Dow slips on escalating Mid-East tensions; Gold, oil surged

·         Overall, JOLTS and ADP payroll job data indicated that NFP payroll data may come better than +150K market expectations

·         Wall Street is also under stress on hotter-than-expected ISM and S&P PMI data

·         There may be a risk of higher inflation amid lingering US dockworker strike

·         Fed may not cut in Nov’24 amid stalled disinflation and stable employment

Wall Street Futures were under stress as Fed Chair Powell almost poured cold water on jumbo rate cuts -50 bps as the usual norm and also made it almost clear unless there is an unusual surge in the unemployment rate in September, the Fed may not cut in November too. Also, growing geo-political tensions in the Middle East over Israel-Hezbollah/Lebanon and also Iran are dragging Wall Street Futures and aiding Gold, and Oil.

On Tuesday, as highly expected, Iran launched its much-awaited ‘staged’ revenge attack on Israel by launching almost 180 drones, and 20-30 ballistic missiles on Israel’s barren lands (outside Tel Aviv and other major cities) with advance ‘sharing’ of coordinates with US/Qatar. As a result of the escalating Israel-Iran conflict, Gold jumped to another fresh life time high around 2685, while Dow Future plunged by almost -500 points; oil jumped.

But Wall Street Futures, Gold, and oil all reversed soon after Iran's ‘revenge’ attack panic low/high as the market may have realized that it would be like the last April duet between Iran and Israel (warning shots). Iran already announced that it’s done with the ‘revenge’ with Israel (‘Zionists’) for killing Hamas and Hezbollah leaders, while Israel also vowed to ‘teach another lesson’ to Iran for its ‘grave mistake’. Israel may be planning to launch a counter-missile/drone attack on Iranian nuclear and oil facilities. But US President Biden has also urged Israel not to further escalate the boiling Middle East tensions by launching a counter-attack on Iran, which is not proportional (as Iran targeted barren lands outside cities).

Overall, it seems that Iran's missile attacks on Israel are staged attacks with advance sharing of coordinates with the US/Israel; most of the missiles are landed in remote/inhabitant areas outside Tel Aviv/other cities without causing any meaningful damages/loss of lives. Iran took the much-awaited 'revenge' against Israel for killing Hezbollah/Hamas leaders; it's all domestic political compulsion by Iran; their citizens were seen dancing in the street. Israel also claimed victory as no serious damages occurred and most of the Iran drones/missiles were destroyed midair by Israel’s famous ‘Iron Dome’ missile defense system.

Now from geopolitics to economics, on Tuesday BLS/JOLTS (Job Openings and Labor Turnover Summary) flash data shows the number of job vacancies/openings in the U.S. increased to 8040K in Aug’24 from 7710K sequentially; 9358K yearly and above market expectations of 7665 K. The job openings/labor force rate was at 4.8% in Aug’24 against 4.6% sequentially. In Aug’24, the number of job openings was boosted by construction (+138K), and state & local governments, especially in education (+78K), while dragged by private service sectors (-93K).

After the latest revisions in Aug’24, the YTM rolling average of NFP job openings to all unemployed persons (H/H survey) ratio is now around 1 against the 2022-23 average of around 2; job openings/labor force rate was around 4.9% against 2023 average 5.6%.

In 2022, the U.S. economy was suffering from an acute shortage of labor force due to various structural as well as cyclical issues including unfavorable demography, shrinkage of the workforce after COVID, early retirements, legal immigration issues, and lack of properly skilled workers, outsourcing, and an increasing number of multiple job holders/gig workers/freelancers. In 2023, the US labor market was rebalanced to some extent as immigration increased/normalized after the lifting of all COVID-related restrictions. Overall, in 2024, one open job is available for 20 workers (laborers), 18 workers in 2023, and 15 potential workers in 2022.

Overall JOLTS job data details may be indicating higher NFP/BLS job additions; i.e. we may see higher NFP job additions data in Sep’24 or the coming months. Also, layoffs & discharge rates remain low around 1.0% of total NFP employment levels.

On Wednesday, some focus of the market was also on ADP private payroll job data ahead of official NFP job data on Friday. The ADP flash data shows Private nonfarm payrolls in the U.S. (only private establishment/business employees using ADP payroll processing software) added +143K payroll jobs in Sep’24 from +103K sequentially (m/m) and +137K yearly (y/y), and above the market expectations of +120K. The annual (y/y) wage growth was at +4.7% in Sep’24 vs +4.8% sequentially for job-stayers and 7.3% for job-changers.

As per ADP, private job creation showed a widespread rebound after a five-month slowdown, with manufacturing adding jobs for the first time since April’24. The US service-producing sector, using ADP payroll processing software added 101K jobs, led by leisure/hospitality (34K); education/health services (24K); professional/business services (20K); trade/transportation/utilities (14K); and financial activities (2K) while job losses occurred in information/tech (-10K). Meanwhile, the goods-producing sector added 42K jobs, of which 26K in construction; 14K in natural resources/mining; and 2K in manufacturing. The ADP flash data shows the number of US Private employees (using ADP payroll software) reached around 132589K in Sep’24 against NFP Private Employees around 135440K till Aug’24 (provisional).

Although the divergence between ADP and BLS for job addition data is now decreasing, overall, ADP and BLS data trends, along with JOLTS job details, we may see around +175K private NFP job additions in Sep’24 against the present market estimate +125K and ADP flash figure +143K. The 2024 YTM average of private job additions as per the ADP survey is now around +150K against the 2023 average of +209K, while the 6M rolling average is now around +143K against +139K as per NFP/BLS survey data (till Aug’24) as the divergence between NFP/BLS and ADP payroll data is gradually decreasing due to increasing adoption of ADP payroll processing software by US Private Establishments.

The ADP said:

·         Stronger hiring didn't require stronger pay growth last month. Typically, workers who change jobs see faster pay growth. But that premium over job-stayers shrank to 1.9 percent, matching a low we last saw in January.

·         Job creation showed a widespread rebound after a five-month slowdown. Only one sector, information, lost jobs. Manufacturing added jobs for the first time since April.

Conclusions:

Recent comments by Fed Chair Powell and also other Fed policymakers almost poured cold water on further jumbo rate cuts (-50 bps) and indicated normal 25 bps rate cuts in the coming days unless the unemployment rate unexpectedly surges (say above the 4.5% red line). Moreover, Powell indicated another 25 bps rate cut in Nov’24 may not be assured unless the unemployment rate unexpectedly jumps in September. The Next Fed meeting would be on 7th November and before that Fed may have official access to only one inflation and employment situation report for September only. Thus unless there is an unusual surge in the unemployment rate or an unexpected drop in core CPI, the Fed may pause. The US average (6MRA) core inflation (CPI+PCE) may have already stalled in Q3CY24 at around +3.2%, while the average unemployment rate is around 4.1% as per available data. Thus if it moves a little in September, then the Fed may go for a pause and cut 25 or 50 bps in Dec’24 based on actual Q3CY24 and 6MRA data and outlook thereof.

Bottom line:

The projected Fed rate cut of -50 bps by Dec’24 not be assured as US core disinflation may have stalled in Q3CY24, while unemployment remains around 4.0%; Fed may cut -25 bps in Dec’24 after pausing in Nov’24.

 

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

Whatever the narrative, technically Dow Future (42500) has to sustain over 42700 for any further rally to 42900/43050-43250 and 43500/44000-44500/44800 in the coming days; otherwise sustaining below 42600/650, DJ-30 may again fall to 42400/42300-42100/42000 and 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

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

Technically, SPX-500 (5780), now has to sustain over 5850 for any further rally to 5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5825/800, may again fall to 5725-5675/5625-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also, technically Gold (XAU/USD: 2625) has to sustain over 2655 for a further rally to 2675*/2700-2725/2750 in the coming days; otherwise sustaining below 2650/2645, may again fall to 2625 and 2595/2590-2585/2575, may again fall to 2560*/2540-2530/2515 and 2495/2480-2470*/2425 and further 2415/2400-2390/2375 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory).