Wall Street mixed on hopes of Gaza war pause; Gold slips

On Tuesday, Wall Street, Gold jumped on softer than expected core CPI, which may keep the Fed on a less hawkish hold stance and hopes of an early rate cut (by May’24 instead of July-Sep’24). There was no fresh significant news of Gaza war front escalation/ceasefire, but Israel is also reportedly thinking hard stance against the ongoing Hezbollah attack.

On early Wednesday European session, Wall Street Futures were under some stress on lingering suspense about the Gaza war trajectory but were also supported by hopes of an early Fed rate cut in 2024 and reduced cold/tech war tensions between U.S. and China ahead of the Biden-Xi meeting.

On Wednesday's U.S. session, overall economic data was mixed as PPI was slightly softer than expected, while retail sales were slightly higher than expected. Overall, Wall Street Futures, and Gold were almost flat, but Wall Street Futures got some boost eventually, while Gold was undercut on the progress of the Gaza war temporary (3-5 days) ceasefire/pause negotiations to release some hostages. This is despite Israel’s intensified military operation in many Gaza Hospitals suspected of covert/underground Hamas operations and subsequent huge global condemnation.

As per the media report:

·         Israeli Minister: A temporary ceasefire in return for hostages will happen

·         Hamas has agreed outlines of the deal, but Israel has yet to agree and still negotiating the details

·         Under a possible deal, Israel would allow an increase in humanitarian aid to Gaza including Fuel

The Palestinian Authority (PA) President Abbas said Palestinians are facing a “barbaric war of aggression and an open war of genocide”, while Israeli PM Netanyahu reiterated his goal of eliminating Hamas during a visit to the Zikim army training base near Gaza: “There is no place in Gaza that we will not reach, there is no hideout, refuge, or shelter for Hamas killers-- We will arrive, we will eliminate Hamas, and we will return the hostages. These two goals are sacred… Yesterday, I spoke with President Biden again. We will be relentless. We will eliminate Hamas, achieve victory, and return the hostages—“.

Meanwhile, WHO pointed out that Hospitals are not battlegrounds; the WHO Chief Tedros tweeted:  “Israel’s military incursion into Al-Shifa hospital in Gaza City is unacceptable. Hospitals are not battlegrounds. We are extremely worried for the safety of staff and patients. Protecting them is paramount. One thing is clear: Under international humanitarian law, health facilities, health workers, ambulances and patients must be safeguarded and protected against all acts of war-- Even if health facilities are used for military purposes, the principles of distinction, precaution and proportionality always apply-- WHO has lost contact with health workers at Al-Shifa—“.

Overall, both the U.S. and Israel are now under huge global and local pressure for at least a temporary humanitarian pause/ceasefire in the Gaza war. And Israel is now also accelerating its control all over Gaza City including the southern area and may also go for at least a temporary ceasefire in the Gaza war by the next few days, although the war against Hamas terrorists or other state-sponsored proxies may not end before Dec’23.

U.S. Retail sales remain robust despite higher borrowing costs:

On Wednesday, the CB flash data shows seasonally adjusted U.S. retail sales for Oct’23 were around $704.954B vs. 705.701B sequentially (-0.01%) and 687.871B yearly (+2.5%); i.e. the U.S. retail sales contracted -0.01% sequentially in Oct’23, against an upwardly revised +0.9% rise in Sep’23, and above market consensus -0.3% decrease, putting an end to a 6-month winning streak.

In Oct’22, sales at miscellaneous store retailers recorded the largest decrease (-1.7%), followed by furniture stores (-2.0%), motor vehicle dealers (-1.0%), sporting goods, musical instruments, and booksellers (-0.8%), gasoline stations (-0.3%), and general merchandise stores (-0.2%). These declines were partially offset by rising sales at health and personal care stores (1.1%), food & beverage stores (0.6%), electronics and appliances stores (0.6%), restaurants and bars (0.3%), and online trade (0.2%). Every year, retail trade growth slowed to 2.5% in October from an upwardly revised 4.1% in September.

Overall, the average retail sales are now around $693.104B in 2023 against the prior average of $691.734B and the 2022 average of $672.675B, growing around +3.1% annually. The US retail sales nominal growth is still robust despite higher borrowing costs and higher cost of living as the labor market is still robust and the lagging effect of huge fiscal stimulus (COVID) is still prominent; wealthy consumers having access to leaked fiscal stimulus don’t need to borrow to fund discretionary high-value spending.

Although underlying retail sales are robust, adjusted headline inflation (CPI), the real retail sales are almost flat to negative in 2023 (YTM) against +1.4% growth in 2022 (y/y). Overall, U.S. real retail sales growth is moderating, but still hot enough for the Fed’s ‘higher for longer’ stance to contain inflation without causing an all-out recession (hard landing). In Oct’23, real retail sales contracted -0.07% sequentially and -0.70% annually. Overall, Wall Street was boosted by hopes of Fed pause/pivot/rate cuts and also a soft landing while bringing inflation back to +2.0% targets.

On late Tuesday, Fed’s Barkin said:

·         There are risks from over and under-correcting inflation

·         The Fed is making real progress on inflation

·         Housing prices remain strong despite slowing activity

·         Government shutdown impacts are historically modest

·         The impact of higher rates may be lagged

·         I fear more needs to happen to curb demand and inflation

·         I am not convinced inflation is on a smooth glide path to 2%

On Wednesday, Fed’s Goolsbee said:

·         The labor force participation rate has come back more than we would have expected

·         There are a lot of really pessimistic people who are spending a lot of money, that's a puzzle

·         Consumer sentiment data historically was a good indicator of how much money people would spend, but that relationship has utterly broken

·         The October CPI report looked pretty good

·         Auto strikes, historically, don't do anything at the national level

·         If the war in the Middle East spread and drove up the price of oil, the Fed would have to take that into account

·         Inflation progress continues while economic growth has been strong

·         The key to further progress on inflation is housing, there will be some bumps

·         Still have a way to go before the US Central Bank's 2% inflation goal is reached

·         Positive supply developments allow blockbuster economic growth without added inflationary pressures

·         I am more concerned about possible external shocks than about the economy overheating

·         Inflation progress continues, economic growth has been strong, and the labor markets vibrant

·         This year could see the fastest non-war-related one-year fall in US CPI inflation in a century, with an unemployment rate that never gets above 4%

On Wednesday, Fed’s Daly said:

·         Have little concern about the recent sharp fall in US government bond yields in recent days, which has loosened financial conditions

·         Encouraged by falling CPI but warned against declaring the end of hikes

·         The recent economic data showing a further deceleration in inflation was very, very encouraging –

·         I am concerned about a 'stop-start' on tightening

·         Data shows further deceleration in inflation

Conclusion

Fed will be on hold with a hawkish stance in December too and hold the repo rate at present +5.50% at least till Aug’24; by then, the U.S. core inflation should fall below +3.0% on a sustainable basis, and in that scenario, Fed may go for -0.50% rate cut each in Sep’24 and Dec’24; i.e. cumulative -100 bps rate cut in H2CY24 to keep real rate around +1.50%, in line with present level (repo rate at +5.50%; average core inflation for 2023 around +4.0%).

Market wrap:

On Wednesday, Wall Street Futures surged on hopes of an early Fed cut in 2024 and the progress of the Gaza war temporary pause/ceasefire. The market is now expecting a -50 bps Fed rate cut by July’24. Blue chip DJ-30 surged around +140 points, tech-heavy NS-100 edged down -0.14%, while broader SPX-500 edged up +0.10%.

Overall, Wall Street was boosted by Target (upbeat report card), while dragged by Nvidia (growing completion for AI chips). Wall Street was boosted by consumer staples, communication services, banks & financials, materials, Industrials, real estate, and healthcare, while dragged by energy (lower oil), utilities, techs and consumer discretionary. Gold slips from around 1975 to 1955 on the progress of the Gaza war's temporary pause/ceasefire.

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

Whatever the narrative, technically Dow Future (35027), now has to sustain over 35200 for a further rally to 35350/35500-35650/35850 in the coming days; on the other side, sustaining below 35150, Dow Future may again fall to 34800/34650-34120/34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (15850), now has to sustain over 16100 for a further rally; otherwise sustaining below 16050, may again fall to around 16100-14140 in the coming days.

Also, technically Gold (XAU/USD: 1960) now has to sustain over 1975 for any further rally to 1980/1995-2008/2012 and 2063-2085 for a further rally to 2022/2038-2055/2085; otherwise sustaining below 1970, may further fall to 1955/1932-1923 and 1908/1904-1895/1885 and 1850/1810 in the coming days (if there was a Gaza war ceasefire).