Dow Jones slumped on muted earnings, but Tesla helped Nasdaq

·         Apart from an upbeat report card, Tesla soared over 20% on increasing odds of Trump 2.0; Musk is an active member of Trump's election campaign team

·         But stock markets on both sides of the Atlantic as well as the Pacific may be also concerned about Trump trade war tantrum 2.0

·         Gold is getting a boost from escalating Gaza war tensions, increasing geopolitical fragmentations, and increasing public deficits, debt and devaluation of local currency

Wall Street Futures wobbled on mixed earnings/report card, fading hopes of another rate cut of 25 bps in Nov’24, stalled core disinflation, less dovish Fed talks, and boiling geopolitical tensions (Gaza and Ukraine war), especially the shape & intensity of Israel’s counter-attack on Iran. Although Israel reportedly promised the US that it would not attack any nuclear or oil infra of Iran and would target only selected military facilities, the market is not relieved, while Iran is also daring that any potential Israel attack will be dealt with ‘serious’ retaliation. Israel Defense Minister Gallant warned Wednesday (23rd Oct’24): “After we strike in Iran, the world will understand all of our training”.

On the other side, the US is trying desperately to not initiate any serious military conflict in the Middle East, at least till 5th November. Overall, it seems that Israel may not launch any all-out war against Iran in the coming days except for some types of a ‘staged attack’ (like last time on Apr 24) to satisfy domestic political compulsions. The Israeli PM is now enjoying a higher political approval rate than a few months ago after launching an all-out war against Hamas and also Hezbollah. Gold has been a major beneficiary of Gaza war geopolitical tensions in the last year as it surged from around 1650 to almost 2760 since early Oct’23, when Hamas carried out the heinous attack on an Israeli concert in the border town near Gaza strip and adducted several Israeli and other nationals including some Americans.

Gold was also boosted by the Fed’s post-COVID plan of almost 10-12 rate cuts from late 2024 to early 2027 and an unexpected -50 bps rate cut in Sep’24. Gold is also being boosted by 3D-higher public deficits, higher debts, and higher currency devaluation. Traditionally, Gold is an inflation hedge physical asset, limited in supply, unlike unlimited paper currency.

On 22nd Oct’24, Fed’s Daly said:

·         Fed is not declaring victory against elevated inflation as of now

·         Fed will continue to adjust policy

·         50 bps cut was meant to right-size policy, expect additional cuts going forward

·         Recent fed rate cut a 'close call'

·         I came down strongly in favor of a 50 bps cut

·         50 bps cut was what was needed; didn’t want to find out we had overtightened, and taken jobs from people

·         Will be data-dependent for the Fed's November meeting

·         So far have not seen anything that would suggest we would not continue to cut rates

·         The policy is still tight

·         I don't want to see the labor market slow further

·         To get a soft landing accomplished we have to adjust the policy rate as inflation falls

·         A reasonable estimate for the neutral rates is between 2.5 and 5%

·         Fed will learn, experientially, where the neutral rate is

·         My neutral rate estimate is around 3%

·         Would want to be open-minded to continue to ease policy if inflation is falling, even if the economy is strong

On 15th Oct’24, SF Fed’s President Daly said in a prepared article:

A More Balanced Economy

“Let me start with where we are right now. The economy is clearly in a better place. Inflation has fallen substantially, and the labor market has returned to a more sustainable path. And the risks to our goals are now balanced. This is a significant improvement from just two years ago.

This figure makes the point. Since March of 2022, when the FOMC began raising interest rates, inflation has declined from over 7 percent at its peak to just over 2 percent in the most recent readings. Inflation expectations—what people believe about the future—have come down as well, confirming that households, businesses, and markets see the progress and believe the disinflationary process will continue.

At the same time, the labor market has cooled. Most labor market indicators are now at or near their pre-pandemic values, and the unemployment rate is hovering around a level judged to be sustainable over the long run. All this means that the labor market has largely normalized and is no longer a major source of inflation pressures.

Recalibrating Policy

Of course, as conditions improve, policy needs to adjust.

Remember, during the fight to bring inflation down, the FOMC raised rates aggressively and kept monetary policy tight, historically so. And then each month that inflation and inflation expectations fell, policy became tighter in real terms.

So, the FOMC needed to recalibrate and did so at the September meeting. I see this recalibration as “right-sizing,” recognizing the progress we’ve made and loosening the policy reins a bit, but not letting go. Even with this adjustment, policy remains restrictive; exerting additional downward pressure on inflation to ensure it reaches 2 percent. Making these adjustments to match the economy we have is crucial. It prevents the mistake of over-tightening and ensures we are supporting both of our goals.

Continued progress is not guaranteed. We must stay vigilant and be intentional, continually assessing the economy and balancing both of our mandated objectives: fully delivering on 2 percent inflation while ensuring that the labor market remains in line with full employment. That is a soft landing.

Beyond A Soft Landing

But as the dad in my neighborhood reminded us, this is only part of what people need. What households, businesses, and communities want is a durable economy, with sustained growth, a good labor market, and low inflation.

High inflation chipped away at real incomes and purchasing power, intensifying the challenges of overcoming pandemic disruptions; everyone felt it. But the burden fell particularly hard on low- and moderate-income families, who spend a disproportionate share of their resources on shelter, food, and fuel, where price increases have been especially large.

Businesses have also struggled, especially small- and medium-sized firms that have been saddled with back-to-back challenges of pandemic closures, supply bottlenecks, labor shortages, and high inflation. A durable and sustained expansion allows both families and businesses to recoup their losses and rebuild incomes and wealth that raise their economic well-being.

All of this helps communities, which depend on households and businesses to thrive.

So, is a durable expansion possible?

History says yes.

Again, the data tell the story. Compared to recent history, the current expansion is still relatively young.

I’ve had the benefit of working at the Federal Reserve during the two longest expansions on record—the 1990s and the pre-pandemic period. During both, remarkable things occurred. Businesses thrived, workers got jobs, and gains in household earnings, income, and wealth were widely shared.

The expansion just before the pandemic was especially impressive: nearly 11 years, 10 years and 8 months to be precise, the longest on record. And I saw firsthand what the data tell us—sustainable growth with low inflation delivers opportunities.

Robust labor markets brought a broader group of workers into jobs. More and more Americans entered or reentered the labor force, wages and incomes rose, and inequality fell. Even wealth gains were widely shared, with low-net-worth families generally seeing the largest growth in their holdings. All of this meant better conditions for households and businesses across the country.

We’ve already seen some of the same patterns play out in our current expansion. Labor force participation for prime-age workers has reached new highs. Earnings gaps between high- and low-wage workers have closed somewhat. And after rising initially during the pandemic, household income inequality has fallen back down more recently.

The bottom line: sustained expansion helps all Americans.

The Economy We Deserve

In the coming months and years, there will almost certainly be economic bumps, disturbances, and scares. And the Federal Reserve cannot fully prevent shocks from having an impact. But barring such events, and with the right monetary policy mix, we can help create the conditions for enduring growth.

The most important trait in a central banker is the ability to look ahead; To keep an eye on today and an eye on tomorrow. The work to achieve a soft landing is not fully done. And we are resolute to finish that job.

But that cannot be all we’re after.

Ultimately, we must strive for a world where people aren’t worried about inflation or the economy; A world where people have time to catch up, and then to get ahead.

On 22nd Oct’24, Kanas City (KC) Fed President Schmid said:

·         I am cautious and prefer a gradual, deliberate approach to rate cuts

·         I prefer to avoid outsized rate cuts

·         I am reasonably confident inflation heading in the right direction

·         We are seeing a normalization of the labor market, not a deterioration

·         Current policy is restrictive, but not very restrictive

·         Interest rates will settle well above levels seen in the pre-pandemic decade

·         Preference is for a relatively aggressive approach to balance sheet reduction (QT)

·         Proper Amount of Reserves Determines Fed's Balance Sheet Size

·         Fed has a very strong commitment at the Fed for 2% inflation

·         Fed doesn't focus too much on anticipated shocks

·         I expect modest cuts in upcoming quarters

·         My personal opinion is that crypto is a risk asset, a playground, and not a currency

·         FedNow could reduce check fraud

·         I suggest modernizing the discount window to support the asset side of the banking industry for real-time, instant payments.

·         Funding for banks is changing dramatically.

·         Fed not overly concerned with expected economic disruptions

·         I see a pleasant surprise with the banking system's post-pandemic navigation

·         Around 1000 banks have joined the Fed today

·         Suggests Cautious Approach to Minimize Market Volatility

·         I predict rates to settle significantly higher than pre-pandemic levels

·         Favors shorter duration and smaller balance sheet

·         I am "reasonably confident" that inflation is heading in the right direction

·         I urge careful, steady, and purposeful methods for reducing interest rates

·         Neutral Interest rates to exceed pre-pandemic decade levels

·         I aim to prevent significant fluctuations in interest rates

On 22nd Nov’24, the Minneapolis Fed President Kashkari said:

·         Fed’s monetary policy's role in bringing down inflation was probably mainly in anchoring inflation expectations, not in reducing demand

·         Lower-credit-score borrowers' delinquencies are climbing, on average, consumers seem like they are doing fine

·         It has been surprising that geopolitics hasn't had more oil impact

·         Right now, I see modest cuts over the next quarters

·         Evidence of quick labor market weakening could lead to faster rate cuts

·         Resilience makes me wonder if the neutral rate is higher

·         I still think that policy is putting a brake on the economy

·         We want to avoid recession and saw signs of the labor market weakening, that's why the Fed cut by 50 bps

·         A rise in budget deficit would mean that on the margin interest rates would be higher (because of higher government borrowings to fund deficit spending/fiscal deficit)

·         It wasn't labor markets that caused inflation

On 22nd Oct’24, the US Treasury Secretary Yellen said:

·         Bringing deficits under control will help ensure demand for US debt

·         Must keep the real net interest to GDP ratio under 2 (%)

·         Fiscal deficit reduction is required over the coming years

·         High and broad tariffs would likely strengthen the dollar

·         Policy Prescription for China: The Treasury's view is that raising consumer spending as a share of GDP and fixing property problems are important. I have not yet seen policies announced by China to achieve that

·         The China economic and finance working groups are to meet over the next week

·         We want to make sure that oil markets are well supplied in considering further sanctions

·         Some entities supporting Russia's war efforts, and intermediaries will be designated in new sanctions

On 22nd IMF’s latest World Economic Outlook and Presser highlights:

·         Sees potential 0.5% hit to global GDP from trade tensions

·         The global fight against inflation is 'almost won' but warns of rising risks

·         Projects global headline inflation to fall to 3.5% by the end of 2025

·         Hikes UK growth outlook amid lower inflation and interest rates

·         The global fight against inflation is 'almost won' but warns of rising risks

·         IMF Chief Economist Gourinchas: Inflation progress is more pronounced for advanced economies, to reach the target in 2025

·         IMF's Gourinchas: China stimulus measures announced by PBOC are not sufficient to lift growth in a substantially material way

·         IMF's Gourinchas: IMF projections assume two more Fed rate cuts in 2024, additional cuts in 2025

·         IMF downgrades Eurozone forecasts, sees 2025 GDP growth at 1.2%

·         Conflict, protectionism, and higher rates are among the risks

·         IMF cuts growth forecasts for Germany in 2024 and 2025 in its world economic outlook

·         Risks for the global economic outlook are tilted to the downside

·         IMF upgrades US forecasts, sees 2025 GDP growth at 2.2%

·         Global growth faces downside risks, trims 2025 outlook

·         IMF assumes BoJ will keep raising rates gradually over the medium term to around 1.5%

·         IMF cuts growth forecasts for Germany in 2024 and 2025 in its world economic outlook.

·         IMF cuts Japan's economic forecast for 2024 to 0.3% vs 0.7% projected in July

·         German economy is expected to stagnate this year vs the 0.2% growth forecast previously.

·         German GDP expected to grow by 0.8% in 2025 vs 1.3% forecast previously

·         IMF expects Japan's economy to expand by 1.1% in 2025 as rising real wages boost consumption

·         The IMF now sees 1.1% growth for the U.K. economy this year, up from its July forecast of 0.7%

·         U.S., China trade tariffs escalating would be 'costly for everybody,' IMF deputy director says

·         IMF Fiscal Affairs Director Gaspar: China has ample policy space

·         MF Fiscal Affairs Director Gaspar: US debt path cannot continue to rise forever, but is currently sustainable

·         IMF Fiscal Affairs Director Gaspar: The UK is living with high interest rates and low growth, with public investment badly needed

·         The UK has debts substantially higher than projected before the pandemic.

On Wednesday (23rd Oct 24), the latest Fed Beige Book showed:

·         The economy flattening, employment moderated further

·         There was slight or modest job growth in more than half of Fed districts

·         Inflation continued to moderate with selling prices reportedly increasing at a slight or modest pace in most districts

·         Despite elevated uncertainty, contacts were somewhat more optimistic about the longer-term outlook

·         On balance, economic activity was little changed in nearly all districts since early September, though two districts reported modest growth.

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

Market Impact:

On Thursday, Wall Street closed mixed as blue-chip DJ-30 edged down -0.33% amid a subdued report card of key constituents and lingering Boeing strike, while tech-heavy NQ-100 snapped a 3-day losing streak and surged +0.8% helped by Tesla’s upbeat report card and broader S&P-500 ticked up +0.2%. Overall, US and EU/Global stocks are under stress due to increasing odds of Trump 2.0 and the repeat of the Trump trade war 2.0. But Tesla may be also a big beneficiary (at least sentimentally) due to CEO Musk’s active political participation in Trump election campaign 2.0; Musk may be also an important policy maker/cabinet secretary if Trump is indeed reelected this time.

On Thursday, Wall Street was boosted by consumer discretionary, communication services, real estate, techs, and banks & financials to some extent, while dragged by materials, industrials, utilities, healthcare, consumer staples, and energy. Scrip-wise Wall Street was boosted by Tesla (upbeat report card), UPS, Goldman Sachs, Home Depot, McDonald’s, Salesforce, Amazon, JPM, Caterpillar, Amgen, Intel, and Microsoft, while dragged by IBM, Honeywell, United Health, J&J, Boeing, 3M, American Express, Nike, Verizon, Walt Disney, Coca Cola.

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

Whatever the narrative, technically Dow Future (43500) has to sustain over 43700 for any further rally to 43900/44050-44250/44500* and 44800/45000-45500/45800 in the coming days; otherwise sustaining below 43650, DJ-30 may again fall to 43400/43200-42900/42700 and 42300/42000-41650/41350-41150/40900 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 (5900), now has to sustain over 5950 for any further rally to 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5925/900-5850/800, may again fall to 5750/5725-5675/5625-5600/5575*-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: 2735) has to sustain over 2755 for a further rally to 2775/2800-2825/2850 in the coming days; otherwise sustaining below 2750-2735, Gold may again fall to 2700/2675-2650/2625 and 2600/2575-2550/2525 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).