Wall Street slips on the concern of hawkish FOMC minutes

Wall Street Futures, Gold tumbled Friday after hotter than expected core PPI data and possible hotter core PCE data to be published at the month's end. Dow Future tumbled by almost -200 points to 38652 but eventually recovered to an almost life time high around 38909 and again stumbled to close around 38654 amid softer-than-expected housing starts, building permits, consumer sentiment, hotter-than-expected inflation expectations data and mixed/less hawkish Fed talks. Gold initially slipped from around 2008 to 1995, but soon recovered to 2015 before closing around 2010; the S&P 500 lost 0.5%, the Dow dropped -145 points, and while Nasdaq slid -0.8%. The Fed will eventually set policy rates on average core inflation (PCE+CPI) and employment data.

On Monday, in a holiday-thinned trading mode, the Dow Future was almost flat, but Dow Future made a high around 38733 early Tuesday on hopes & hypes of Chinese stimulus. On Sunday, Chinese Premier Li called for ‘pragmatic and forceful’ steps to bolster the country's economic confidence. The market is now expecting an imminent cut by PBOC, while LI emphasized a consistent and stable fiscal/monetary policy. PBOC may not cut pre-maturely before Fed. China’s travel spending during the long Lunar New Year holidays (last week) beat pre-COVID levels and surged 47% (y/y).

On Tuesday, China PBOC cut the LPR (Loan Prime Rate) for a 5-year mortgage loan by -25 bps to +3.95% against market expectations of -15 bps but kept the 1Y LPR unchanged at +3.45%. PBOC is providing targeted monetary stimulus for China’s ailing real estate sector.

China is now also trying to re-establish good diplomatic/trading relations with various G7/NATO countries such as Canada in addition to the number one export customer U.S. and number two EU. Last week, China's foreign minister Wang Yi discusses lifting sanctions against Chinese companies and individuals in talks with US Secretary of State Blinken.

Also, China's Foreign Minister Wang Yi expresses willingness to collaborate with the EU in upholding free trade, practicing multilateralism, promoting an equality-driven and ordered multipolar world, and supporting inclusive economic globalization. Wang Yi supports European integration, the development and growth of the EU, and realizing strategic autonomy, viewing the EU as an important force in the multipolar pattern (according to the Chinese Foreign Ministry).

But Wall Street was also buoyed by softer than expected core inflation data from Canada as it may be also replicated in its immediate Northern Neighbor U.S. Also risk trade was briefly boosted by the latest economist survey, indicating 75-100 bps rate cuts in H2CY24.

In an early Tuesday European session, Gold was boosted after Belarusian President Lukashenko warned about WW-III, while Russia allegedly placed nuke missiles in space. Gold was also boosted on lower USD after hawkish jawboning by BOE Governor Bailey, pointing out that BOE may not be ready for any rate cuts in H1CY24.

Conclusions:

Ahead of the Nov’23 U.S. Presidential election, White House/Biden/Fed/Powell is more concerned about elevated inflation rather than the labor market; prices of essential goods & services are still significantly higher than pre-COVID levels, which is creating some incumbency wave (dissatisfaction) among general voters against Biden admin (Democrats).

Thus Fed is now giving more priority to price stability than employment (which is quite robust) and not ready to cut rates early as it may again cause higher inflation just ahead of the election. Fed may hike only from July’24, which will ensure no inflation spike just ahead of the Nov’24 election (as any rate action usually takes 6-12 months to transmit in the real economy), while boosting up both Wall and Real/Main Street.

Overall, the Fed’s mandate is to ensure price stability (2% core inflation), and maximum employment (below 4% unemployment rate) along with financial/Wall Street stability as well as lower borrowing costs for the government. As the US is now paying almost 15% of its tax revenue as interest on debt, the Fed will now not allow the 10Y US bond yield above 4.50-5.00%. Thus some Fed policymakers like Goolsbee are trying to balance hawkish talks by sounding less hawkish /dovish in conjunction with overall less dovish/hawkish Fed talks to control the overall market (Wall Street), inflation expectations, and the most vital bond yield. It’s a well-planned jawboning strategy by the Fed in synchronization with ECB, BOE, and BOC to control the overall financial market and bring down inflation towards targets without causing an outright recession; i.e. soft & safe landing.

Fed may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps; every major central bank including ECB, BOE, and BOC has to follow ‘King Fed/USD’, whatever may be the narrative (synchronized global rate cuts amid a synchronized easing in core inflation). In any way, as the Fed is not in a hurry to cut rates in H1CY24, expect generally hotter than expected US labor market data and gradual easing of core inflation data to suit the Fed narrative. The White House/Biden admin will also be happy going for the election supported by a strong economy, robust labor market, and cooling inflation almost at the 2% target.

Also Wall Street will make fresh record highs by June-July’24 on hopes of an imminent rate cuts cycle, which will boost Biden/Democrats on the prospect of another election win. But this time Trump/Republicans will have an edge due to the growing incumbency wave. And if Trump again wins the White House, then it may be negative for Wall Street (anti-China, anti-EU, trade/cold war policies, fiscal austerity), but pro-Russian policies may help the end of the Ukraine war as well as the Gaza war; we may also see some tax cut stimulus effort by Trump if elected.

But all policies will depend upon whether Trump or Biden can win the trifecta (White House, House, and Senate) for a majority government; otherwise, a minority government at the White House may continue to affect U.S. policies in the absence of bipartisan politics/agreement between Democrats and Republicans. The U.S. needs to deploy substantial infra stimulus and another fiscal stimulus to increase the supply capacity of the economy to match the growing demand for durable price stability and also to stimulate the economy rather than too much emphasis on ‘easy Helicopter money’ (monetary stimulus, direct grants/subsidies, etc).

Bottom Line:

Fed, ECB may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps (synchronized global rate cuts amid a synchronized easing in core inflation); every major central bank including PBOC has to follow ‘King Fed/USD’, whatever may be the narrative.

Market wrap:

On Tuesday, Wall Street Futures stumbled from Chinese stimulus optimism high on the concern of a hawkish FOMC minutes to be released Wednesday. Gold also slipped from a session high around 2030 to 2023, almost flat. Wall Street was dragged by techs, consumer discretionary, energy (lower oil), healthcare, banks & financials, industrials, materials, real estate, Utilities, and communication services, while dragged by consumer staples.

Wall Street was dragged down by mega-cap technology stocks. Nvidia tumbled on the concern of a subdued report card (to be released Wednesday) and a report that Microsoft may be making AI server gear (networking card) to cut NVIDIA dependence. Apple slip as EU is set to impose Apple with first-ever fine in €500M penalty over music streaming. Walmart jumped after reporting an upbeat report card. Amazon will replace Walgreens Boots in Dow Jones.

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

Whatever may be the narrative, technically Dow Future (38637), now has to sustain over 39200 levels for a further rally to 39500/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39150/39000-38950/38600 levels may again fall to 38400/38200*-38000*/37300 levels in the coming days.

Similarly, NQ-100 Future (17549) now has to sustain over 17400 levels for any recovery to 18000-18200 and further towards 18500/18675-18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, 17290/17250 and 16750-16550 in the coming days.

Also, technically Gold (XAU/USD: 2023) now has to sustain over 2035-2055 for any further rally to 2067/2085-2100/2125-2130/2175; otherwise sustaining below 2030, may again fall to 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card.