Wall Street mixed on Gaza war suspense and hawkish Fed talks

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. On Thursday, it became apparent that despite no official confirmation by Israel, the Gaza war pause has been extended till at least Sunday (3rd December). The U.S. Secretary of State Biden is now on a Middle East tour to find an acceptable permanent Gaza war ceasefire and peace solution by both sides (Israel-Hamas/Palestine authority).

As per the WSJ report, Israel and the U.S. may be now discussing the idea of expelling Hamas fighters from Gaza in a bid to shorten the war and avoid further mass/civilian casualty in the process; i.e. Israel is now basically asking for Hamas surrender and a safe passage of the top leadership, fighters/terrorists/mercenaries out of Gaza/Palestine, so that a separate Palestine authority may take charge of the separate state.

On Thursday, the Israeli minister and war cabinet member Gantz tweeted that he told the US Secretary of State Biden that operations in Gaza must continue: “For the security of the State of Israel and the stability of the entire region – Israel must complete the operational mission, and remove the threat of Hamas and its rule in the Strip”.

For his part, the US secretary of state emphasized the need to protect civilians in southern Gaza, where many have fled after Israel began attacking the territory. Blinken stressed the imperative of accounting for humanitarian and civilian protection needs in southern Gaza before any military operations there. Blinken also urged Israel to take every possible measure to avoid civilian harm. Blinken also requested Israel to cool off and refrain from resuming the Gaza war to pave the way for a long-term sustainable two-state peace solution.

On Thursday, Israeli PM Netanyahu said: “I just finished a meeting with US Secretary of State Anthony Blinken, shortly after Hamas murderers murdered Israelis here in Jerusalem, and I told him: This is the same Hamas-- This is the same Hamas that carried out the terrible massacre on October 7, the same Hamas that tries to murder us everywhere”. This is after three people were allegedly killed by two Hamas fighters/mercenaries/terrorists at the entrance of Jerusalem.

On Friday, BEA flash data showed U.S. annual core PCE inflation (at 2017 constant prices) for October further eased to +3.5% from +3.7% sequentially, in line with the market expectations and lowest since Apr’21.

On a sequential (m/m) basis (seasonally adjusted at 2017 constant prices) the U.S. core PCE inflation increased by +0.2% in October from +0.3% in September, in line with market expectations of +0.2%

In October’23, the U.S. core PCE service inflation ex Housing, the current focus of the Fed also eased to +3.9% from the prior sticky & elevated zone of around +5.0% in H1CY23.

 

Overall, the Fed goes by a 6M average of core PCE inflation for any important policy move. As per the new series (2017 constant prices), the 6M average (H1CY23) core PCE inflation is now around +4.7%, while the 3M average underlying rate may be now around +3.4%; at the current run rate and trend, the average US core PCE inflation may be around +3.0% by June’24 and +2.0% by June’25-in line with Fed’s projections.

On Thursday, Fed’s Williams said:

·         There is a significant decline in inflation

·         It is hard to predict where ample reserve level lies

·         Financial conditions are volatile amid sensitive markets

·         The key to policy is the persistence of easing financial conditions

·         I expect 2024 GDP growth below trend, but quite positive

·         I am not losing sleep over market views of Fed funds path

·         Financial conditions have tightened

·         It's appropriate to keep monetary policy restrictive for some time

·         I see up and downside risks for inflation

·         The Fed is at or near peak for interest rate target

·         Future Fed decisions will be driven by data

·         I see inflation easing to 3% this year, 2.25% in 2024

·         Monetary policy is quite restrictive, the most in 25 years

·         If inflation pressures persist Fed could hike again

·         Bond yields have shown high sensitivity to new data

On Thursday, Fed’s Daly said:

·         People's fear of a recession has faded into the background

·         Currently on the way to temporarily reaching 2% but we are not interested in temporary price stability

·         The latest inflation data is encouraging but we must not prematurely declare victory

·         There is still a lot of information to come before December, we are not ready to take any meeting off the table

·         Then need to be prepared to either raise rates again if necessary or say the tightening cycle is complete if that is appropriate

·         We need to better understand what is happening with the economy, inflation

·         We should take our time now, remain vigilant, and act prudently

·         Stalling progress on inflation and further rate hikes are not our base case

·         We can continue reducing the balance sheet even after rate hikes are done

·         Still too early to know if the Fed is done raising rates

·         The economy needs to cool down a little more

·         Policy is in a very good place

·         I'm not thinking about rate cuts at all right now

·         Should neither stubbornly continue raising rates without looking at a weakening economy nor stop too soon and fuel inflation again

·         We are hearing more and more that it is harder for companies to pass along rising prices

On Thursday’, U.S. President Biden said after the PCE/core PCE inflation data: “We still have more work to do, prices are still too high”.

 The US Treasury Secretary Yellen said:

·         The signs are very good the US will achieve a soft landing

·         The Fed need not trigger recession to quell inflation

·         There is a good chance unemployment will stabilize near the current level

Conclusions:

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 restrictive 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. Fed has to bring down inflation to +2.0% targets by ensuring US 10Y bond yield below 5.00-5.25%, and an unemployment rate below 4.0% without triggering an all-out or even a brief recession in the US Presidential election year (Nov’24). The Fed will ensure that the US10Y bond yield is below 5.00-5.25% at any cost for lower borrowing costs for Uncle Sam (U.S.), everything being equal. Thus, overall Fed is methodically jawboning on both sides (hawkish/dovish) from time to time to achieve all its goals at the same time.

Market wrap:

On Thursday, Wall Street closed mixed on hopes of Fed pivot, and less dovish Fed talks, in line with expected core PCE inflation data and upbeat report card/update from Salesforce, Boeing and United Health; Dow Jones future (DJ-30) jumped over +500 points. But techs dragged NQ-100, which edged down around -0.2%, while SPX-500 gained +0.4%. For November, DJ-30, and SPX-500 jumped almost +%, while NQ-100 soared around +9%-best performance by Wall Street since late 2022 despite lingering uncertainty about the Gaza war trajectory.

On Thursday, Wall Street was boosted by healthcare, industrials, banks & financials, materials, real estate, consumer staples, energy, and utilities to some extent, while dragged by communication services (social media companies), and tech. Oil stumbled on subdued OPEC+ voluntary production cut. Gold slips on less dovish Fed talks. USD surged below the expected EU core inflation report; EURUSD and GBPUSD slumped.

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

Whatever may be the narrative, technically Dow Future (35990), now has to sustain over 36100 levels for a further rally and a further 37300 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 (15950) 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 (75.60) 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: 2036) 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)