Dow slips from soft landing optimism high on Gaza war tension

·         Gold scaled $2500 (new life time high) on lingering uncertainty about Gaza war ceasefire talks and the concern of an imminent Israel attack by Iran

·         Earlier Wall Street surged on fading concern of a hard landing after upbeat retail sales and soft jobless claims data; but stumbled on fading hopes of an imminent Gaza war ceasefire

On Wednesday, after mixed US core CPI/inflation report, Wall Street Futures closed mixed amid hopes & hypes of an early Fed rate cut from Sep’24 rather than Dec’24; the market is now expecting -100 or even -150 bps rate cuts in H2CY24 against Fed’s -25 bps rate cut projections (June’24 SEP/dot-plots). But the overall impact was limited as fine prints of July inflation (CPI and core CPI) show a muted disinflation pace and thus Fed may continue its wait-and-watch policy for the next few months to get more confidence for the launch of much-awaited rate cuts. The implied probability of a Sep’24 rate cut was almost unchanged.

Wall Street Futures recovered last week from the US hard landing panic low after a soft US jobless claims report, indicating US labor market may be not so weak as seems by July’s terrible US NFP/BLS job data. On Thursday, some focus of the market was also on US retail sales as consumer spending is the backbone of the US economy and the Fed also watches this data closely for an assessment of overall economic activities.

On Tuesday, the CB flash data (SA) showed U.S. retail sales for July’24 were around $709.7B against 702.9B sequentially (+1.0%) and 691.2B yearly (+2.7%); i.e. the U.S. retail sales increased around +1.0% in July’24 sequentially (m/m), against a downwardly revised -0.2% in the prior month and higher than the market consensus +0.3%, while increased by +2.3%. annually (y/y).

Overall, after the latest revisions the average/month retail sales are now around $702.8B in 2024 (MTD) against an earlier average of $701.0 in the prior report and the 2023 average of $692.5B. The current 2024 (MTD) US retail sales nominal growth is now around +2.3% against the 2023 rate of +3.6%. The US retail sales growth although cooled, remained strong despite higher borrowing costs and higher cost of living as the labor market is still robust, while the lagging effect of huge fiscal stimulus (COVID) is still there. Adjusted inflation (CPI), the underlying real retail sales have contracted around -0.5% in 2023 against +1.2% in 2022, while remaining around -0.6% in 2024 (YTM).

In 2024 (YTM), the real retail sales contracted by around -0.6%; i.e. real US retail; sales are still negative while continuing to hover around 30% of nominal GDP as overall, the goldilocks nature of the U.S. economy remains intact despite some volatility in underlying economic data due to various transient/seasonal factors.

The 3M rolling average of US retail sales is now around $705.6B and vs 688.9B yearly; i.e. grew by around  +2.4%, while US core retail sales (w/o food and fuel) grew +2.6% annually.

In July’24, the US retail sales were boosted by sales at motor vehicle & part dealers rising the most (+3.6%), followed by sales at electronics & appliance stores (+1.6%),  grocery stores (+1%); building material & garden equipment (+0.9%); health and personal care (+0.8%); furniture (+0.5%); food services & drinking places (+0.3%); non-store retailers (0.2%); and gasoline stations (+0.1%). In contrast, July US retail sales declined at miscellaneous stores (-2.5%); sporting goods, hobbies, musical instruments and books (-0.7%); and clothing and footwear (-0.1%). Excluding sales of food services, auto dealers, building materials stores and gasoline stations, the so-called US super core retail sales (used in real GDP calculation-consumer spending) rose +0.3% in July, compared to +0.9% in June and forecasts of 0.1%.

Overall, US retail sales are still hot enough for the Fed to keep a restrictive rate (higher) for longer to produce additional slack in the economy so that demand comes down to some extent and try to balance with the present constrained supply capacity of the economy, pulling inflation down to around +2.0% on a sustainable basis. The US retail sales average remains around 30% of nominal GDP, indicating no recession or even a moderate slowdown in consumer spending despite higher borrowing costs as the US labor market remains robust.

On Thursday, some focus was also on U.S. jobless claims (seasonally adjusted), which serves as a proxy for the unemployment trend/overall labor market conditions. The U.S DOL flash data shows the number of Americans filing initial claims for unemployment benefits (UI-under insurance) eased to +227K in the week ending 10th August from 234K in the previous week, lower than the market expectations of 235K and lowest in the last 5-weeks after scaling a new one year high around 250K late July. In the U.S., Initial jobless claims refer to the number of people who have filed for unemployment benefits with their state's unemployment agency for the first time during a specific reporting period, typically every week.

The 4-week moving average of initial jobless claims, a better indicator to measure underlying data, as it removes week-to-week volatility, also eased to 236.50K on the week ended 10th August from 241K in the previous week, which was the highest in the last one year.

The continuing jobless claims in the U.S. also eased to 1864K in the week ending 3rd August, from 1870K in the previous week, and lower than the market expectations of 1880K. The 4-week moving average was 1862K, from the previous week's average of 1861K and the highest since late Nov’21. The advance seasonally adjusted insured unemployment rate was unchanged at 1.2%. The continuing jobless claims number is a proxy for the advance numbers of seasonally adjusted insured unemployed persons for the week. The continuing jobless claims in the U.S. measure unemployed people who have been receiving unemployment benefits for a while/ more than a week or filed for unemployment benefits at least two weeks ago (under UI),

The continuing jobless claims of all types are also a proxy for the total number of people receiving payments from state unemployment programs, i.e., the overall trend of unemployed persons (insured). The latest continuing jobless claims are still elevated which may be an indication of some softening in the labor market amid a difficult macroeconomic and geopolitical (external trade) environment coupled with higher borrowing costs and the deluge of tech layoffs (amid generative AI narrative).

Overall, as per seasonally unadjusted continuing jobless claims under all categories (UI) of around 1950K (4-week rolling average) and assuming average uninsured employees (not getting any UI benefit) of around 5213K (against prior average 4000K), estimated unemployed persons was around 7163K in July’24 against 6810K sequentially. The latest continuing jobless claims 4WMA of around 1861 is lower than last month and thus we may see fewer unemployed persons in Aug’24.

Conclusions:

We may see better/improved/upbeat US job data for not only August but also for Sep and October and a moderate inflation report (ahead of Nov’24 US election) to justify Bidenomics. Fed is not in a hurry to start the rate cut cycles of 11 QTR cuts without evaluating data for a few more months in totality. Thus Fed may not only evaluate inflation and employment data for July and August but also for September and October/ November before launching the much-awaited rate cut cycles from Dec’24 QTR end.

Despite the market now suddenly panicking for a hard landing for the ‘terrible’ NFP/BLS job report for July, if we consider the increasing number of multiple job holders, higher number of temporary layoffs, and an unusual addition in labor force due to one-time seasonal factor), the overall nature of US labor market is still strong enough for Fed to continue its wait & watch stance to gain more disinflation pace and required full confidence to launch the series of rate cuts from Dec’24 rather than Sep’24.

But even if the Fed responds to the present market panic and begins cutting rates from Sep’24 instead of Dec’24, it will make no significant difference in reality (Real Street) but may boost the sentiment of Wall Street by ensuring financial stability first. In that scenario, even if the Fed cuts the rate by -25 bps each (no question of -50 bps pace), it will continue the pace of 4 rate cuts each in 2025-26 and one QTR/HLY cut in 2027.

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump 2.0.

Although the market is now almost discounting the start of Fed rate cuts from Sep’24, considering overall pace of disinflation, Fed may continue its wait & watch stance till at least Dec’24 and may continue to indicate on 31st July FOMC/policy meeting that Fed is gaining incrementally higher confidence for overall disinflation process till Q2CY24, but still it’s not enough for launching the rate cut cycle in Sep’24 as Fed may want to be more confident after having actual data for another QTR. If Q3CY24 average US Core inflation (CPI+PCE) indeed goes around +2.9%; i.e. below the +3.0% ‘confidence’ line, then the Fed may officially indicate the start of the 11-QTR rate cut cycle from Dec’24 QTR till Dec’27 (two half yearly rate cuts in 2027).

The Fed will get the Sep’24 core inflation report by mid-late Oct’24 and accordingly may indicate the rate cut from Dec’24, just ahead of the Nov’24 election to keep both Democrats and Republicans happy; the Fed may indicate the start of a rate cut in Oct’24 (just ahead of the Nov’24 election) Fed talks and may start cutting rates from Dec’24 (just after the Nov’24 election), keeping Wall Street near life time high with some healthy corrections.

But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Market wrap:

On Thursday, Wall Street Futures surged on fading hopes of an imminent recession after an upbeat US retail sales report and soft jobless claims report. But on early Friday, Wall Street Futures slipped, while Gold surged to almost $2500 levels (a fresh life time high) on fading hopes of an imminent Gaza war ceasefire even after 2nd day of the Doha peace summit without Hamas, which is now accusing Doha mediators of straying away Biden’s six stage ceasefire proposal.

Also, both Hamas and Hezbollah & Co are now ‘attacking’ Israel (barren places) with a deluge of rockets/Drones/Missiles. Also, US & Co is trying to convince Israel to an immediate ceasefire or else face another Iran ‘attack’. The market is concerned that Iran may launch its drone attack on Israel by Sunday/early Monday Asian session if Israel does not agree with the ceasefire proposal. As per the latest report from TOI, the US presented an updated ceasefire proposal and aims to finalize the deal when mediators regroup next week, while Hezbollah said holding off on a retaliation attack while talks unfold.

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

Whatever the narrative, technically Dow Future (39300) has to sustain over 39900 for any further rally to 40100/40500-41050/41450 and 41675*/41950-42100*/42700 in the coming days; otherwise sustaining below 39800/39550, DJ-30 may again fall to 39200 and 39000/38800-38600/38300-38000 in the coming days.

Similarly, NQ-100 Future (18300) has to sustain over 18800-19000 for any further recovery to 19300/19600-19750/19950 and 20150*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 18700/18500-18200/18000 it may further fall to 17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5300), now has to sustain over 5450 for any further recovery to 5475/5525-5605/5675 and rally further to 5725/5750*-5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5425/5400-5350/5300 may further fall to 5250/5200-5175/5100* and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2400) has to sustain over 2425-2440 for a further rally to 2455*/2490-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2420-2410, may fall to 2395/2385-2370/2360 and 2350*/2340-2320/2300-2290/2275* and 2235/2210-2160/2110 in the coming days (depending upon Fed stance, Gaza/Ukraine war trajectory and US election outcome).