Wall Street wobbled on hotter PMI data and hawkish Fed talks

·         Also, Nvidia/AI Chip led tech rally stumbled before some short covering early Tuesday; Fed may not cut before Dec’24

Wall Street was trading mixed for the last few days amid mixed US economic data, mixed Fed talks, and mixed sectoral movement as techs/AI chip optimism led by Nvidia boosted the risk trade sentiment, while industrials dragged led by never-ending Boeing quality issues. As a result, while tech-heavy NQ-100 made a new life time high around 20400 and SPX-500 almost 5600, at new life time highs a few days ago, blue-chips savvy DJ-30 was still hovering around 39300/400, almost 1000 points away from the previous life time high.

Overall, Wall Street got some boost on softer than expected US CPI, PPI, and retail sales data, while dragged by hotter than expected/mixed NFP/BLS job data. Also less hawkish Fed talks helped risk assets to some extent, but the overall impact was quite limited as it’s quite clear that the Fed is gradually preparing the market for the mega rate cut cycles from Dec’24 with an eye on bond yield management (backdoor YCC). BOJ actions/interventions/talks in the FX/bond market also affected the USD amid Gold in both ways (roller coaster movement).

Gold and oil also wobbled on hopes & hopes of an imminent Gaza war ceasefire and Israel’s plan/action of an all-out offensive on Hezbollah in Lebanon. Also, Russian President Putin’s narratives about the fate of the Ukraine war and any use of Russian nukes against NATO/US (?) triggered some movement in Gold on both sides of the trade. Finally, Gold, which stumbled last week from around $2390 to almost $2290 after a report that China/PBOC may be slowing down on sovereign buying, got again some boost from Central Bank buying after a favorable report from World Gold Council and another report that Thailand Central Bank is now again very active (?) on Gold buying spree to diversify from USD assets. Subsequently Gold again surged to almost $2370 levels early Friday.

But it was later found that the Thailand Gold buying spree may be too hyped and together with that hotter than expected S&P Global PMI data for the US dragged Gold back to $2315 levels late Friday. Wall Street Futures also stumbled dragged by option expiries and also some long profit booking in Nvidia/AI Chip stocks after the recent phenomenal rally. On Friday Dow Jones (DJ-30) surged on Amazon boost, while NQ-100 slips as Chip makers dragged. Also, Apple slid on EU regulatory tightening concern over its AI software/OS upgrade issue; blue-chip DJ-30 surged almost +1.8%, while tech-heavy NQ-100 closed almost flat, while broader SPX-500 gained +0.8% in the last week (ending 21st June).

On Friday (21st June), some focus of the market focus was also on preliminary S&P Global PMI data for June to have an early assessment of the health of the US economy. On Friday, the S&P Global flash data shows US Manufacturing PMI increased to 51.7 in June from 51.3 sequentially, above the market consensus of 51.0 and the highest pace of private manufacturing (MFG) expansion in the last three months and also 3rd highest pace of expansion in the past 21 months. The latest MFG PMI reading signaled an improvement in business conditions within the goods-producing sector for a second successive month. New orders and employment made increasingly positive contributions, with manufacturing payrolls rising the most in the last 21 months.

On the price front, selling price inflation eased to a six-month low, and input inflation also slowed. Still, US manufacturers reported higher raw material costs related to shipping, with supplier delivery times also lengthening for the first time in five months to hint at some supply chain pressures. Meanwhile, the positive contribution from production moderated, and business optimism fell to the lowest for just over one-and-a-half years. Manufacturers commonly cited concerns over the demand environment in the months ahead as well as election-related uncertainty, notably relating to policy.

Overall, US MFG PMI is still hovering around the 50.0 boom/bust line and far below the pre-Trump trade war and a pre-COVID average of 58.0-55.0 zone.

On Friday, the S&P Global flash data shows US service PMI increased to 55.1 in June from 54.8 sequentially, pointing to the sharpest expansion in US private services sector activity since Apr’22 (26 months), and above market expectations of 53.7. The latest Service PMI data by S&P Global and ISM may be contrasting to some extent, but S&P Global PMI data may be more reliable / broader than ISM. Inflows of new work rose at the sharpest pace in a year during the period, resulting in a sharp expansion in output. In the meantime, employment levels increased the most in five months to rebound from drops in the second quarter, as firms aim to increase the capacity and halt the recent expansion of outstanding work. On the price front, input inflation fell to a five-month low.

Finally, the S&P Global flash data shows US Composite PMI increased to 54.6 in June, from 54.5 sequentially and the highest level since Apr’22, led by the Service sector. Business confidence for the upcoming year, particularly in services, and increasing demand leading to higher operating capacity prompted companies to expand their workforce for the first time in three months. Additionally, the survey indicated a decrease in selling price inflation due to slower growth in input costs, suggesting a moderation in inflationary pressures.

The S&P Global comments about the US Composite PMI for June:

·         Private US business activity growth accelerated to its fastest for 26 months in June, signaling a strong end to the second quarter

·         The service sector led the upturn with additional support from manufacturing, albeit with the latter’s recent revival losing some momentum

·         Improved business confidence for the year ahead, notably in the service sector, as well as renewed pressure on operating capacity from rising demand

·         Meanwhile encouraged firms to boost payroll numbers for the first time in three months

·         The survey’s gauge of selling price inflation meanwhile fell, linked to slower growth of input costs, to point to a moderation of inflationary pressures

“The early PMI data signal the fastest economic expansion for over two years in June, hinting at an encouragingly robust end to the second quarter while at the same time, inflation pressures have cooled. The PMI is running at a level broadly consistent with the economy growing at an annualized rate of just under 2.5%. The upturn is broad-based, as rising demand continues to filter through the economy. Although led by the service sector, reflecting strong domestic spending, the expansion is being supported by an ongoing recovery in manufacturing, which so far this year is enjoying its best growth spell for two years.

The survey also brings welcome news in terms of job gains, with a renewed appetite to hire being driven by improved business optimism about the outlook. Selling price inflation has meanwhile cooled again after ticking higher in May, down to one of the lowest levels seen over the past four years. Historical comparisons indicate.”

Overall, the S&P Global flash US PMI for June indicated upbeat real GDP just under the present trend (R/R) +2.5%, cooling inflation, and a robust labor market, which may help the Fed to continue its ‘wait & watch’ stance at least till Sep’24 (Q3CY24), while the overall report may also keep Biden (White House) in good mood ahead of 1st election debate with opponent Trump Thursday (27th June); Biden needs a ‘brilliant smart’ debate with Trump for any breakthrough in the Nov’24 election prospect as despite various legal challenges, Trump is still slightly ahead of ‘sleepy Joe’ (Biden) in the election (national opinion polls).

Although nationalist Trump is being seen as a better candidate to manage the US economy and immigration issues, Biden is also seen as a better candidate to address growing political extremism. Trump’s win may boost Wall Street more as he may continue the 2017 tax cut policy beyond the scheduled 2025 expiration, but at the same time, Wall Street may again suffer from a ‘Trump trade war tantrum’, mainly against China and Germany/EU.

Also, the 2017 experience of routine Trump tantrums on the Fed and the lack of bipartisan political/policies in the world’s largest democracy (US) may be negative for Wall Street as there may be no Trifecta (majority government controlling both Senate and House as well as White House). Even if one party gets the rate status of a majority government; it may soon turn into a minority after the mid-term election (just after 2-years after the main Presidential election). Trump’s win may be also positive for USD/US bond yields as he (generally Republicans) is seen as less inclined for higher deficit spending, but prefers tax cut stimulus in contrast with Biden/Democrats.

 On Thursday, Fed’s Kashkari said:

·         Wage growth might still be a bit too high to get back to 2% right now

·         It will probably take a year or two to get inflation back to 2%

·         The economy keeps throwing us challenging curve balls

·         Optimistic that the fundamentals of the economy are very strong

·         There is some evidence of some softening around the edges of the economy

·         We are getting disinflation despite remarkable economic growth

·         The interest rate outlook depends on the path of the economy

On Friday, Fed’s Goolsbee said:

·         We don't need annual inflation to hit 2% before the rate cut

·         The economy outside of inflation data, is showing signs of cooling

·         We have to consider restrictiveness vs other economies

·         The real economy isn't showing traditional overheating

·         I am hopeful the Fed will get more confidence that inflation is heading back to 2%

·         I am optimistic we'll see improvements in inflation data

·         Slowing inflation data would open the door to easier policy

On Friday, Fed’s Barkin said:

·         The impact of Fed rate increases will hit in time

·         Wants clearer signals on falling inflation before a rate cut

·         Federal Reserve well positioned with the necessary firepower for job

·         Data to Determine Further Moves After Initial Rate Cut

On Monday, Fed’s Mester said:

·         I don't think it's immediate that we should sell mortgage bond sales

·         Mortgage bond sales should stay open for the Fed

On Monday, Fed’s Daly said:

·         The US economy has been remarkably resilient

·         Excess consumer saving has been largely exhausted, we should see spending slowing

·         It's very clear monetary policy is restrictive

·         US stock market rallies reflect enthusiasm for the future

·         There's no evidence that stagflation or recession is in our future

·         Must be thoughtful about not loosening too early or holding too long

·         Preemptive cutting is something you do when you see risks, but right now the labor market is good

·         At this point, the risks to inflation and the employment mandate are in better balance

·         The bumpiness of inflation data so far this year has not inspired confidence

·         Recent inflation readings are more encouraging, but it's hard to know if we're on track to sustainable price stability

·         Restrained demand, not improved supply is likely needed to get inflation to the 2% goal

·         At this point, we have a good labor market, not a frothy one

·         We are nearer to a point where benign outcomes in the labor market could be less likely

·         Policy has to be conditional, we need to exhibit care

·         If there are gradual declines in inflation and slow labor market rebalancing, then the Fed can normalize policy over time

·         If inflation falls more slowly than expected, the policy rate must stay higher for longer

·         If inflation falls rapidly or the labor market softens more than expected, lowering the policy rate would be necessary

·         We must fully restore price stability without a painful disruption to the economy

·         The bumpiness of inflation data so far this year has not inspired confidence

·         We have made a lot of progress on inflation, but there is still work to do

·         Inflation is not the only risk

On Tuesday, Fed’s Bowman said:

·         Not yet at the point where it is appropriate to cut rates

·         I'm still open to raising rates if inflation doesn't improve

·         Other central banks may ease monetary policy sooner or more quickly than the Fed

·         The US labor market remains tight, despite some further rebalancing

·         We are not yet at the point where it is appropriate to cut rates

·         We will remain cautious in the approach to future changes in policy stance

·         Should data show inflation moving sustainably to 2%, it will eventually become appropriate to gradually lower the policy rate

·         I see a number of upside risks to the inflation outlook

·         I expect inflation to remain elevated for some time

·         We remain willing to raise rates if inflation progress stalls

·         I hope a number of things in the current Basel 3 proposal will be changed

·         We need to look forward and understand the banking risks of the future, rather than use liquidity ratios to solve problems of the past

·         I don't see any rate cuts for 2024, shifted cuts to 2025

·         I am also closely monitoring the labour market for deterioration

·         I need to see how subcategories of inflation evolve

·         I've begun to shift my view on policy to be more scenario-based

On Friday, the White House Economic Advisor Brainard said:

·         There is every reason to expect further inflation progress

·         There is not enough progress on housing and healthcare prices

·         Aberrations in Q1 inflation haven't stretched into Q2

·         Of course, the Russia-North Korea agreement is of concern. We would think that concern would be shared by China

On Friday, the U.S. Treasury Secretary Yellen said:

·         Trump tariffs will be across the board, affect all trade partners, and raise costs to consumers

·         I believe the new tariffs on Chinese goods are highly strategic

·         Limits on US investment in China may be final by the year-end

On Friday, the BOJ Governor Ueda said:

·         We need to watch the FX impact on prices and growth

·         Japan's price uncertainties remain high

·         Japan's financial system maintains stability overall

·         BoJ will adjust the degree of monetary easing if the economy and prices move in line with our forecasts

·         We decided to cut JGB buying to let the market decide the yields

·         BoJ will decide the specifics of the bond tapering plan & size of the reduction in bond buying will likely be significant

·         We must be vigilant to financial and FX market developments, and their impact on Japan's economy & prices

·         Japan's economy is recovering moderately, albeit with some weak signs

·         Underlying inflation is likely to gradually accelerate

On Friday, former St’ Louis influential Fed President Bullard said:

·         Expect a slow pace of rate cuts

·         US Growth Outlook Remains Robust

Conclusions: The Fed may start the long-awaited rate cut cycle from Dec’24 and may almost confirm the same by Sep’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24

·         Fed has projected in the June’24 dot-plots -25 bps rate cut in 2024, -100 bps rate cuts each in 2025 & 2026, and -50 bps in 2027 for terminal neutral repo rate +2.75%

·         Fed may not cut rates in Sep’24. just before Nov’24 US election to avoid any political controversy

·         But the Fed may start the rate cut cycle from Dec’24 QTR (Q4CY24) and may cut cumulatively eight times in 2025-26 at each QTR end by -25 bps each; then Fed may cut twice in 2027 at June’27 (H1CY27) and Dec’27 (H2CY27) @-25 bps each

·         One month of data may not change the Fed’s narrative about higher for longer stance as the headline unemployment average is still below 4%, while average core CPI inflation is still around 4%; the Fed generally considers at least 6M rolling average of economic data to suit its narrative

·         The 6M rolling average of US core inflation (PCE+CPI) would be around +3.3% by May; the Fed may not start the rate cut cycle until this average of core inflation (PCE+CPI) goes at least below 3.0% on a sustainable basis. This may not be possible before Sep’24; i.e. Fed may not get the required confidence for indicating a definitive rate cut before Sep’24

·         In that scenario, the Fed may give a definitive signal for eleven rate cuts from Dec’24 QTR onwards in its Sep’24 dot-plots, just before the Nov’24 election to keep both Wall Street, Main Street as well as Capitol Hill Street happy; both Democrats and Republicans may not object Fed in that case; Powell will keep both sides of the political Street happy.

·         Ahead of the Nov’24 U.S. Presidential election, White House/Biden and also Fed/Powell are more concerned about elevated inflation rather than the healthy labor market; prices of essential goods & services are still significantly higher (around +20%) than pre-COVID levels, which is creating some anti-incumbency wave among the general public (voters) against Biden admin (Democrats) due to relatively higher cost of living. Thus Fed is now giving more priority to price stability than employment (which is still healthy- hovering below the 4% red line) and is not ready to cut rates early as it may again cause higher inflation just ahead of the November election

·         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 4.75-5.00% at any cost (against present levels of average core CPI around +4.0%); i.e. Fed will not allow core real bond yield above +1.00%. Fed has to also ensure Wall Street stability by keeping SPX-500 TTM PE around 25 rather than lower/mean levels around 20.

·         Also, the reduction of Fed B/S from around $8.97T to around $6.60T by Dec’25 (projected); i.e. around $2.50T (~$2.37T) reduction over 2.5-3.00 years is equivalent to a rate hike of around +50 bps (higher 2Y bond yield)

·         Fed had boosted its B/S from around $3.86T in late September’2019 (after the QT tantrum) to around $8.97T in Apr’22; i.e. over $5T in a matter of 32 months (@0.16T/M) to fight previous QT and COVID induced financial crisis.; but in the process may have also caused huge inflationary pressure along with the deluge of COVID fiscal stimulus and direct fund transfer; all these may have caused the vicious cycle of higher deficits, higher debts, higher devaluation, higher borrowing costs, and still elevated inflation

·         Fed will continue the QT at a reduced rate of around 40B/M till Dec’25 for a B/S size of around $6.60-6.50T (around 22% of estimated US nominal GDP of around $30T by CY26)

·         Fed may continue the QT (even at an officially slower pace) and rate cuts at the same time despite being contradictory

·         Fed may say (like BOC) that as long as the policy rate is in the restrictive zone (say 1.50-2.00% above average core inflation), the Fed may continue both rate cuts and QT to reduce overall restrictiveness. When the policy rate moves into a neutral/stimulative zone, say 50 bps above average core inflation, then the Fed may go for more rate cuts and close the QT

·         Overall, Fed rate cuts along with QT (even at a slow pace) may be less dovish than pure/only rate cuts as QT is also equivalent to rate hikes to some extent

·         All other major G20 Central Banks including ECB, BOE, BOC, RBI, and even PBOC may be compelled to follow the Fed’s real rate action to keep present policy differential with the Fed

·         As USD, is the primary global reserve/trade currency, any meaningful negative divergence with the Fed will result in higher imported inflation, everything being equal; for example, if the ECB indeed goes for 50-75 bps rate cuts in H2CY24, while the Fed is still on hold, then EURUSD may slip further towards parity (1.0000), which will result in higher imported inflation as the EU is dependent quite heavily on imported goods, foods, and fuel/commodities

·         In this way, no major G20 Central Bank will take such rate action/cuts alone as there is a routine/regular coordination/consultation between all major central banks for a coordinated/synchronized policy action to avoid disorderly FX movement

·         The Fed also not seeking a very strong USD as it would eventually affect US export competitiveness. Thus all major central banks are now focusing on maintaining proper balance and coordination with the Fed, whatever may be the domestic political/election, inflation/economic narrative/jawboning; they can’t afford to diverge too much against the Fed, all being equal

·         Like in India, the US Presidential election in Nov’24 may be also acting as a big/moderate fiscal stimulus amid huge election spending, which may likely boost inflation again or prevent the disinflation process, making the Fed’s job harder to cut rates before Nov’24 election

·         Moreover, the Biden admin is spending huge for the US private defense industry in the name of aid to Ukraine and even Israel and will also actively participate in the reconstruction process of both Gaza and Ukraine when the war finally stops

·         Although the US Treasury may have some control of certain FX assets and also the Gold reserves of Russia, Ukraine, and even Israel, the deluge of deficit/fiscal spending, debt, and money printing is also boosting overall inflation

·         In H2CY24, the U.K., Canada, and also various other developed economies in the EU are going for the general election, and economic issues such as elevated inflation/higher cost of living will be one of the major issues

·         For example, U.K. PM Sunak suddenly called for an early general election in July after a recent softening in inflation data. But all this election spending will also act as some fiscal spending and will not help the present disinflation pace. Thus Fed as well as ECB, BOE, BOC, and even RBI should feel less confident about going for any new/further rate cuts until Fed cuts in Dec’24

·         Thus almost all major G20 Central Banks including ECB, BOE, BOC, RBI, and even PBOC may not cut rates in H2CY24 if the Fed remains on hold; no central bank will go against the Fed irrespective of any narrative/rhetorics and make LCU weaker against USD, causing higher imported/total/core inflation in the process; all central banks led by Fed will continue the 24/7 jawboning to keep bond yields under control (indirect YCC like BOJ) and a vibrant financial/money/FX market

·         Although the ECB and BOC have cut rates once (-0.25%) already –which may be due to domestic political compulsions (elections), looking ahead they may not cut rates further before Sep-Dec’24 as the Fed may not cut rates before Dec’24 and that may not provide a specific signal before Sep’24

Market impact:

On early Tuesday, Wall Street Futures were mixed as NQ-100 surged on Nvidia recovery (short covering after three days of a slump), while DJ-30 slumped as Boeing dragged. Gold is also under stress due to fading hopes of an early Fed rate cut.

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

Whatever may be the narrative, technically Dow Future (39400) has to sustain over 39500 for any further rally to 39800/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 39450-39400 may again fall to 39200/39000-38900/38600 and further fall to 38400/38200-38100/37900* and 37600/37400 in the coming days.

Similarly, NQ-100 Future (20250) has to sustain over 20500 for a further rally to 20700-21050 in the coming days; otherwise, sustaining below 20450/2035020300/20250 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5560), now has to sustain over 5650 for any further rally in the coming days; otherwise, sustaining below 5625/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2340) has to sustain over 2375-2385 for a further rally to 2395/2400 and further to 2410/2425-2435/2455* and 2475-2500; otherwise sustaining below 2370/2360-2345/2320, may further fall to 2290/2275 and may further fall to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.