Dow recovered after less hawkish FOMC minutes and Fed talks

On Tuesday, Wall Street was boosted by hopes of Chinese stimulus, Fed pause/pivot, less hawkish Fed talks, and U.S. reluctance to blame Iran directly for the Israel-Hamas conflict, avoiding a major escalation of Middle East (ME) geo-political tensions. On Wednesday, China’s government-backed paper Xinhua said China will likely meet its annual economic growth target.

But Wall Street Futures were also affected late Tuesday as there was some escalation of ME tensions (after reported rocket/missile shelling on Israel by Hezbollah and Syria). Israel strikes a South Lebanon town with artillery shells, while missiles have been also fired from Lebanon toward Israel

Also, Fed’s Kashkari sounded more hawkish than expected, although some other Fed speakers are now pointing higher 10Y US bond yield, which may prevent the Fed from a further rate hike as government borrowing costs are increasing alarmingly and the White House, Congress as well as U.S. Treasury (Yellen) are all concerned. Late Tuesday, the U.S. CBO warned that the U.S. annual deficit tops $1.7T as interest rates surge.

In any way, despite simmering geopolitical tensions in the ME, oil slid as Russia’s Deputy PM Novak said:

·         Russia is ready to raise oil product shipments to Saudi Arabia

·         Russia and Saudi Arabia are to discuss the oil market situation

·         Russia and Saudi Arabia have not discussed a scenario of actions within OPEC+ in case of further escalation in the Middle East

Also, oil failed to surge further above $87 as the U.S. may not allow such a regional war narrative involving Iran, Syria, Egypt, Lebanon vs Israel, and Saudi Arabia (?), which may take the form of a mini-WW-III. In that scenario, oil may jump to $150 levels ahead of the U.S. Presidential election in Nov’24. Trump is already blaming Biden for ‘betraying’ Israel and allowing Hamas to launch such an unthinkable barrage of missile attacks as a result of a major intelligence failure by both Mossed (Israel) and CIA (U.S.). In this way, the Early US intelligence shows Iran leaders were surprised by Hamas's attack.

On early Wednesday European session, Wall Street Futures got some boost, while gold slipped to a day low around $1859 after the U.S. Defence Department Spokesman Kirby again stressed Iran is not directly involved in Hamas rocket/missiles massacre on Israel in the weekend:

·         Iran is complicit but there is no direct evidence tying it to attacks

·         It's not time to review intel failure, but to support Israel

·         We don't have intel pointing to direct participation of Iran

·         The US is to send additional arms aid to Israel in the coming days

·         The US has funding for near-term military aid for Israel

·         US Defence Secretary Austin: We will ensure that Israel has what it needs to protect itself

·         US Official: The US does not have any information that Iran directed or orchestrated the Hamas attack but Tehran likely knew Hamas was planning operations against Israel

The U.S. President Biden said:

·         I discussed coordination to support Israel, deter hostile actors, and protect innocent people with Israel's Prime Minister Netanyahu

·         I will make sure Israel has what it needs to defend itself

·         We stand ready to approve additional assets as needed

·         I will ask Congress to take urgent action to help Israel

·         The US surging additional military assistance including ammunition and interceptors to replenish the Iron Dome

But on Wednesday, Wall Street and European Futures were also briefly undercut after Israel increased air strikes on Hamas targets in Gaza, and at least two missiles were fired from Lebanon at Israel in retaliation. The market is now concerned that an escalation of the conflict will have repercussions throughout the Middle East, jeopardizing Israel's fragile rapprochement with its Arab neighbor and raising the possibility that hostilities will escalate into a larger regional war with larger implications.

But the key question may be how a militant organization like Hamas can procure so many rockets/missiles and other arms & ammunition. Who is supplying them? Again, as the world’s largest producer of arms & ammunitions and also oil, the U.S. (Wall Street) is the biggest beneficiary of such Middle East as well as Russia-Ukraine, North Korean-SK/Japan, China-Taiwan and even India-Pak/China geopolitical tensions.

Such never-ending global geo-political tensions (usually far from American soil) are also acting as a major fiscal stimulus for the U.S. economy, irrespective of whether Democrats or Republicans at the White House; but history shows U.S. Democrat Presidents are more war-savvy than Republicans. But at the same time, the U.S. needs to keep its borrowing costs lower and preserve the Dollar as the world’s reserve currency to fund the never-ending/unlimited fiscal deficit. On the other side of the Atlantic, Europe is usually the biggest loser of such geopolitical tensions as it’s a huge importer of fuel/oil and food.

This year, China may have saved almost $10 billion by buying cheap oil from sanctioned exporters and also India. Chinese and Indian refiners are now exporting record refined products (mainly gasoline, diesel and ATF) to the EU/Europe (sourced mainly from cheap Russian crude oil). Indian, and Chinese government is also earning handsomely by imposing windfall profit on such refiners. All this shows the colossal failure of the hypocrisy of the G7/NATO policy allowing the Russia-Ukraine war to linger, causing higher commodity prices (led by fuel & food) and pushing the global economy towards stagflation.

On Wednesday, Russian President Putin said:

·         Conflict in Israel may have an impact on logistics but not on oil output

·         Russia supports the creation of a Palestinian state

·         Saudi Arabia's Crown Prince plays a big role in the energy market, we will continue cooperation

·         OPEC+ deal likely to be continued in 2024

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

·         We have worked very constructively with representatives from China's PBOC, we are optimistic about continuing that work

·         I expect to discuss debt issues with the PBOC governor, progress has been slow, but we have seen some progress

·         A soft landing is the most likely path, but attacks on Israel pose additional risks

·         Risks to the outlook include global shocks

·         I still see a soft landing for the US economy

·         The US is monitoring the potential economic impacts of the crisis in Israel and Gaza

·         We have not, in any way, relaxed sanctions on Iranian oil

·         At this point, we do not see attacks on Israel as having a major impact on the economy

·         We seek a healthy economic relationship with China and cooperation on debt restructuring and global challenges

·         We must continue to impose severe and increasing costs on Russia to ensure it pays for the damage it has caused

·         The oil price cap has "significantly reduced" Russian revenue over the last 10 months while keeping energy markets stable

·         While some countries are seeing slowing growth, we do not see signs of broad spillovers destabilizing the global economy

·         Russia's war in Ukraine is a major headwind for the global economy

·         The Biden administration will work with the bipartisan majority in Congress to ensure Ukraine support continues

·         The global economy is in a better place than expected, we are monitoring downside risks

On late Tuesday, Fed’s Daly said:

·         If bond yields are tight, that could be the equivalent of another rate hike

·         Decline in goods inflation has been an easy win, and not largely due to the Fed's rate hikes

·         Just starting to see improvement in non-housing services inflation, need more of it

·         We have more work to do, inflation is still high

·         Fed policy is helping supply and demand get into a better balance

·         In the future could see the nominal neutral rate go to 2.5%-3%

·         The new normal may be a little different, but probably won't be a gigantic reset

·         I don't manage markets, I watch them for information

·         The risks to the economy are more balanced

·         We need to get inflation down to fully balance the economy

·         If financial conditions, which have tightened considerably in the past 90 days, remain tight, the need for us to take further action is diminished

On Wednesday, Fed’s Bowman said:

·         Interest rates may need to rise further

·         Treasury markets are functioning but risks remain

·         We are monitoring the effects of higher rates on bank risk

·         Regulatory reform can pose financial stability risks

·         We are watching financial-stability risks from nonbank firms

·         The US policy rate may need to rise further

On Wednesday, Fed’s Waller said:

·         There is still no answer to the question of what purpose a retail CBDC would serve

·         It is hard to see a direct link between the Middle East violence to Fed policy unless there is a broader conflict

·         We will see how higher long-term rates feed into Fed policy

·         Financial markets are tightening and will do some of the work for us

·         3Q GDP may come in over 4%, the economy is booming

·         The Fed can watch and see what happens in rates

·         The real side of the economy is doing well

·         If current trends continue inflation will be back to the target

·         In the last three months, inflation data has been very good

·         Higher-for-longer rates will push up longer-term yields

·         It's astounding how resilient the job market has been given the tight Fed policy

·         When the deficit is 6% with low unemployment it is hard to see that as sustainable

·         Long-term rates are market-determined

·         The fiscal situation just isn't sustainable

·         China's CBDC is not an ominous threat to the reserve currency status of the Dollar

On Wednesday, Fed’s Bostic again popped up and said:

·         Elevated wages are following inflation, not leading to it

·         Inflation stalling would be a sign that we need to do more

·         There are a lot of signs the economy is starting to slow

On late Wednesday, Fed’s Collins said:

·         The long-term chance of a soft landing has gotten higher for the economy

·         As savings dwindle the economy is becoming more responsive to rate policy

·         The policy must stay restrictive until there's a clear sign inflation moves to the target of 2%

·         I am optimistic inflation can be tamed with an orderly slowdown and a small jobless rise

·         The main uncertainty is measuring the impact of past Fed actions

·         Policy patience will give the Fed time to get read on the economy

·         The Fed faces challenges in extracting signals from economic data

·         Cooler core inflation will need a softer labor market

·         Further rate hikes could be warranted depending on the incoming data

·         Too soon to say core inflation is on trend for 2%

·         Fed is at or near the peak of the rate hike cycle

On Wednesday, the latest (September) FOMC minutes show:

·         Participants judged that risks had become more two-sided

·         Fed Staff economic forecast was stronger than the July projection on resilient consumer and business spending

·         Several participants commented that with policy rates at or near peak, decisions and communications should shift to how long rates stay restrictive versus how high they will rise

·         Many participants noted that data volatility, and potential data revisions as supporting cases for proceeding carefully in determining the extent of additional tightening

·         Participants still saw below-trend growth and, a softer labor market as necessary to restore economic balance

·         Several participants noted that balance sheet runoff could continue for some time, even after rate cuts begin

·         Participants said inflation was unacceptably high, and more evidence is needed to be confident that price pressures ebbing

·         Most participants continued to see upside risks to inflation

·         Risks included longer lag effects from financial tightening, the effect of union strikes, slowing global growth, and continued weakness in commercial real estate

·         The vast majority of participants continue to judge the future path of the economy as highly uncertain

·         Many participants saw continued downside risks to economic activity and upside risks to the unemployment rate

·         A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted

·         Yields on medium- and longer-term nominal Treasury securities rose more substantially, mainly reflecting higher term premiums and higher real yields

·         In China, signs of strain in the property sector increased, and optimism about growth diminished further, on the net, although broader markets, including global commodity markets, did not appear to show elevated concern about China-related risks

·         U.S. financial conditions tightened, with higher longer-term rates, lower equity prices, and a stronger dollar contributing roughly equally to the increase in various financial conditions indexes

·         Participants judged that the current stance of monetary policy was restrictive and that it broadly appeared to be restraining the economy as intended

Full Text of FOMC minutes: September

Participants' Views on Current Conditions and the Economic Outlook

“In conjunction with this FOMC meeting, participants submitted their projections of the most likely outcomes for real GDP growth, the unemployment rate, and inflation for each year from 2023 through 2026 and over the longer run. The projections were based on their individual assessments of appropriate monetary policy, including the path of the federal funds rate. The longer-run projections represented each participant's assessment of the rate to which each variable would be expected to converge, over time, under appropriate monetary policy and in the absence of further shocks to the economy. A Summary of Economic Projections (SEP) was released to the public following the conclusion of the meeting.

Regarding the economic outlook, participants assessed that real GDP had been expanding at a solid pace and had been more resilient than expected. Nevertheless, participants also noted that they expected that real GDP growth would slow in the near term. Participants judged that the current stance of monetary policy was restrictive and that it broadly appeared to be restraining the economy as intended.

Participants stressed that current inflation remained unacceptably high while acknowledging that it had moderated somewhat over the past year. They also noted that further evidence would be required for them to be confident that inflation was clearly on a path to the Committee's 2 percent objective. Participants continued to view a period of below-trend growth in real GDP and some softening in labor market conditions as likely to be needed to bring aggregate demand and aggregate supply into better balance and reduce inflation pressures sufficiently to return inflation to 2 percent over time.

In their discussion of the household sector, participants observed that aggregate consumer spending had continued to exhibit considerable strength, supported by the strong labor market and by generally strong household balance sheets. However, many participants remarked that the finances of some households were coming under pressure amid high inflation and declining savings and that there had been an increasing reliance on credit to finance expenditures.

In addition, tighter credit conditions, waning fiscal support for families, and a resumption of student loan payments were viewed by several participants as having the potential to weigh on the growth of consumption. While household credit quality was seen as generally strong, a few participants noted rising delinquency rates on some types of consumer credit. A couple of participants also remarked that households were becoming increasingly price-sensitive. Some participants noted that housing demand was resilient despite higher interest rates; new home construction was solid, in part reflecting the limited inventory of homes available for sale.

Regarding the business sector, participants noted that activity continued to be solid, though several pointed to signs of softening conditions. Many participants noted improved business conditions from an increased ability to hire and retain workers, better-functioning supply chains, or reduced input cost pressures. A few participants commented that their business contacts had reported difficulties passing on cost increases to customers. Several participants judged that, over coming quarters, business activity would be restrained by tighter financial conditions, such as higher interest rates and more constrained access to bank credit.

Several participants noted, however, that the tightening of credit conditions resulting from the banking stresses earlier in the year was likely to be less severe than they previously expected. A number of participants expressed concerns about vulnerabilities in the CRE sector. Many participants commented that they expected that the autoworkers' strike would, in the near term, result in a slowdown in production of motor vehicles and parts and possibly put upward pressure on automobile prices, but that these effects would be temporary. With respect to the agricultural sector, a few participants noted that conditions were mixed, as crop prices had declined amid higher production estimates and as supply and demand imbalances pushed up the prices of some types of livestock and held down the prices of others.

Participants observed that the labor market was tight but that supply and demand conditions were continuing to come into better balance. Most participants remarked that a range of indicators of labor demand were easing—as could be seen by declines in job openings, a narrowing of the jobs-to-workers gap, lower quits rates, and a reduction in average weekly hours worked to levels at or below those seen before the pandemic.

However, several participants noted that labor markets remained very tight in some sectors of the economy, such as health-care services and education. Many participants also observed that measures of labor supply, especially the LFPR, had moved up. Some participants commented that the increase in the LFPR for women had been particularly notable, although they expressed concern that challenges regarding the availability of childcare could affect the sustainability of this increase in participation.

Several participants noted that immigration had also been boosting labor supply. Some participants observed that payroll growth remained strong but had slowed in recent months to a pace closer to that consistent with maintaining a constant unemployment rate over time. Most participants commented that the pace of nominal wage increases had moderated, and a few also mentioned that the wage premium for job switchers had come down. They noted, however, that nominal wages were still rising at rates above levels generally assessed to be consistent with the sustained achievement of the Committee's 2 percent inflation objective, given current estimates of trend productivity growth.

Participants noted that the data received over the past several months generally suggested that inflation was slowing. Even with these favorable developments, they emphasized that further progress was needed to get inflation sustainably to 2 percent. Participants pointed to the softening of price inflation for goods amid improving supply conditions and to declining housing services inflation. Several participants remarked that, despite the recent rise in energy prices, food, and energy prices over the past year had contributed to a decline in overall inflation.

However, participants also noted that significant progress in reducing inflation had yet to become apparent in the prices of core services excluding housing. Participants noted that longer-term inflation expectations remained well anchored and that shorter-term inflation expectations had been moving down from elevated levels. Participants observed that, notwithstanding recent favorable developments, inflation remained well above the Committee's 2 percent longer-run objective and that elevated inflation was continuing to harm businesses and households—particularly low-income households. Participants stressed that they would need to see more data indicating that inflation pressures were abating to be more confident that inflation was on course to return to 2 percent over time.

Participants generally noted there was still a high degree of uncertainty surrounding the economic outlook. One new source of uncertainty was associated with the autoworkers' strike, and many participants observed that an intensification of the strike posed both an upside risk to inflation and a downside risk to activity. A majority of participants pointed to upside risks to inflation from rising energy prices that could undo some of the recent disinflation or to the risk that inflation would prove more persistent than expected.

Various participants noted downside risks to economic activity, including that credit conditions might tighten more than expected if the domestic banking sector experienced further strains; the possibility that the economic slowdown in China could result in a drag on global economic growth; or that an extended U.S. government shutdown could have negative, albeit temporary, consequences for growth.

Some participants remarked that an upside risk to their projections for economic activity was that the unexpected resilience that the economy had demonstrated so far could persist. Several participants commented that a government shutdown might result in the delayed release of some economic data and that this outcome would make it more difficult to assess economic conditions. A few participants observed that there were challenges in assessing the state of the economy because some data continued to be volatile and subject to large revisions.

In their consideration of appropriate monetary policy actions at this meeting, participants concurred that economic activity had been expanding at a solid pace and had been resilient. While the labor market remained tight, job gains had slowed, and there were continuing signs that supply and demand in the labor market were coming into better balance. Participants also noted that tighter credit conditions facing households and businesses were a source of headwinds for the economy and would likely weigh on economic activity, hiring, and inflation. However, the extent of these effects remained uncertain.

Although inflation had moderated since the middle of last year, it remained well above the Committee's longer-run goal of 2 percent, and participants remained resolute in their commitment to bring inflation down to the Committee's 2 percent objective. Amid these economic conditions, and in consideration of the significant cumulative tightening in the stance of monetary policy and the lags with which policy affects economic activity and inflation, almost all participants judged it appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent at this meeting.

Participants judged that maintaining this restrictive stance of policy would support further progress toward the Committee's goals while allowing the Committee time to gather additional data to evaluate this progress. All participants agreed that it was appropriate to continue the process of reducing the Federal Reserve's securities holdings, as described in its previously announced Plans for Reducing the Size of the Federal Reserve's Balance Sheet.

In discussing the policy outlook, participants continued to judge that it was critical that the stance of monetary policy be kept sufficiently restrictive to return inflation to the Committee's 2 percent objective over time. A majority of participants judged that one more increase in the target federal funds rate at a future meeting would likely be appropriate, while some judged it likely that no further increases would be warranted.

All participants agreed that the Committee was in a position to proceed carefully and that policy decisions at every meeting would continue to be based on the totality of incoming information and its implications for the economic outlook as well as the balance of risks. Participants expected that the data arriving in the coming months would help clarify the extent to which the disinflation process was continuing and labor markets were reaching a better balance between demand and supply. This information would be valuable in determining the extent of additional policy firming that may be appropriate to return inflation to 2 percent over time. Some participants also emphasized the importance of continuing to communicate clearly to the public about the Committee's data-dependent approach to policy and its firm commitment to bring inflation down to 2 percent.

All participants agreed that policy should remain restrictive for some time until the Committee is confident that inflation is moving down sustainably toward its objective. A few participants noted that the pace at which inflation was returning to the Committee's 2 percent goal would influence their views of the sufficiently restrictive level of the policy rate and how long to keep the policy restrictive.

Several participants commented that, with the policy rate likely at or near its peak, the focus of monetary policy decisions and communications should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels. A few participants noted that it would be important to monitor the real federal funds rate in gauging the stance of monetary policy over time.

Most participants observed that post-meeting communications, including the SEP, would help clarify to the public how participants assessed the likely evolution of the stance of monetary policy. Participants observed that the continuing process of reducing the size of the Federal Reserve's balance sheet was an important part of the overall approach to achieving their macroeconomic objectives. Several participants noted that the process of balance sheet runoff could continue for some time, even after the Committee begins to reduce the target range for the federal funds rate.

A vast majority of participants continued to judge the future path of the economy as highly uncertain. Many noted data volatility and potential data revisions, or the difficulty of estimating the neutral policy rate, as supporting the case for proceeding carefully in determining the extent of additional policy firming that may be appropriate.

Participants discussed several risk-management considerations that could bear on future policy decisions. Participants generally judged that, with the stance of monetary policy in restrictive territory, risks to the achievement of the Committee's goals had become more two-sided. But with inflation still well above the Committee's longer-run goal and the labor market remaining tight, most participants continued to see upside risks to inflation. These risks included the imbalance of aggregate demand and supply persisting longer than expected, as well as risks emanating from global oil markets, the potential for upside shocks to food prices, the effects of a strong housing market on shelter inflation, and the potential for more limited declines in goods prices.

Many participants commented that even though economic activity had been resilient and the labor market had remained strong, there continued to be downside risks to economic activity and upside risks to the unemployment rate. Such risks included larger-than-anticipated lagged macroeconomic effects from the tightening of financial conditions, the effect of labor union strikes, slowing global growth, and continued weakness in the CRE sector. Participants generally noted that it was important to balance the risk of overtightening against the risk of insufficient tightening.

Market wrap:

On Wednesday, Wall Street Futures were undercut by hotter-than-expected core PPI data and dragged by hawkish comments by Fed’s Bowman. Dow Future stumbled from around 34075 to 33795, but soon recovered after less hawkish FOMC minutes and comments by Fed’s Collins, Daly and Waller; Dow Future eventually closed around 34075, up by around +50 points., while broader SPX-500 edged up +0.4% and tech-heavy NQ-100 surged +0.7% on hopes of a Fed pause in November. Gold got some boost from the Fed’s less hawkish stance coupled with haven asset appeal amid escalating ME (Israel-Hamas) geopolitical tensions.

On Wednesday, Oil was also undercut by bearish EIA projections. The U.S. EIA cuts the forecast for global oil demand while boosting estimated production (led by the U.S.) for both 2023 and 2024. As a reminder, OPEC now publicly is raising its objections to ‘biased’ EIA projections, leading to the fall in oil prices.

On Wednesday, Wall Street was boosted by real estate, utilities, communication services, techs, industrials, consumer discretionary, materials, and financials while dragged by energy (lower oil), consumer staples, and healthcare. Dow was boosted by Amgen, Boeing, Intel, Microsoft, Nike, Apple, IBM, Walgreens Boots, Walmart, American Express, JPM and travelers to some extent, while dragged by Chevron, J&J, P&G, Verizon, Coca-Cola, Goldman Sachs and Cisco.

Conclusion:

Fed may go for a hawkish hold policy action/stance on 1st November amid excuses of Israel-Hamas war/simmering ME geological tensions and rising 10Y US bond yield. But the Fed may continue to project at least another hike in December and one hike in H1CY24 (March/June) to continue its hawkish hold stance and to ensure tighter financial conditions and also Fed credibility.

The Fed is now preparing the market for higher for longer policy and another hike in December (if required)- then a possible end of the tightening cycle by Dec’23. Overall, the U.S. labor market and core inflation trajectory are still hot enough for another Fed hike. Fed never surprised the market with its rate action and by mid-October (after core inflation and labor/wage data for September), it will be clear whether the Fed will go for another +25 bps hike in Nov’23 before going for a final pause in Dec’23. Fed may not be in a hurry to cut rates before Sep’24.

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)*(5.50.00-2.00) =0+2+3.50=5.50%

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 (CPI+PCE) =5.50% (for 2022); H1CY23 average core inflation around +5.40% (~5.50%)

As there is no significant easing of core inflation, especially core service inflation, the Fed may go for another +25 bps hike in Nov’23 and possibly the end of a tightening cycle. But, if core CPI inflation indeed eased further to below +4.0% by Oct’23, then the Fed may refrain from any further rate hike in 2023 and may also indicate some rate cuts in Q2CY24 in the Dec’23 SEP (ahead of the US Presidential Election in Nov’24) to keep real repo rate around +1.00% levels (restrictive zone).

Looking ahead, oil prices may stay elevated in the coming months between $75-95 instead of the earlier $65-75 despite US efforts to bring more supply from, Mexico, Brazil, Iran, Iraq, and Venezuela. OPEC/Saudi Arabia will not ‘cooperate’ with the U.S. for ‘breach of trust’ in refilling SPR (as agreed ‘verbally’). Elevated oil prices around $90 will continue to boost energy/transportation/logistics costs and core inflation. Saudi Arabia/most OPEC producers and even Russia are now seeking $85 oil prices on a sustainable basis to fund budget deficits, EV transition, and also the cost of the Ukraine war.

China may also deploy more targeted stimulus to bring out the economy from the deflationary spiral in the coming days, which may also support elevated oil prices. But at the same time, China is now also producing higher oil by almost 5 mbpd against its demand of around 15 mbpd. China is also taking various steps to increase domestic production of oil rather than being too dependent on Russia, Iran, Saudi Arabia, and even the U.S.

The U.S., as a producer, is also benefitting from elevated oil prices. The U.S. is also a beneficiary of the Russia-Ukraine war and other geo-political tensions involving North Korea, China, and Iran. The U.S. defense/military industry is now booming. Also, the lingering Cold War mentality with China is resulting in supply chain disruptions and elevated inflations. The global economy continues to face the daunting challenges of macro-headwinds- elevated inflation, high levels of debt, tight and volatile financial conditions, continuing geopolitical tensions, fragmentations, and extreme weather conditions.

Going by the present trend/run rate, the U.S. core CPI may fall to +3.8% by Dec’23 and +3.4% by Feb’24, which may keep the Fed to hold on rates at +5.7% till at least Aug’24 before going for any rate cuts -25 bps or even -50 bps each in Sep’24 and Dec’24 (one rate cut every QTR end from H2CY24). Fed would like to boost Wall Street as well as Main Street before Nov’24 U.S. Presidential election. Fed has to ensure a soft landing; i.e. price stability along with financial/Wall Street stability and Main Street stability.

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut from June’24 (H2CY24) to ensure a soft landing while bringing down inflation. Also, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%. This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price stability and soft-landing.

Overall, it seems that the White House would be quite happy if the Fed could bring back core inflation towards 2% on a durable basis, while keeping the unemployment rate below 4% ahead of Nov’24, the U.S. Presidential election. The Fed is itself eager to cut its losses by cutting rates. The U.S. 2Y bond yield is now hovering around +5.15% and may soon scale 5.25-5.50% in hopes of another +25 bps Fed rate hike for a terminal repo rate of +5.75% by Nov’23. Even after the expected pause after Nov’23, the Fed may keep open for further hikes by projecting at least another 25/50 bps hike in H1CY24 (one rate hike at Q1 and Q2) if core inflation does not fall as expected as a result of the still hot labor market and other demand-related factors.

Bottom line:

All focus would be now on US Core CPI data Thursday; as of now the implied probability of another +25 bps hike on 1st November is only around 10%; if the Fed does not try to improve it to at least 80% by 16th October (start of blackout period), then Fed may pause in November with a hawkish stance- keeping the option of the last hike in December; i.e. Powell/Fed may prefer a hawkish hold stance if core CPI eases further in September

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

Whatever may be the narrative, technically Dow Future (33950) now has to sustain above 34200 levels for a further rally 34350/34450-34555/34650 and further to 34825-35070/200-415/850 levels; otherwise, sustaining below 33800 may again fall to 33650/33450-33200-32950 and further to 31700-31500 levels in the coming days.

Similarly, NQ-100 Future (15400) now has to sustain over 15500 levels for a further rally to 15750/900-16000/655 in the coming days; otherwise, sustaining below 15450-400, may again fall to 15000-14700, and further to 14500-14300/175-100/13890 and 13650-13125 levels.

Gold (XAU/USD: 1863) now has to sustain above 1875 for any further rally to 1890/1900 and 1910/1920-1926/1937 and 1952/1970 levels; otherwise, sustaining below 1870-1865, may again fall to 1825/1810-1798*/1770 level in the coming days.

Technically, whatever may be the narrative, oil (84.55) now has to sustain over the 88.00-89.00 area for a further recovery towards 90.50/91.50 and 94.00/96.00-102.00/115.00-120; otherwise sustaining below 87.50, it may correct again towards 82.50-81.40-81.00/80.00-78.75/77.50 and 75.00-70.00/67.00 area in the coming days.