Wall Street, Gold surged on less hawkish Fed/Powell talks

·         But Powell also indicated Fed needs further evidence of a sustainable disinflation process to get confidence for rate cuts; the Fed may not cut from Sep’24

On Friday, Wall Street Futures, Gold stumbled despite softer core PCE inflation reading for May (+2.6% from +2.8%) as after the latest revisions, overall 6M rolling average is now around +2.8% against earlier +2.9%; i.e. the overall progress of disinflation is still incremental rather than monumental and Fed may go for -25 bps rate cuts from Dec’24 rather than Sep’24; the market is still expecting -50 bps rate cuts in H2CY24 against Fed’s dot-plots of only -25 bps one rate cut! Also, US/UM consumer confidence/sentiment data was revised sharply higher for June, and negative for risk assets. Although the US/UM 1Y inflation expectation was also revised lower, it’s now a lagging indicator (after lower core CPI data was published in mid-June).

For June, broader SPX-500 surged +2.9%, blue-chip DJ-30 edged up +0.7%, while tech-heavy NQ-100 jumped +4.9%. For H1CY24, the SPX-500 added +15.1%, the Nasdaq +20%, and the Dow gained only +3.7%; AI chips optimism led by Nvidia and other AI Chip stocks boosted NQ-100. Stimulus-addicted Wall Street was also boosted by hopes & hopes of an early Fed rate cut. But Dow was also affected by China-heavy MNCs amid Trump’s likely China tax tantrum once again as he is now leading Biden after the ‘spirited’ debate performance last week.

Overall, Trump’s win, or even trifecta may be negative for Wall Street to some extent as there is no scope for fresh tax cuts for corporations, although he may try to extend the 2017 tax cuts beyond 2025, there will be immense opposition in the US Congress/Senate. Moreover, Trump may again play China and even the EU/German trade war card for domestic political compulsion along with immigration (legal/illegal), which may be positive for inflation. Under Trump, there may be also less emphasis on infra spending, especially in high-speed railways. And Trump admin may be also positive for health insurance, oil and banks & financials, while negative for RE.

After last week’s debate and the SC’s ruling Monday ruling that ex-presidents have broad immunity from criminal prosecution raised the odds of a second term for Trump. A potential Trump presidency is seen as inflationary due to his stance on tax cuts, tighter immigration policy and higher tariffs on imports. But all these may not boost inflation abnormally so the Fed has to hold rates after five rate cuts from Dec’24 to Dec’25; the Fed may continue to another four times in 2026 and twice in 2027 for a cumulative eleven times from Dec’24 to Dec’27 with the end of QT by Dec’25. Contrary to the earlier term, this time Trump may have a ‘good’ relation with ‘powerful Powel’ as this time Fed would be in a rate cut cycle rather than rate hikes & QT.

On early Monday, Wall Street Futures were also briefly boosted by EU optimism. EUR and also CAC-40 and other European indices got some boost as Le Pen’s far-right National Rally (RN) party led the first round of the French Legislative Assembly election, but with a narrower margin than some polls had predicted and falling short of a simple majority, which may eventually cause a coalition government with less expansive fiscal agenda and less Eurosceptic stance. Macron is also changing his narrative focusing on Islam and immigration issues in line with Le Pen for domestic political compulsion. EU leaders will also support liberal Macron rather than hard-liner Li Pen.

Macron would be good for stock market sentiment compared to Li Pen. Macron was primarily elected in 2017 and 2022 as President on the Reformed and Pro-European agenda. However, some of his biggest structural plans, including a proposed change to the pension system, were not implemented in the wake of the COVID pandemic. In the meanwhile, Le Pen was also able to change her erstwhile extreme right-wing brand of politics to more mainstream ones (centrist). Macron won in 2022 too irrespective of this regional election outcome due to his pro-reformist and liberal/centrist leadership appeal. But this time Macron may lose amid an anti-incumbent wave and an urge for a change in top leadership. But for the time being, the Market is calm as Le Pen may not get the simple majority in the current Legislative Election for any monumental change in French policy like Frexit.

But soon after the mid-EU session Monday, risk trade stumbled as there may be a hung Parliament for months with political and policy paralysis to some extent, although it’s nothing new in Europe and the overall system/economy will go on as usual as their are political partisan (supports) for all important economic policy decisions and the overall political system/Parliament is designed in such a way, that ruling political party/alliance or even head of state has limited legislative power for checks & balances so that electoral democracy may not turn into an electoral autocracy.

On Monday, Wall Street Futures were also dragged by escalated Gaza war geopolitical tension as Israel may have already attacked selected Hezbollah positions at the Lebanon border, while Iran threatens Israel with 'obliterating war' if it attacks Lebanon. But at the same time, there was another report that the US proposed a new language/T&C for reaching a hostage deal in Gaza. Gold and Oil got some boost. But a slightly negative revision in S&P Global Manufacturing PMI data (51.6 vs flash estimate 51.7) also undercut Wall Street as overall it’s indicating the US manufacturing recession may be over for the time being after hovering below 50.0 boom/bust line for most of the months in 2023.

On Tuesday (2nd July), all focus of the market was on Fed Chair Powell’s comments in the annual ECB conclave:

·         The disinflation trend shows signs of resuming

·         Most people think we're not going back to the ultra-low rates of the recent past, but nobody knows

·         The budget deficit is very large, and the deficit path is unsustainable

·         Restrictive policy working hand-in-hand with supply

·         We're seeing the effects of high rates in the housing market

·         The policy is still restrictive and it's appropriate

·         Inflation may get back to 2% late next year or the following year

·         Headline PCE inflation should be around 2.00-1.50% by Dec’25; it would be nice

·         Fed is focused on both core and total CPI around 2% on a sustainable basis as price stability

·         The labour market is cooling off

·         Wage increases are still above where they will wind up in equilibrium

·         Wage increases moving back down towards more sustainable levels

·         Services inflation is usually stickier

·         We need to see profits absorbing wage increases

·         The labor market is still strong, though we've seen a continued rebalancing

·         The risks becoming much more balanced

·         We are well aware of the risk of cutting too soon and too late

·         We can take our time and get this right

·         If the labor market unexpectedly weakens, that would also cause us to react

·         The data represents significant progress

·         We need to be more ‘confident’ before reducing policy rates; Need to see more data like we have been seeing recently.

·         We made quite a bit of progress on inflation

·         The disinflation trend shows signs of resuming

·         We continue to have solid growth and, a strong labor market

·         Inflation now shows signs of resuming its disinflationary trend

·         We are getting back on a disinflationary path

·         We've made a lot of progress

·         September cut? "I'm not going to be landing on any specific dates here today”

·         I would be happy if unemployment stayed right where it is

·         Inflation a year from now should be in the mid to low 2s

On Tuesday (2nd July), Fed’s Goolsbee said:

·         We are emphasizing job reports and price data

·         Restrictive rates for too long is a problem

·         There are some warning signs in the job market

·         We are still grappling with housing inflation

·         Improved monthly inflation readings feel like the path to 2%

·         If inflation returns to normal rates will too

·         There have been a string of improved inflation readings in the US

·         US interest rates are restrictive now

·         I see some warning signs the real economy is weakening

·         Market-based rents are down, but not yet reflected in the data

·         I don't buy that the last mile on inflation could take longer

·         The arc of inflation is down

·         I still think a soft landing is possible

·         As inflation comes down, policy gets more tight

·         I think we are restrictive

On Monday, the NY Fed President Williams said:

·         Amid uncertainty, the Fed should be clear on its goals

·         I am confident the Fed is on a path of getting inflation back to 2%

On Tuesday, ECB’s de Guindos said:

·         It's key to respect the fiscal framework

·         The market issue in France is fiscal policy

·         French market evolution has been quite orderly

·         The economy is to be stronger in 2H than 1H

·         Base effects are playing a role in inflation moves

·         National inflation data has been quite positive

·         Inflation will have ups and downs this year

·         We have to be very prudent

·         There is no pre-determined rate path, given the uncertainty

On Tuesday, ECB President Lagarde said:

·         The strong labor market allows the ECB to gather enough data

·         A strong labor market means we have time to gather information

·         A soft landing for the Eurozone economy is not guaranteed

·         It will take time to be certain that inflation is on track

·         It is very unlikely that we'll go back to ultra-low rates

·         The rising number of trade restrictions is concerning

·         We are very advanced in disinflation

·         We don't need to have services inflation at 2%

·         Inflation is heading in the right direction

·         We are very advanced in disinflation

·         Inflation in one year will be in the low 2s

On Tuesday, BLS/JOLTS (Job Openings and Labor Turnover Summary) flash data shows the number of job vacancies/openings in the U.S. increased to 8140K in May from 7920K sequentially, above market expectations of 7910K, and recovered from the 36-months lowest reading in April.

In May, U.S. job openings increased in state and local government, excluding education (+117K), durable goods manufacturing (+97K), and Federal government (+37K). On the other hand, job openings decreased in accommodation and food services (-147K) and in private educational services (-34K).

After the latest revisions in May, the YTM rolling average of job openings to unemployed person 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. 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, ached of the Nov’24 election, Government job openings and actual hiring are also boosting headline NFP job additions.

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. 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.

Market impact:

On early Wednesday, Wall Street Futures, Gold got some boost on less hawkish Fed talks as Powell, and Goolsbee acknowledged the resumption of the disinflation process; thus the market is now quite optimistic about both Sep’24 and Dec’24 rate cuts. Following Powell's speech, US interest rate futures slightly increased the chances of a Fed rate cut in September, from around 60% to 65%. Although, Fed Chair Powell acknowledged progress on inflation but emphasized that the central bank is not yet ready to cut interest rates.

Wall Street edged up soon after Powell started speaking when he stated that "the disinflation trend shows signs of resuming", following the bump in the road on the inflation path that we saw recently, which sparked fears on the Feds rate cut path. Powell said there’s been a “substantial” move toward a better balance between the supply and demand for workers. He continued to describe the job market as strong but also noted that it is cooling off appropriately. For the first time in its history, the S&P 500 closed above 5,500, while the Nasdaq 100 hit the 20,000 mark. But Powell said nothing new Tuesday and overall, the Fed may not cut rates before Dec’24.

In regular trading Tuesday, the S&P 500 and NQ-100 surged +0.62% and +0.84%, respectively, while the Dow (DJ-30) gained 0.41%. Wall Street was boosted by consumer discretionary, banks & financials, communication services, consumer staples, industrials, techs, utilities, real estate, and materials, while dragged by healthcare and energy. Script-wise, Wall Street was boosted by Apple, Amazon and Alphabet. Tesla jumped after delivery numbers exceeded expectations, while Nvidia stumbled amid concerns of abnormal valuation and about the sustainability of the AI-driven rally (profit booking in long). Wall Street was also dragged by Verizon, Nike, Boeing, Caterpillar, Cisco, Amgen and Chevron.

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

Whatever the narrative, technically Dow Future (39400) has to sustain over 39500-39850 for any further rally to 40050*/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 39800/39600-39400/39200 may again fall to 39000/38800-38600/38400 and further 38200/38100-37900*/37600-37400 in the coming days.

Similarly, NQ-100 Future (20250) has to sustain over 20350-20500* for a further rally to 20700-21050 in the coming days; otherwise, sustaining below 20450-20300 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: 2325) has to sustain over 2350-2365 for a further rally to 2375/2385-2395/2400 and further to 2410/2425-2435/2455* and 2475-2500; otherwise sustaining below 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.