Wall Street recovered on Intel, Amazon, and Fed pivot boost

·         After the ‘soft’ NFP job report for Oct, the market is now pricing almost 100% of the Fed rate cut in Nov despite core disinflation almost stalled in Q3CY24

·         Broadly speaking, in Q3CY24 US core disinflation almost stalled, while the employment situation remains stable amid resilient US economic activities

·         The overall earnings report card for Q3CY24; all focus may be now on the US election The overall and the Fed meeting next week

·         Gold slips despite renewed Israel-Iran war of words and highly expected ‘terrible’ US NFP job addition

·         Fed may not cut in Nov’24 solely based on one month employment report and Iran may soon develop and ‘use nuke’ against Israel to ‘settle all accounts’

Wall Street was under stress on upbeat ADP Private NFP payroll job and Real GDP data, indicating robust economic activities and a stable labor market, which may keep the Fed on the sideline (pause) in Nov’24. But Wall Street Futures also got some boost briefly after the White House issued a warning for US NFP/BLS job data to be released Friday to minimize market impact (after an upbeat ADP job data). The data collection methodology (survey period) is different between ADP and BLS. And White House (President’s office) has early access to important US economic data like employment situation (NFP/BLS) and inflation. Overall, the Fed may not cut in Nov’24 but may cut -25 bps in Dec’24. All focus now on US NFP/BLS job data Friday.

Wall Street is also under stress on mixed/subdued report cards. On Wednesday, the S&P 500 and Nasdaq 100 lost -0.3% and -0.6%, respectively, while the Dow Jones slips -91 points. Chipmakers including Nvidia were under pressure as AMD slid on tepid guidance, while Super Micro Computer tumbled after its auditor’s sudden resignation. But Alphabet boosted sentiment with strong cloud growth, fueling optimism ahead of results from Meta, Microsoft, Apple, and Amazon. On early Thursday (European session) mega-cap techs tumbled on subdued report card earnings reports (including guidance warning) from Meta and Microsoft.

On Thursday, some focus of the market was also on U.S. Core PCE inflation, the Fed’s preferred gauze to measure underlying inflation trends. The BEA flash data showed U.S. annual (y/y) core PCE inflation (Seasonally Adjusted-SA) for Sep’24 was unchanged at +2.7% from +2.7% sequentially, above the market expectations of +2.6% and remained stalled at +2.7% in Q3CY24 (July+ Aug+ Sep), just above +2.6% in June, which was the lowest since Mar’21 (three years), but still substantially above pre-COVID levels 1.5-1.7%. This is also an ideal/actual target of the Fed as core PCE inflation always comes around 0.5-1.0% lower than core CPI due to different methodologies.

On a sequential (m/m) basis (seasonally adjusted) the U.S. core PCE inflation was increased by +0.3% in Sep’24 against +0.2% in the prior month, in line with the market expectations of +0.3% and the highest gain in last five months. The Fed needs the sequential average core PCE inflation running around +0.1% (0.2-0.0.0%) consistently for its price stability real target of annual core PCE inflation around +1.5%.

Although the sequential core PCE inflation rate was almost the same as that of core CPI inflation, overall, for 2024 (YTM), the average sequential rate of core PCE inflation was around +0.2% against core CPI +0.3%.

On Sep 24’24, the so-called U.S. super core PCE service inflation Ex-Housing/Shelter, (the current focus of the Fed) was edged down at +3.2% from +3.3% (y/y). The US super core PCE service inflation was around +2.0% in pre-COVID days. The sequential (m/m) US core PCE inflation was unchanged and remains elevated/sticky around +0.3% in Sep’24.

Overall, after the latest annual/regular revisions, the 6M rolling average (6MRA) of US core PCE inflation was around +2.8% in Sep’24 against +2.7% in the prior month/report. The YTM-2024 average core PCE inflation was around +2.8% in Sep’24 against +4.2% in 2023. The 6MRA sequential core PCE inflation was around +0.2% unchanged from the previous report, but the overall 2024-YTM sequential rate is now +0.2% against earlier +0.3% (before the latest annual revisions, affecting data from 2018 onwards).

The Q2CY24 average was around +2.7% vs the Q1CY24 average of +3.0%. Overall, for 2023, US core PCE inflation decreased from 4.9% to 3.0%; i.e. 1.9% over eleven months at an average disinflation rate of around -0.17% per month on average. In 2024, so far the US core PCE inflation further decreased from 3.1% in January to 2.7% in September; i.e. only 0.4% over 8 months; i.e. an average disinflation rate of around -0.05% per month. The pace of the last mile of US core PCE disinflation has slowed down or almost stalled in 2024 from the unexpectedly higher pace in 2023.

Overall, US core PCE inflation needs to go around 1.5-1.6% from present levels of +2.7%; i.e. around 1.0% for Fed’s price stability target. At present disinflation rate of -0.05% per month on average, it may take almost 20 more months; i.e. around Mar’26 for US core PCE inflation to fall around +1.50% on a sustainable basis.

On Friday, the BEA flash data showed U.S. annual (y/y) total PCE inflation (Seasonally Adjusted-SA) for August increased by +2.1% against +2.3% sequentially, in line with the market expectations of +2.1% and the lowest since Mar’21, but still above +1.5% average levels or actual targets of Fed.

On a sequential (m/m) basis (seasonally adjusted) the U.S. total PCE inflation was increased by +0.2% in Sep’24 against +0.1% in the prior month and in line with the market expectations of +0.2%.

Overall, after the latest annual/regular revisions, the 6M rolling average (6MRA) of US PCE inflation was around +2.5% in the Sep’24 report, unchanged sequential report. The YTM-2024 average core PCE inflation was also around +2.5% in Sep’24 against +3.8% in 2023. The 6MRA sequential PCE inflation was around +0.2%, the same as the 2024-YTM sequential rate and also the same as the total CPI sequential rate.

In Sep’24, goods PCE inflation contracted -1.2% from -0.9% sequentially, and service inflation edged down at +3.7% from +3.8%.

The Fed usually goes by a 6M rolling average (6MRA) of core inflation (PCE+CPI) for any important policy move. After the latest annual/regular revisions, the 6MRA of US core inflation (CPI+PCE) is now around +3.0% (vs +3.1% in the previous report), still around 1.0% above the Fed’s +2.0% targets. The US average unemployment rate (6MRA) is now at 4.1% after Oct’24 BLS data, unchanged from the previous report.

Usually, the Fed considers 4.0% average levels (orange line) as minimum unemployment; i.e. maximum employment (96% of the available work/labor force), sustainable in the longer run. But the Fed also considers a 3.5% unemployment rate as the lowest (green line), below which there may be a risk of deflation, while a 4.5% unemployment rate may be a red line for the Fed, above which there would be a risk of an all-out economic slowdown or even a recession (if sustained over a few months).

In brief, for the achievement of dual mandate (price stability and maximum employment), the Fed now needs to bring down 6M rolling average core inflation (PCE+CPI) to around +2.0% from the present +3.0% without allowing the average unemployment rate materially above 4.0%. If the unemployment rate surges above 4.5%, then the Fed may go for a more rapid dialing back of the restrictive rate (deeper rate cuts), while 3.5% unemployment levels would be consistent with +2.0% core inflation price stability targets and 3.00-2.75% longer-term Fed terminal/neutral rate.

Although the Fed targets +2.0% core PCE inflation officially as a price stability target, in reality, usually it’s +1.5% on average due to a 0.5% lower spread with core CPI inflation. Fed's price stability TGT is just below 2.0% inflation on a durable basis; the Fed generally targets average core inflation (PCE+CPI) +1.9%-as core PCE inflation is generally -0.5% lower than core CPI, Fed normally targets 1.5% core PCE and 2.3% core CPI for average core inflation at around +1.9%.

Thus Fed's average (6MRA) targets for the dual mandate:

·         CORE PCE INFLATION: +1.5%; now at 2.7%

·         CORE CPI INFLATION: +2.3%; now at 3.5%

·         UNEMPLOYMENT RATE: 4.0% (LOWER TGT: 3.5%; RED LINE: 4.5%); now at 4.1%

·         FED'S LONGER TERM TERMINAL/NEUTRAL REPO RATE: +3.0% or +2.75% (POST-COVID) vs +2.50% (pre-COVID); now at 5.00%

Although, the Fed targets core PCE and core CPI inflation, in the longer run ensures both core and total PCE and CPI inflation are around 1.5% and 2.3% respectively.

In the US, Core CPI (Consumer Price Index) and Core PCE (Personal Consumption Expenditures) are two different measures of inflation used to gauge price changes in the economy as well as any change in consumer consumption behavior after any meaningful change of prices (excluding food and energy prices due to their volatility).

The key differences between US Core CPI and Core PCE inflation are:

·         Core CPI measures the change in the prices of a fixed basket of goods and services purchased by households (out of pocket), while Core PCE measures the change in prices of variable goods and services consumed by individuals, both excluding food and energy

·         Core CPI focuses on the price changes of a fixed basket of goods and services typically consumed by urban households, while Core PCE has a broader scope, including all goods and services consumed by households, and adjusts for changes in consumer behavior in line with any significant changes in price (e.g., substitution effects)

·         The Core PCE, on the other hand, includes a broader range of expenditures. It accounts not only for out-of-pocket expenses but also for various goods and services paid for by third parties, such as employer-provided health insurance. This means that the PCE captures a wider array of consumer spending and includes expenditures by non-profit institutions as well.

·         The CPI uses a specific formula, which is based on a fixed basket of goods. This means it does not adjust for changes in consumer behavior in response to price changes. For example, if the price of beef rises, the CPI does not account for consumers switching to chicken.

·         The PCE employs a Fisher ideal index formula, which allows for substitutions between items as their relative prices change. This flexibility typically results in a smoother inflation rate, as it reflects changing consumer preferences more accurately. For example, if the price of beef rises, the CPI does not account for consumers switching to chicken, but the PCE does

·         The weights assigned to different categories in the CPI are based on a fixed survey of consumer spending patterns. These weights are updated less frequently, which can lead to discrepancies over time as consumer behavior shifts.

·         The PCE updates its weights more regularly based on current expenditure data, reflecting more recent consumer spending habits. This results in a more dynamic representation of inflation as it adapts to changes in consumption patterns.

·         Historically, the Core CPI tends to report higher inflation rates compared to the Core PCE. For instance, since 2000, the average annual PCE inflation has been about 0.4% points lower than that of the CPI. This difference can be attributed to the broader scope and more adaptive nature of the PCE, which captures the effects of consumer substitution more effectively.

·         Both the Core CPI and Core PCE are essential for understanding inflation trends in the U.S. economy.

·         The Fed prefers Core PCE because it provides a more comprehensive view of inflation and better captures changes in consumer behavior.

Moreover, ahead of Nov’24 election, several US Senators/Congress members, both Democrats and Republican Presidential nominees (Harris and Trump) are not very happy about still elevated inflation compared to pre-COVID levels, still up by at least +20%, and insisting that Fed/Powell should focus on core CPI inflation rather than core PCE inflation, which is around 1.0-0.5% lower most of the times due to composition/weightage issue; ordinary people (vote bank) are worried about overall inflation (CPI), especially for daily essential goods & services, which is still significantly elevated than pre-COVID levels, while their real earnings may be still flat.

Powell also publicly acknowledged to a Senator in the last hearing/testimony (Mar’24) that US Congress officially mandated the Fed to maintain price stability mandate as +2% headline inflation (CPI), not PCE, which is always the lowest among various inflation gauzes. Powell pointed out that the Fed is now actually targeting core CPI inflation around +2.0%; say +/- 0.25% on a sustainable basis due to lower volatility, which is still higher than headline CPI due to the fuel/energy components. But as price stability, the Fed eventually tries to converge both core and total inflation to the same levels; i.e. both core CPI and total CPI around +2.3%,  and core PCE and total PCE inflation +1.5% for a longer run.

Although the Fed generally targets +2.0% core PCE inflation as the price stability (inflation) target, in reality, it maintains that around +1.5%, which is equivalent to core CPI inflation targets around 2.0-2.3%. Before COVID, the Fed started cutting rates in late 2019 amid repo market disruptions (due to excessive QT) from Aug’19 (after Trump blasted out Powell), when 6MRA of core PCE inflation was around +1.6% and core CPI inflation was around +2.0%. Fed had cut rates from +2.50% to +1.75% in H2CY19 (pre-COVID).

The average rate of core disinflation was around -0.16% in 2023, which is now reduced by almost half to -0.08% in 2024. In 2023, the rapid pace of disinflation was due to the easing of the supply chain/constraints and also the supply of more workers/labor force amid huge immigration (legal/illegal). But the main effect of those easing in the supply chain (goods & labor/service) may be already over by 2023 (after withdrawal of all types of COVID restriction by late 2022) and thus we are now seeing comparatively slow, but predictable disinflation, although often stalled. Goods inflation is again ticking up amid higher demand from increasing population/immigration; also demand for housing, especially rented homes is high and also resulting in elevated rent/housing inflation along with increasing geopolitical and global trade/supply chain fragmentation.

Conclusions:

As highly expected, after the unusual White House warning well in advance Wednesday, on Friday the Sep’24 NFP payroll job addition comes at +12K; private payroll job contracted to -28K, while Government payroll added +40K jobs. In Oct’24, US Private payroll jobs contracted -28K due to the disruptive effect of dual Cyclones (Helene and Milton by around 100-200K), the US election (many workers may be now politically active) and also ongoing Boeing Labor Union strike (around 40K). As per Oct’24 ADP Private payroll job addition data of +233K and JOLTS NFP job addition trend, the BLS report may show around 250-350K Private payroll job addition in the Nov’24 report.

As US core inflation almost stalled in Q3CY24 around +3.0% on average, while the unemployment rate remains stable at around 4.0% along with resilient Real GDP and PDPF growths around 2.8-3.0% on average, the Fed may pause in Nov’24. Also, the Fed may cut -25 bps in Dec’24 rather than another jumbo -50 bps. The market is now expecting a -25 bps rate cut each in November and December as the Fed may have missed the opportunity of two rate cuts in H1CY24. Thus to make up, the Fed may also cut -25 bps in Nov’24 and another -25 bps in Dec’24 for a cumulative -100 bps in CY24. (Front-loading to stay ahead of the curve).

Bottom line:

The projected Fed rate cut of -50 bps by Dec’24 not be assured as US core disinflation may have stalled in Q3CY24, while average unemployment remains around 4.0%; Fed should cut -25 bps in Dec’24 after a pause in Nov’24, but as Fed didn’t try to talk down against almost 96% implied market probability of a-25 bps rate cut in Nov’24, Fed may also cut in Nov’24 by -25 bps to stay ahead of the curve. But the Fed may also want to see Nov’24 job data after a transient disruption due to Hurricane/Cyclone Helena in mid-Oct’24.

Market Impact:

On early Friday, Wall Street Futures surged on short covering after being in red for the last few days. Wall Street Futures were boosted by upbeat earnings from Amazon and upbeat guidance by Intel (about Festival season sales and solid Chinese market). After the ‘terrible’ NFP data for Oct’24 along with negative revision for the last two months, Wall Street Futures; also upbeat report card of Chevron helped Dow, while Apple dragged. Gold was also boosted briefly on hopes & hopes of Fed rate cuts In September after the soft job and ISM MFG PMI report, while soft jobless claims helped.

But Gold also stumbled after Iran said they were technologically nuclear-ready and could develop and use it against any country (Israel) that systematically threatened it for extinction. Also, Iran may soon retaliate against Israel’s ‘too heavy retaliation’ through Iraqi soil/proxies. Although the market is now concerned about the vicious cycle of the ‘war-war-‘ game between Israel and Iran, if Iran indeed develops nukes, it will eventually ensure broader peace not only with Israel but also in the entire Middle East, especially in burning Lebanon, Syria, etc. Iranian nuke will ensure no big/serious conflict/war between Israel and Iran and we may see a durable peace in Gaza.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (42500) now has to sustain over 42800 for any further rally to 42900/43050-43250/43500* and 43700/44000-44500/44800 in the coming days; otherwise sustaining below 42750/42700-42600/650, DJ-30 may again fall to 42400/42300-42100/42000 and 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (20800) has to sustain over 21100 for a further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 21050/21000-20950/20850, NQ-100 may again fall to 20700/20500-20300/20100 and 19900/19700-19600/19350 to 19100/18900 in the coming days.

Technically, SPX-500 (5880), now has to sustain over 5975 for any further rally to 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5900-5950/5900-5850/5800, may again fall to 5725-5675/5625-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also,technically Gold (XAU/USD: 2785) has to sustain over 2810 for a further rally to 2825/2850-2875/2900 and 2925/2950-2975/3000 in the coming days; otherwise sustaining below 2805/2800-2795/2790, may again fall to 2775/2750-2725/2700* and 2675/2650-2625/2600 and 2590/2575-2540*/2500 and further to 2470*/2440-2425/2400-2375/2330-2275 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory