Wall Street slips on fading hopes of June rate cuts by Fed

On Thursday, Wall Street Futures, Gold stumbled on hotter than expected US PPI data, softer than expected jobless claims, but also briefly boosted by colder than expected retail sales. Although the market was expecting an earlier & deeper Fed rate cut of -150 bps from March/May’24, various Fed policymakers including Chair Powell are now carefully jawboning the market in a well-planned (co-ordinated) manner to control inflation expectations and also bond yields for the intended soft & safe landing of the Wall/Real street (economy) ahead of Nov’24 U.S. Presidential election.

The market is now expecting Fed rate cuts from June and also the start of QT tapering from June’24. But the Fed may start QT tapering from March’24 and close the same by June’24 before going for rate cuts from July’24 as the world’s most important central bank may not go for two contradictory policy actions (QT and rate cuts) at the same time.

On Thursday, some focus of the market was also on US retail sales as consumer spending is the backbone of the US economy and the Fed also watches this data closely for an assessment of overall economic activities. On Thursday, the CB flash data shows seasonally adjusted U.S. retail sales for Feb’24 were around $700.727B against 696.710B sequentially (-0.58%) and 690.375B yearly (+1.50%); i.e. the U.S. retail sales surged +0.6% sequentially in Feb’24 against -1.1% fall in Jan’24, but below market consensus +0.8% rise.

The Jan’24 retail sales were subdued due to the end of the Q3 holiday shopping season and unusual cold weather. In Feb’24, the relatively modest increase, combined with a larger decline in January, along with negative revisions suggest a potential slowdown in consumer spending, the backbone of the US economy.

In Feb’24, the biggest increases were seen in sales at building materials and garden equipment (2.2%), motor vehicles and part dealers (1.6%) and electronics appliance stores (1.5%). Also, sales at gasoline stations rose 0.9% and other increases were seen at miscellaneous store retailers (0.6%), food services and drinking places (0.4%), general merchandise stores (0.4%) and food and beverages stores (0.1%). On the other hand, a decline was recorded in sales at furniture stores (-1.1%), clothing (-0.5%), health (-0.3%) and non-store retailers (-0.1%). Excluding food services, auto dealers, building materials stores and gasoline stations, the so-called super core retail sales which are used to calculate GDP, were almost flat. U.S. Retail sales are adjusted for seasonality but not for price changes (inflation).

Overall, after the latest revisions the average retail sales are now around $698.719 in 2024 (till February flash data) against the 2023 average of $695.251B, grown around +3.4% annually. The US retail sales nominal growth is still strong despite higher borrowing costs and higher cost of living as the labor market is still robust, while the lagging effect of huge fiscal stimulus (COVID) is still prominent. Adjusted inflation (CPI), the underlying real retail sales has contracted around -0.75% in 2023 against +1.7% in 2022. In 2024 (till February), the real retail sales contracted around -2.37%.

Conclusions:

The 6M rolling average of US core inflation (PCE+CPI) is now around +3.6%. Fed may cut 75-100 bps in H2CY23 if the 6M rolling average of core inflation (PCE+CPI) indeed eased further to +3.0% by H1CY24.

As per Taylor’s rule, for the US:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(4.50.00-2.00) =0+2+2.50=4.50% (for 2024)

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation for CY23

Fed may announce a plan for QT tapering in the March meeting and close the same by June before going for rate cuts from July’24. Fed, the world’s most important central bank may not continue QT and rate cuts at the same time, which is contradictory.

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.

Market wrap:

On Friday, Wall Street Futures slipped on fading hopes of Fed rate cuts from June; the market is now gradually implying July’24 as the start of the 1st rate cuts after hotter than expected core CPI, PPI, and also goldilocks US retail sales data. The focus of the market is now on the 20th March Fed meeting’s fresh SEP/dot plots, where the Fed is expected for a less hawkish hold stance with an announcement of QT tapering.

On Friday, Wall Street was also dragged/affected by the triple witching event, which is a simultaneous quarterly FNO expiration (mid-March/June/September/December- usually 3rd Friday) of index futures, index options and stock options. Previously it was known as Quad witching as stock futures were also traded, which is now no longer traded / applicable in the U.S. The term, witching’ suggests that there could be unexpected/sudden unexplained two-way market movements/volatility with higher trading volumes as an institutional big position in options gets squared off/adjusted; options have usually a time decay factor.

On Friday, Wall Street was fragged by techs, communication services, consumer discretionary, healthcare, consumer staples, real estate, and banks & financials, while boosted by energy (higher oil), utilities, materials, and industrials to some extent. Stock-wise Wall Street was boosted by 3M, Caterpillar, JPM, Merck & Co, Honeywell, United Health and Boeing, while dragged by Salesforce, Amazon, Microsoft, Cisco, IBM, Visa, Amgen, Apple Intel, Alphabet and Nvidia to some extent. Blue chip DJ-30 lost almost -200 points, tech-heavy NQ-100 tumbled -1%, while broader SPX-500 slumped -0.6%. For the week, Wall Street closed almost flat.

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

Whatever may be the narrative, technically Dow Future (39137), now has to sustain over 39000 levels for any rebound to 39200/39400-39700-39800*/39900-40200/40500, and even 42600  levels in the coming days; otherwise, sustaining below 38900, may again fall to 38550/38350* and 37800/37100-36450/36100-35750/35195 in the coming days.

Similarly, NQ-100 Future (18055) now has to sustain over 18000 levels for any rebound towards 18200/18400-18550*/18700 and 19000/19200/19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 17900, NQ-100 may fall to and 17700/17400-17150/16750-16450/16350 and 16200-15450 in the coming days.

Also, technically Gold (XAU/USD: 2155) now has to sustain over 2210 for any further rally to 2225/2250-2275/2300; otherwise sustaining below 2205/2200-2195*/2190, may again fall to 2145*/2120-2100/2080-2060/2039 and 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card (if Fed indeed delays QT tapering and rate cuts, while a permanent Gaza war ceasefire takes concrete shape).