Wall Street surged on tech boost and hypes of Mid-East peace

·         Fed talks indicate a pause in Nov’24, followed by either a 25 or 50 bps cut in Dec’24 depending on actual economic data or the outlook thereof

·         Both Iran and Israel want to avoid an all-out war against each other, while the White House is trying hard for durable peace/ceasefire on all war fronts in the Middle East ahead of the election

Wall Street Futures surged Friday on a Chinese stimulus boost and also fading concern of a hard landing/recession. Although overall US job data for Sep’24 may be indicating a Fed pause in Nov’24, Wall Street Futures surged after some knee-jerk negative reaction amid renewed optimism about a soft landing. In July and August, Wall Street Futures slid after a subdued/terrible US NFP job report due to the concern of a hard landing/job recession and overall economic slowdown. Although the Fed eventually cut an unusual crisis era/panic -50 bps in Sep’24 primarily based on subdued job report, Wall Street Futures initially slumped on the concern of an all-out economic recession, something which no stock market would like to see as it will eventually affect earnings/EPS despite lower borrowing costs.

On Monday, Wall Street Futures again slipped as the market is now gradually discounting -25 bps or even no rate cuts in Nov’24 against the earlier assumption of another -50 bps jumbo rate cut again (after Sep’24). Also, growing geopolitical tensions over the Gaza and Israel war are affecting stocks, while boosting Gold and Oil as both Israel and Ukraine may be now targeting/planning retaliatory strikes on Iranian and Russian oil and nuclear facilities, despite Biden admin/US intense effort to stop such types of ‘serious’ retaliation, which may ignite an all-out Middle East war or even WW-III.

But on Tuesday, Gaza war panic was eased to some extent after a TOI (Times of Israel) report: US in talks with Iran, and Arab states for ceasefire on all war fronts; but Israel not officially involved so far. The US and Arab states have launched covert talks with Iran for a comprehensive ceasefire aimed at calming all war fronts at once. The report says Israel isn’t currently involved in the initiative, but adds that senior Israeli officials have been informed about it. The report also notes that it isn’t clear how the efforts would affect Gaza, which is more complex than the rest of the fronts due to Israel’s desire to continue fighting even after a potential hostage deal and Hamas’s demand for an Israeli withdrawal in any deal.

One of the senior Israeli officials is quoted as saying: “We are currently in a position of power, a ceasefire will be on our terms, including a Hezbollah withdrawal beyond the Litani River and the dismantling of all military Hezbollah sites in areas near the border.”

But on mid-Tuesday, Wall Street was also undercut, while Gold and oil got a boost after a report by ABC/NBC news that US intelligence indicated an imminent retaliatory strike by Israel on Iran’s oil and nuclear facilities.

On Tuesday, Fed’s Bostic said:

·         The labor market has slowed down, but it's not slow or weak

·         Monthly job creation is above what is required to account for population growth

·         The economy is close to the Fed's targets and is moving closer

·         The inflation rate is still quite a ways above 2%

·         Still laser-focused on inflation but the job market is also salient

·         There is a risk that the economy is too strong, and could hamper policy recalibration

·         The labor market has slowed down but is not slowing or the week

·         Businesses say that consumers have become much more price-sensitive, curbing their ability to raise prices

·         Hurricanes Helene and Milton potentially have significant implications for the economy over the next three to six months

·         Shifts in supply chains mean business cost structures will also change, something the Fed will need to understand

·         While risks to inflation have come down, threats to the labor market have risen, though the economy is still strong

On late Tuesday, Fed’s Collins said:

·         I am more confident inflation is on a durable path of ebbing

·         Fed needs to preserve healthy labor market conditions

·         Core inflation has moderated but is still elevated

·         Unemployment is still historically low, and job growth solid

·         Restrictive monetary policy has helped cool inflation

·         The data shows the economy is strong and resilient

·         Fed SEP/dot-plots predict an additional 50 bps of cuts into year-end

·         The optimistic path for the economy has widened

·         Fed is focusing on both sides of its mandate

·         US labor markets are in a good place overall

·         I see 2% inflation achieved by late next year or so

·         High price levels are a challenge for many

·         The optimistic path for the economy has widened

·         Further rate cuts are likely needed, and future action to be data-driven

·         Is more confident inflation is on the durable path of ebbing

·         Important for the Fed to preserve healthy labor market conditions

·         Unemployment is still historically low, and job growth solid

·         The job market in a good, balanced place

·         The economy now more vulnerable to adverse shocks

·         Data show the economy is strong and resilient

·         Wage growth is robust, not a driver of inflation

·         Restrictive monetary policy has helped cool inflation

On Monday, Fed’s Musalem said:

·         The costs of easing too much outweigh easing too little

·         More rate cuts are likely given the economic outlook

·         Won't predict timing or size of future Fed easing

·         The personal rate outlook is above the Fed’s median view

·         Supported the Fed’s decision last month to cut rates by 50 basis points.

·         Policy patience has served the Fed well

·         A cooler job market still consistent with a strong economy

·         Expects inflation pressures to continue to abate

·         Expect inflation to converge to 2% over the next couple of quarters

·         Financial conditions remain supportive of growth

·         Some economic activity is slowed by rate policy, election uncertainty

·         The September jobs report was very strong

·         The labor market is strong; it is healthy

·         There is no emergency in the job market right now

·         The jobs report didn't cause a change in the outlook

·         The current policy path is still appropriate despite the job data

·         I don't pay much attention to market pricing of the Fed outlook

·         Won't prejudge the outcome of coming Fed meetings

·         Fed's dot plot helps understand Fed actions

·         Upside risks to inflation are still there, but risks aren't high

On Monday, Fed’s Kashkari said:

·         The balance of risks has shifted towards higher employment

·         The balance of risks has shifted away from higher inflation towards maybe higher inflation

·         Overall the US economy is resilient

·         Not seeing signs of resurgent inflation

·         Reduction in new rents gives us confidence that housing inflation will come down

·         We could be surprised by stresses on particular banks from office sector real estate

·         We're watching the office very carefully but not seeing evidence of systemic risk

·         I'm deeply enthusiastic about generative AI

·         Underbuilding is a big source of housing inflation

·         Supply chain disruptions and labor shortages are another source of housing inflation, as is the risk of working from home

·         Balance sheet shrinking (QT) has a ways to go

·         There is huge uncertainty about the neutral rate, I see it close to 3%

On Monday, Fed’s Williams said:

·         I expect that it will be appropriate again to bring interest rates down over time

·         Right now, I think monetary policy is well positioned for the outlook, and if you look at the SEP (Summary of Economic Predictions) pro that captures the totality of the views, it's a very good base case with an economy that’s continuing to grow and inflation coming back to 2 percent.

·         I don’t see the September move (50 bps rate cuts) as the rule of how we act in the future.

·         Fed Aims for Neutral Interest Rates

·         It will be appropriate again to bring interest rates down over time

·         Signals More Rate Cuts Ahead After September Reduction

On Tuesday, Fed’s Kugler said:

·         I will support additional rate cuts if progress on inflation continues as expected

·         I want a balanced approach to make progress on inflation and avoid an undesirable slowdown in jobs and economic growth

·         Hurricane Helene and Middle East events could affect the US economic outlook

·         Our approach to any policy decision will continue to be data-dependent

·         If downside risks to employment escalate; cutting rates more quickly may be appropriate

·         If incoming data do not provide confidence inflation is moving toward 2%, slowing normalization may be appropriate

·         The Fed is looking at trends in the labor market, not single data

·         While the U.S. labor market is cooling, it remains resilient

·         Fed aims to avoid a significant slowdown in employment while bringing down inflation gradually towards the 2% targets over the medium term.

·         I also welcome the recent drop in unemployment.

·         The healthy levels of job creation in last Friday's report are very welcome

·         Several indicators suggest the job market is normalizing, but the Fed remains cautious to prevent any excessive weakening that could cause undue hardship

·         Labor market cooling has started but the Fed is looking at trends, not single data.

·         A healthy level of job creation is very welcome

·         Several metrics point toward labor market cooling

·         I have been seeing a serious reduction in inflation

·         I don't know where the neutral rate is, but way above it

·         Labor market cooling has started but the Fed is looking at trends, not single data

On Monday, Fed’s VC Jefferson said in a prepared article:

Economic Outlook and Considerations for Monetary Policy

“Economic activity continues to grow at a solid pace. Inflation has eased substantially. The labor market has cooled from its formerly overheated state.

As you can see in the slide, personal consumption expenditures (PCE) prices rose 2.2 percent over the 12 months ending in August, well down from 6.5 percent two years earlier. Excluding the volatile food and energy categories, core PCE prices rose 2.7 percent, compared with 5.2 percent two years earlier. Our restrictive monetary policy stance played a role in restraining demand and in keeping longer-term inflation expectations well anchored, as reflected in a broad range of inflation surveys of households, businesses, and forecasters as well as measures from financial markets. Inflation is now much closer to the Federal Open Market Committee's (FOMC) 2 percent objective. I expect that we will continue to make progress toward that goal.

While, overall, the economy continues to grow at a solid pace, the labor market has modestly cooled. Employers added an average of 186,000 jobs per month during July through September, a slower pace than seen early this year. As shown in the slide, the unemployment rate now stands at 4.1 percent, up from 3.8 percent in September 2023. Meanwhile, job openings declined by about 4 million since their peak in March 2022. The good news is that the rise in unemployment has been limited and gradual, and the level of unemployment remains historically low. Even so, the cooling in the labor market is noticeable.

Congress mandated the Fed to pursue maximum employment and price stability. The balance of risks to our two mandates has changed—as risks to inflation have diminished and employment risks have risen, these risks have been brought roughly into balance. The FOMC has gained greater confidence that inflation is moving sustainably toward our 2 percent goal. To maintain the strength of the labor market, my FOMC colleagues and I recalibrated our policy stance last month, lowering our policy interest rate by 1/2 percentage point.

Looking ahead, I will carefully watch incoming data, the evolving outlook, and the balance of risks when considering additional adjustments to the federal fund's target range, our primary tool for adjusting the stance of monetary policy. My approach to monetary policymaking is to make decisions meeting by meeting. As the economy evolves, I will continue to update my thinking about policy to best promote maximum employment and price stability.”

Conclusions:

Fed Chair Powell and most also other Fed policymakers almost poured cold water on further jumbo rate cuts (-50 bps) and indicated normal 25 bps rate cuts in the coming days unless the unemployment rate unexpectedly surges (say above the 4.5% red line). Moreover, Powell indicated another 25 bps rate cut in Nov’24 may not be assured unless the unemployment rate unexpectedly jumps in September. As per some reports, Powell may have penciled the policy path slightly above the median in the Sep’24 dot-plots.

The Next Fed meeting would be on 7th November and before that Fed may have official access to only one inflation and employment situation report for September only. Thus unless there is an unusual surge in the unemployment rate or an unexpected drop in core CPI, the Fed may pause. The US average (6MRA) core inflation (CPI+PCE) may have already stalled in Q3CY24 at around +3.2%, while the 6MRA (average) unemployment rate is around 4.1% as per available data. Thus the Fed may go for a pause and cut 25 or 50 bps in Dec’24 based on actual Q3CY24 and 6MRA data and outlook thereof.

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 unemployment remains around 4.0%; Fed may cut -25 bps in Dec’24 after pausing in Nov’24.

Market Impact:

On early Wednesday, Wall Street Futures surged on hopes & hypes of soft core inflation reading for Sep, which may keep the Fed for at least a -25 bps rate cut in Nov’24 followed by another -25 bps in Dec’24. Also, techs helped led by Apple, Tesla and Nvidia.

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

Whatever the narrative, technically Dow Future (42500) has to sustain over 42700 for any further rally to 42900/43050-43250* and 43500/44000-44500/44800 in the coming days; otherwise sustaining below 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 (20200) has to sustain over 20400 for a further rally to 20600/20700-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20350/300, NQ-100 may again fall to 20000/19750* and 19600/19350-19100/18900 and further 18750/18550-18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5780), now has to sustain over 5850 for any further rally to 5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5825/800, 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: 2625) has to sustain over 2655 for a further rally to 2675*/2700-2725/2750 in the coming days; otherwise sustaining below 2650/2645, may again fall to 2625 and 2595/2590-2585/2575, may again fall to 2560*/2540-2530/2515 and 2495/2480-2470*/2425 and further 2415/2400-2390/2375 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory).