Wall Street slips on fading hopes of Fed rate cut in Dec’24

·         Gold surged as China’s PBOC may have resumed buying the precious metal to diversify from UST after a brief pause since May’24 (long-term strategy)

·         Fed talks after an upbeat NFP payroll report for November indicated a pause on 18th December; all focus now on the US core inflation report

Wall Street Futures were hovering around a recent life time high in the last few trading sessions and in an early Santa mood for the last few days on hypes of dual stimulus; both monetary and fiscal. The market is now expecting synchronized global easing in 2025-26 by the Fed, PBOC, ECB, BOE, BOC, and even RBI along with Trump 2.0 fiscal stimulus of around $1T.

China vows 'more proactive' fiscal stimulus measures, and 'moderately' looser monetary policy:

On early Monday, China-savvy Dow and Dax futures surged on Chinese stimulus optimism. As per reports, China's Politburo pledged that it plans to adopt a ‘moderately loose’ monetary policy and a more proactive fiscal stimulus approach next year (2025). In what appears to be the first change in China's monetary policy stance since 2011, the government pledged to boost economic consumption and stabilize the struggling real estate sector.

China's top decision-making body also stated that it would stabilize the stock market while strengthening ‘unconventional countercyclical’ adjustment to improve citizens' livelihoods (standard of living). China's 10-year bond yield further eased below 1.9% amid increasing expectations of easing.

China’s President Xi said:

·         China will continue to be the biggest engine of world economic growth

On early Monday, Wall Street Futures recovered on China stimulus; gold also surged as USD was buoyed by the Chinese stimulus plan; CNY slipped. Also escalated geo-political tensions over Syria helped as President Assad sought safety in Russia following his displacement from his country's leadership when insurgent/rebel forces made significant advances into the nation's capital Damascus. Israel and US/NATO also intensified attacks on ISIS to control Syria and create a favorable regime. Also overall, the Syrian situation may force Iran, and Hamas to seek the much-awaited Gaza war ceasefire even before Trump takes charge of the White House on 20th Januaty’24.

The Israeli Prime Minister Netanyahu said:

·         Hamas Isolated After Assad Regime Fall

·         Isolation of Hamas paves way for hostage deal

Gold is not only a major beneficiary of lingering geopolitical tensions (Gaza and Ukraine war) but also never-ending US/global stimulus, causing higher public deficit, higher public debt, higher currency devaluation and higher inflation; the purchasing power of currency is going down, while Gold is increasing. When too much Helicopter Money goes into the hands of the consumers without a productivity improvement, it will inevitably create elevated and sticky inflation.

Trump's mass deportation plan could threaten workforces in industries from agriculture, to health care and hotels/restaurants as it may cause acute labor shortages not only for the affordable segment (being illegal immigrants) but also for the normal/regular segment. Trump may be planning to deport around 11M illegal immigrants, which may cost not only billions of dollars for the US but may also create an acute shortage of labor force for unorganized/SMEs like farming, small hotels/restaurants, construction, infra workers, and also social service providers. Thus Fed needs time to see actual tariffs and immigration policies.

On Sunday Trump cleared his stance with Fed Chair Powell:

·         I have no intention of removing Federal Reserve Chair Jerome Powell

·         No, I don’t think so. I don’t see it (when Trump was asked whether he would seek to replace Powell)

·         I think if I told him to, he would---

·         But if I asked him to, he probably wouldn’t. But if I told him to, he would--

·         When pressed further about whether he planned to request Powell’s resignation, Trump said, ‘No, I don’t’

On Friday, after the upbeat US NFP/BLS Job report, Fed’s Daly said:

·         The labor market remains in a good place and is balanced

·         Inflation is nearing the 2% goal, labor market is balanced

·         Global central bank policies are much less synchronized than before

·         Fed should wait to see the policies of the incoming government before acting

·         We have recalibrated policy with cuts so far

·         As we get to the 'about right' level of the Fed policy rate, I am a proponent of gradualism

·         We are in an uncertain world, it's not clear how quickly inflation will come down

·         Need a thoughtful and careful approach

On Friday, Fed’s Goolsbee said:

·         A single month's data is not reliable, but if the household survey were to show steady deterioration, the Fed would have to look at it more closely.

·         The outlook does matter, so when the new administration starts proposing policies, the Fed will start to think through it.

·         Goods prices will likely return to deflation, services will continue in the right direction, and market data on housing suggests improvement there.

·         I will be watching interest rate-sensitive sectors and the lagged impact of monetary policy for signs that the neutral rate is approaching.

·         The speed at which the Fed is moving will probably slow as the debate proceeds on a stopping-the-point

·         Economic conditions will determine the pace of rate cuts from here

·         A gradual pace of rate cuts seems appropriate

·         On tariffs on Canada and Mexico: Implications for the Chicago region could be more difficult since many imports are intermediate goods for other products; an issue on the minds of regional businesses.

·         Tariffs raise prices, but would not result in persistent inflation unless there is retaliation from other countries or impacts on the supply chain.

·         If Congress and the President want to pass tariffs, the Fed's job is to respond to those conditions.

·         Housing inflation is likely to fall as lagging government data reflects what private data is already showing.

·         Consumer delinquencies are not high compared to historic levels

·         With a more speculative asset that lacks an obvious real economy use case, it is hard to see what the real impacts will be

·         So far, the rise of crypto-based assets has not had much macro impact, but it could have a wealth effect

·         The Fed will get to 2%, we should not consider changing the target

·         The recent rise in productivity does seem to be concentrated in high-technology spaces, which can have a longer runway

·         Given how the rest of the economy is behaving, the one outlier is interest rates, which will likely come down over the next year

·         The Fed will have a series of meetings that will be close calls between cutting and not cutting

·         I won't pre-commit to the December meeting decision; still several data points to come including inflation and consumer spending

·         Overall progress on inflation is still encouraging

·         Inflation has inched up a bit. I still think the US is on the path to 2%

·         What happens with immigration will have a very significant impact on the size of the coming labor force

·         On average it feels like the jobs market cooling from a very hot level

·         Measurements like the ratio of vacancies to the number of unemployed people show balance in the job market

·         The labor market appears largely stable

·         The last few months of jobs numbers feel like a sustainable and full employment place

·         On average, it feels like the job market was cooling from a very hot level to something like sustainable full employment. We want it to stabilize there

·         227k jobs is a big number, but we need to look at averages

On Friday, Cleveland Fed’s President Hammack said:

·         I am very focused on housing and real estate issues

·         Housing inflation is going to take a lot longer to come down

·         Consumers are supporting the economy, and household balance sheets are solid

·         Focused on getting inflation back to target

·         The US economy is strong, and the labor market is pretty healthy

·         Setting monetary policy is independent of the national debt

·         The US debt seems to be on an unsustainable path of growth

·         It is too soon to say what impact the proposed tariffs would have

·         We are at or near the time to slow rate cuts

·         The labor market has become better balanced

·         The Fed has more work to do to cool inflation

·         The economy is strong, labor market is healthy

·         I expect solid growth, low unemployment, and gradual inflation ebbing

·         Data will drive what the Fed does with monetary policy

·         The slowing pace of rate cuts allows the Fed time to sound the economy

·         Monetary policy is likely somewhat restrictive

·         Fed at or near time to slow pace of rate cuts

·         The economic landscape calls for modestly restrictive monetary policy

·         I have an open mind about the December FOMC meeting, more data is incoming

·         The market view of one cut between now and late January is reasonable

On Friday, Fed’s Bowman said:

·         The economy's performance questions view policy as restrictive

·         I am concerned if the Fed cuts too much, could overheat the economy

·         I do not take a dissenting vote on policy lightly

·         Progress on inflation seems to have stalled

·         Labor market data has gotten harder to interpret

·         Upside risks to inflation remain prominent

·         Core inflation is uncomfortably above the Fed's 2% target

·         The labor market is near full employment, core inflation is elevated

·         I want to proceed cautiously and gradually with rate cuts

·         Lowering the policy rate too quickly could reignite inflation

·         We have made progress in lowering inflation, cooling the labor market

·         The Fed still hasn't achieved its 2% inflation target

·         Inflation is the biggest priority when making policy choices

·         Don't take a dissenting vote on policy lightly

Bottom line:

The Fed may be now preparing the market for a potential pause on 18th December’24 as US core disinflation almost stalled, while the labor market remains robust.

Looking ahead, the focus of the market will be on the Nov’24 US NFP/BLS job report and also the core CPI inflation report; if there is no meaningful rise in the unemployment rate and an unusual drop in core CPI inflation, the Fed may pause on 18th Dec’24. Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it will maintain 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed will now try to bring down average core inflation from around 3.0% to 2.5% by keeping the unemployment rate at least around 4.0% by Dec’25 and then 2.0% core inflation and 3.5% unemployment rate by Dec’26 to achieve its mandate of maximum employment and price stability.

Currently, the US NFP productivity growth is lower than the real GDP growth, which may boost inflation again if unchecked. Thus Fed may have to dial back the restrictive rate gradually and thus nay cause in December’24.

Market Impact:

On early Monday, Wall Street Futures recovered from fading hopes of a Fed rate cut on China stimulus optimism; gold also surged as USD was buoyed by the Chinese stimulus plan. Also escalated geo-political tensions over Syria helped as President Assad sought safety in Russia following his displacement from his country's leadership when insurgent forces made significant advances into the nation's capital Damascus. Israel and US/NATO also intensified attacks on ISIS to control Syria and create a favorable regime. Also overall, the Syrian situation may force Iran, and Hamas to seek the much-awaited Gaza war ceasefire even before Trump takes charge of the White House on 20th Januaty’24.

But by Monday's closing Wall Street Futures stumbled as Nvidia plunged amid a Chinese antitrust investigation and less dovish Fed talks, indicating a pause in December’24. Both the SPX-500 and the Nasdaq-100 slid 0.6%, following recent record highs, while the Dow Jones (DJ-30) fell 240 points. Meta slid while Apple rose to almost a record high. Super Micro Computer surged after receiving an exceptional extension from Nasdaq, allowing the company to file its delayed annual report.

On mid-Tuesday, Wall Street Futures were almost flat as Nvidia recovered, while Oracle plunged on the subdued report card. Gold jumped as China’s Central Bank PBOC reportedly resumed its Gold buying after a pause of almost six months. Also escalating geopolitical tensions over Lebanon war and fading hopes of an imminent Gaza and Ukraine war ceasefire boosting gold ahead of US core inflation report and Fed meeting.

Israel began an incursion into the demilitarized buffer zone in the Golan Heights region while also launching a series of airstrikes aimed at destroying military hardware belonging to the former Syrian regime. Meanwhile, Russia signaled it remained open to potential negotiations with Ukraine but also stressed it still intended to achieve the goals it outlined at the beginning of the conflict. On the other side, Ukraine’s President Zelensky also rejected Trump's demand For Ukraine peace after the Paris meeting, where French President Macron was also present.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 45100) now has to sustain over 45500 for any further rally to 45800/46000-46200/46400 and 46800/47000-47500/48000 in the coming days; otherwise sustaining below 45450/45200, DJ-30 may again fall to 45000/44750-44650/44200, DJ-30 may again fall to 43900/43300-42600/41600 in the coming days.

Similarly, NQ-100 Future (21450) has to sustain over 21200 for a further boost to 21500 and further to 21700/21900-22050/22500 and even 21450 levels in the coming days; otherwise, sustaining below 21150, NQ-100 may again fall to 20950/20850-20500/20300 and 20000/19800-19650/19350 in the coming days.

Technically, SPX-500 (CMP: 6050), now has to sustain over 6100 for any further rally to 6150/6200-6350/6500 in the coming days; otherwise, sustaining below 6075/6050 may again fall to 6000/5950-5900/5850 and 5675/5600-5550/5500 in the coming days.

Also, technically Gold (CMP: 2650) has to sustain over 2660-2680 for a recovery to 2700-2725 and further 2735/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2655-2630 may again fall to 2605/2600 and 2590/2565 and further fall to 2550/2500-2470/2450 in the coming days (depending upon Fed rate cuts, Gaza/Ukraine war trajectory); Gold surged almost 75% in the last one year since Gaza war started back in October’23. Now it may retrace to $2100 levels if Trump indeed can mediate both Gaza and Ukraine war ceasefire by early 2025.