completely through fighting, it may be never possible unless Hamas and all such terrorist/militia organizations surrender and take part in the political process or allow such a political/democratic process.

Now from geopolitics to economics, on Wednesday some focus of the market was also on US GDP data. On Wednesday, the BEA 2nd estimate data show U.S. real GDP for Q3CY23 was around $22506.40B against 1st estimate of $22491.60B and $22225.40B sequentially; $21851.10B yearly (all at 2017 constant prices and at seasonally adjusted annual rates); i.e. the U.S. economy has expanded by around +1.3% sequentially (Q/Q), which is equivalent to +5.2% annually against earlier estimate of +4.9%. The market was expecting +5.0% annualized real GDP growth in Q3CY23.

In reality, the U.S. real GDP growth may be around +2.9% in Q3CY23 annually (y/y) if we compare Q3CY23 and Q3CY22 figures directly. Also, at previous 2012 constant prices, the U.S. real GDP for Q1CY23 was around $20.28T, which is now at 2017 constant prices increased to around $22.11T; i.e. almost $2T increase of U.S. real GDP as a result of changing calculation methodology from 2012 to 2017 constant prices (chained dollar).

In any way, the U.S. real GDP grew at the strongest pace since Q4CY21. The BEA data shows non-residential investment was revised higher to show a 1.3% rise instead of a 0.1% fall initially estimated, as the drop in equipment was shorter (-3.5% vs -3.8% in the advance estimate) and structures surged 6.9% (vs 1.6%). Also, residential investment rose for the first time in nearly two years and at a much faster pace than initially expected (6.2% vs 3.9% in the advance estimate).

Meanwhile, private inventories added 1.4 pp to growth, above 1.32 pp in the previous estimate, and government spending increased faster (5.5% vs 4.6%). On the other hand, consumer spending went up 3.6%, slightly less than 4% in the advance estimate, but remained the biggest gain since Q4 2021. The slowdown was mainly due to services spending. Exports soared 6% (vs 6.2%) and imports increased less (5.2% vs 5.7%).

Overall, abnormal real GDP growth in Q3CY23 may be due to higher private inventories and government spending growth. Initially, Wall Street Futures and Gold slipped briefly to some extent after the blockbuster U.S. real GDP data for Q3CY23; but soon reversed as consumer spending growth was lower than prior estimate, which may keep the Fed on a less hawkish hold in December.

On Wednesday, Fed’s Bostic said:

·         Economic activity will slow in the coming months

·         A downward trajectory of inflation will likely continue

·         A tighter monetary policy is biting harder into economic activity

·         Feedback points to ongoing disinflation and a measured slowdown in economic activity

·         US central bank can feel more confident in the current outlook

·         Companies' pricing power is diminishing

·         The path to 2% inflation will be bumpy but the central bank will get there

·         The US Central Bank can feel more confident in its current outlook

On Wednesday, Fed’s Barkin said:

·         Revised consumer spending data is more consistent with what I am hearing on the ground

·         I'm hearing consumers slowing down, but not falling off the table

·         I am skeptical that price-setters at this point have gone back to where they were pre-COVID

·         5.2% GDP growth tells businesses that they can keep trying to raise prices

·         I am skeptical about being on track for 2% inflation

·         A lot of service prices are still going up, driven by wages

·         I am not willing to take another rate hike off the table

·         I'm still looking to be convinced about inflation

·         I want the option of doing more on rates if inflation flares again

·         Markets and the Fed have been having a forecasting battle

·         I believe inflation will be more stubborn than we'd like

·         Talking about rate cuts is premature

·         Market bets on four rate cuts next year might be based on expectations for a soft landing, I hope they are right

·         Once we get to 2% inflation, we can have a conversation about changing the target

·         I am open to an inflation target range after we hit the 2% goal

·         If inflation remains elevated there's no case for a rate cut

On Wednesday, Fed’s Mester said:

·         Monetary policy has tightened financial conditions

·         It will take time to get inflation to 2% but the central bank will do it

·         Monetary policy is in a good place, the US central bank has time to vet incoming data

·         I support raising capital and liquidity requirements for banks

·         More regulation should focus on the market value of bank balance sheets

·         Steps should be taken to increase the resilience of non-bank financial firms

·         More work is needed on a credible bank resolution mechanism

·         I see clear progress in lowering still-high inflation

·         The economy is resilient in the face of restrictive monetary policy

·         Monetary policy is well-positioned to be flexible

·         Monetary policy must be nimble in current circumstances

·         Bank stress has reduced, but underlying issues are still there

·         Stress tests should be redesigned to help banks build up capital buffers

·         Monetary policy is in a good place

On Wednesday, Fed’s latest Beige Book said:

·         Price increases largely moderated across districts, though prices remained elevated

·         The economic outlook for the next six to twelve months diminished over the reporting period

·         On balance, economic activity slowed since the previous report, with four districts reporting modest growth, two indicating conditions were flat to slightly down, and six noting slight declines in activity

·         Demand for labor continued to ease

·         Most districts expect moderate price increases to continue into next year

·         Some wage pressures did persist, there are some reports of continued difficulty attracting and retaining high performers and workers with specialized skills

·         Consumers showed more price sensitivity

·         On balance, economic activity slowed since the previous report

Overall on Wednesday, Fed talks were less dovish than Tuesday’s as no one talked about any rate cut, while Barkin even indicated another hike if required. Similarly, the Fed’s latest Beige Book was less dovish than expected as it indicated still elevated price pressure (inflation), modest economic growth and a still strong labor market. Thus Fed may not be in a hurry to cut rates in early 2024 or even H12024. Subsequently, Wall Street Futures slipped to some extent from the session high along with Gold. Also, the Gaza war ceasefire extension uncertainty dragged Wall Street. But the money market is now fully pricing a -25 bps rate cut from May against the prior June. Thus the early Santa Rally continued.

Market wrap:

On Wednesday, Wall Street was almost flat amid hotter than expected US real GDP data, less dovish Fed talks, and Beige Book coupled with lingering uncertainty about a further extension of the Gaza war pause. Wall Street was boosted by real estate, banks & financials, materials, industrials, healthcare and tech to some extent, while dragged by communication services (social media), energy (volatile oil), consumer staples, utilities and consumer discretionary to some extent. Dow Jones was boosted by Salesforce, Intel, Goldman Sachs, Boeing and Caterpillar, while dragged by Walmart, Chevron, United Health, Microsoft and Apple.

On Wednesday Gold scaled almost 2050 from the 2035 session low and closed around 2044 on Gaza war suspension and hopes of an early Fed rate cut. Oil was volatile amid OPEC+ production cut suspense and reported production cut in Russia due to adverse weather; but eventually recovered from around 75.65 to 78.00 before closing around 77.70 after a news headline that Saudi Arabia is urging for another -1.0 mbpd production cut for 2024.

Bottom line:

If US core CPI indeed dips below +3.0% by May-June’24 and it seems that the 2024 average core inflation will be around +3.00%, then Fed may start cutting rates from June or July’24 and nay cut cumulatively -1.00% at -0.25% pace till Dec’24 for a repo rate at +4.50%, so that real rate continues to stand around +1.50%, in line with present stance.

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut from June’24 (H2CY24) to ensure a soft landing while bringing down inflation. Also, whatever the narrative, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%. This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price stability and soft-landing.

The Fed will ensure that US10Y bond yield below +5.0% at any cost for lower borrowing costs for Uncle Sam (U.S.)

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

Whatever may be the narrative, technically Dow Future (35584), now has to sustain over 35450-35550 levels for a further rally to 35650/35750-35850/36000 and a further 37300 in the coming days; on the other side, sustaining below 35350-35250, Dow Future may again fall to 35000-34800/34650-34120/34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (16040) now has to sustain over 16200 for a further rally to 16700-16800 zones; otherwise sustaining below 16150-16050, may again fall to around 15100-14140 in the coming days.

Technically Oil (77.70) now has to sustain over 79.50 for a further rally to 82.50/84.50-90.50/95.50; otherwise sustaining below 77.00-76.50/75.00, may again fall to 73.80/71.80-71.40/70.00 and even 66.40-65.40 in the coming days (if OPEC+ is unable to agree for a deeper cut and Saudi Arabia withdraws the voluntary cut).

Also, technically Gold (XAU/USD: 2044) now has to sustain over 2050 for any further rally to 2065/2075-2085 areas.; otherwise sustaining below 2045, may again fall to 2020-2010/2005-2000/1995, 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)