Dow, gold surged from Fed panic low on earnings and NFP boost

Wall Street Futures, UST, and Gold wobbled Wednesday on less dovish QT tapering and another hawkish hold by the Fed. On Wednesday Fed reduced the QT pace by -$55B from the prior official rate of $95B/M to $40B against market expectations of -$30B. Thus Wall Street Futures and gold surged despite Fed Chair Powell's failure to assure 75 bps rate cuts in H2CY24. But if we consider the actual effective rate of QT around $70B/M from June’22 till Apr’24 (Fed’s B/S size reduced from around $8.97T to $7.40T), and subsequent QT rate of $40B/M from June’22, the effective pace of B/S reduction reduced by $30B/M ($70B-40B), which is in line with market consensus of $30B/M QT tapering rate.

Also, the Fed will gradually shift its MBS holding to UST in the coming months/years (B/S optimization) to reduce the QE/QT effect directly on the US mortgage market. Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may/may not cut rates in Dec’24; Fed may revise dot-plots in June meeting. At present, Fed’s Mar’24 dot-plots show: 75 bps rate cuts each in 2024, 2025, 2026, and -50 bps in 2027 for a neutral repo rate of +2.75%. But the Fed may now show the June’24 dot-plots as -100 bps rate cuts each in 2025, 2026, and -50 bps in 2027 for terminal neutral repo rate +3.00%.

Overall it’s a hawkish hold by the Fed. Thus Wall Street Futures, Gold, and UST surged initially on higher than expected QT tapering; i.e. slower rate of B/S reduction, which will reduce present restrictive/tighter financial conditions to some extent. But Wall Street, Gold, and UST also stumbled to some extent after Powell's presser as it becomes almost sure that the Fed will not cut 75 bps this year and the Fed’s effective QT tapering amount of $30B/M falls in line with the market consensus.

Further, on early Thursday, Wall Street Futures got some boost, but Gold slipped further on hopes & hypes of an early Gaza war ceasefire. But later gold recovered to some extent as Israel struck a Syrian military facility near Damascus, which allegedly killed eight soldiers of Syria. But Hamas has agreed with Qatar to continue ceasefire talks; Hamas delegation to visit Egypt soon for further peace talks

Gold, Wall Street Futures fell to the session low after mixed economic data (higher than expected US labor costs, lower than expected US Nonfarm business sector labor productivity, softer than expected US jobless claims, and higher than expected ADP payroll job addition), indicating Fed has no option but to go higher for longer stance and may not cut at all in H2CY24.

Summary of U.S. Economic Data Thursday:

·         US Productivity Prelim Actual 0.3% (Forecast 0.5%, Previous 3.2%, Revised 3.5%)

·         US Unit Labor Costs Prelim Actual 4.7% (Forecast 4%, Previous 0.4%, Revised 0%)

·         US Initial Jobless Claims Actual 208k (Forecast 211k, Previous 207k, revised 208K)

·         US Continued Jobless Claims Actual 1.774M (Forecast 1.79M, Previous 1.781M)

·         US Trade Balance Actual -69.4B (Forecast -69.7B, Previous -68.9B, Revised -69.5B)

But Wall Street Futures after upbeat report cards (earnings & guidance) from most of the blue chips, led by Qualcomm, MGM Resorts International, and Carvana, while dragged by Moderna and eBay amid softer than expected report cards. Wall Street was also boosted by hopes of an upbeat report card from Apple after the market hours. Dow Future soon recovered from around 38025 to 38450, before closing around 38350 Thursday.

Also on late Thursday after the US market hours, Dow Future jumped by almost 350 points to around 38695 after an upbeat report card by Apple; NQ-100 and SPX-500 Futures also jumped; Apple shares jumped 3% after Q2CY24 EPS, Chinese revenue beat estimates and also announced buyback of shares. Apple CEO Cook expected to hint at new AI features in the iPhone next week.

Apple reported Q2CY24 earnings as:

·         EPS $1.53 versus $1.50 exp.

·         Revenues $90.75 billion versus 90.01 billion exp.

·         Products revenue $66.89B, est. $66.95b

·         Service revenue $23.87, est. $23.28b

·         iPhone revenue $45.96b, est. $45.76b

·         iPad revenue $5.56b, est. $5.91b

·         Mac revenue $7.45b, est. $6.79b

·         Wearables, home & accessories $7.91b, est. $8.29b

·         Greater China revenue $16.37b, est. $15.87b

·         Total operating expenses $14.37b, est. $14.33b

·         Apple to buy back additional $110b of shares, boosts quarterly dividend,  4.2% to 25 cents/she

On Thursday, BOC Governor Macklem said in a prepared statement in the Canadian Congress:

·         If we cut interest rates and that weakens the C$, that is something you take into account with how much you need to reduce interest rates

·         We don't have to do what the Fed does

·         Bank could start cutting rates before the inflation rate hits 2%, cites the importance of seeing a sustainable decline in inflation

·         Bank of Canada Governor Macklem expects core inflation to continue to ease gradually

·         We forecast GDP growth in Canada of 1.5% this year and about 2% in 2025 and 2026. The strengthening economy will gradually absorb excess supply through 2025 and into 2026

·         The data since January has increased our confidence that inflation will continue to come down gradually

·         We’re looking for evidence that the recent further easing in underlying inflation will be sustained

·         If the Federal carbon tax were to be eliminated, inflation would drop for one year, and then go back up to where it otherwise would have been

·         Even when we start reducing interest rates, it's likely to be a pretty gradual path

·         Rates are unlikely to go back down to pre-COVID levels

·         There is a limit to how far US/Canada rates can diverge

·         Canadian inflation rate will probably stay close to 2.9% for the next several months, in part due to rising gasoline prices

·         (When asked when rates are coming down), reiterates that the bank is looking for reassurance that the recent fall in underlying inflation will be sustained

·         A cut in rates is a signal we are on track to 2% inflation

·         Bank of Canada's Rogers says not seeing a high level of stress in the mortgage market

·         Growth in the economy looks to be picking up

·         Monetary policy is working

On Thursday, Wall Street and gold were also buoyed by hopes of Fed cuts, at least from September or even November’24 after BOC Governor Macklem’s comments that BOC, the smaller proxy of BOC may go for limited rate cuts even if the Fed chooses to hold. Fed may also cut -50 bps in Dec’24 or even in Jan’25 after the Nov’24 US election to avoid any political controversy and also to assess overall inflation and employment data for the whole of 2024.

On Thursday, the OECD published its latest global economic projections:

·         OECD raises 2024 global growth forecast to 3.1% (vs 2.9% in February), sees 3.2% in 2025 (vs 3% in February)

·         OECD raises 2024 US growth forecast to 2.6% (2.1% previously), sees 2025 at 1.8% (1.7% previously)

·         OECD raises Chinese 2024 growth outlook to 4.9% (4.7% previously) and 2025 to 4.5% (4.2% previously)

·         OECD sees 2024 UK growth of 0.4% (0.7% previously), 1% in 2025 (1.2% previously)

·         US-Europe economic divergence is to persist in the near term

·         OECD cuts Japanese growth to 0.5% in 2024 (1% previously) and sees 2025 at 1.1% (1% previously)

·         OECD sees the US Federal Reserve cutting rates from Q3 to 3.75-4% by the end of 2025 and the ECB seen cutting from Q3 to 2.5% by the end of 2025

·         OECD raises Euro Zone growth forecast to 0.7% (0.6% previously) and raises 2025 to 1.5% (1.3% previously)

Market impact:

Wall Street Futures surged Thursday and also early Friday on an earnings boost led by Apple and Amgen. On Thursday, the DJ-30 surged +0.85%, the SPX-500 gained +0.91% and the NQ-100 jumped +1.51%. Nine out of the eleven S&P sectors finished higher, led by techs, consumer discretionary, real estate, communication services, consumer staples, industrials, utilities, energy, and banks & financials, while dragged by healthcare and materials. Wall Street was also boosted by Boeing, Amazon, Nike, Apple, Walt Disney, United Health, Walmart, Goldman Sachs and Caterpillar, while dragged by 3M, Honeywell, J&J, Verizon, McDonald’s, Merck and Cisco.

Further on early Friday U.S. Session, Wall Street Futures, Gold jumped and USD slid on hopes of September rate cuts after softer than expected US NFP/BLS job report:

·         US Nonfarm Payrolls Actual 175k (Forecast 240k, Previous 303k, Revised 315K)

·         US Private Payrolls Actual 167k (Forecast 195k, Previous 232k, 243k)

·         US Labor Force Participation Actual 62.7% (Forecast 62.7%, Previous 62.7%)

·         US Average Workweek Hrs Actual 34.3 (Forecast 34.4, Previous 34.4)

·         US Average Earnings YoY Actual 3.9% (Forecast 4%, Previous 4.1%)

·         US Unemployment Rate Actual 3.9% (Forecast 3.8%, Previous 3.8%)

·         US Manufacturing Payrolls Actual 8k (Forecast 5k, Previous 0k, Revised -4k)

·         US Average Earnings MoM Actual 0.2% (Forecast 0.3%, Previous 0.3%)

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

Whatever may be the narrative, technically Dow Future (38900), now has to sustain over 39150 for a further rally to 39200/39300-39500/39750 and 40000/40200-40425/40600-40700-42600 levels in the coming days; otherwise, sustaining below 39100/39000-38900, DJ-30 may again fall to 38700/500-38300/38050-37650/37450*, and further fall to 37300*/37200-37050/36600 and 36300/36300 and even 35700 levels in the coming days.

Similarly, NQ-100 Future (17950) now has to sustain over 18150 for any recovery/rally to 18375-18600/18750-18800/18900*-19100/19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18100-18000, NQ-100 may again fall to around 17800/17700-17600-17500 and 17400/17300-17100/17000* and 16890/16700-16595*-16100/15900 in the coming days.

Also, technically Gold (XAU/USD: 2296) now has to sustain over 2280 for any recovery/rally to 2310/2330*-2350/2355 and 2375/2385-2395 and 2400/2410-2425/2435* to 2455-2475/2500; otherwise sustaining below 2275, Gold may again fall to 2255/2235*, and 2180/2145*, and further to 2120*/2110-2100/2080-2060/2039 and 2020/2010-2015 in the coming days.

Bottom line: Summary

·         US Rate Futures now price in two cuts of 25 bps in 2024 vs one before jobs data

·         US Fed Funds Futures raise chances of a rate cut in September to 78% after jobs data vs 63% just before

·         The April jobs report won't change much for the Fed because there's another one before their next meeting. They're more focused on inflation data, it doesn't show "unexpected" weakness But it will certainly help ease fears about reacceleration/overheating - WSJ's Timiraos (Influential Fed watcher/insider)

·         Fed may not cut rates before Nov’24 US election

·         Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may/may not cut rates in Dec’24; Fed may revise dot-plots in June meeting.

·         At present, Fed’s Mar’24 dot-plots show: 75 bps rate cuts each in 2024, 2025, 2026, and -50 bps in 2027 for a neutral repo rate of +2.75%

·         But the Fed may now show the June’24 dot-plots as -100 bps rate cuts each in 2025, 2026, and -50 bps in 2027 for terminal neutral repo rate +3.00%

·         Another scenario: Fed may also cut -50 bps in Dec’24 or even in Jan’25 after the Nov’24 US election to avoid any political controversy and also to assess overall inflation and employment data for the whole of 2024.

·         One month of weak job data may not change the Fed’s narrative about higher for longer stance as the headline unemployment average is still below 4%, while core CPI inflation is still around 4%