Gold, Dow almost flat after US job data; Fed may cut 25 bps

The market was expecting a 50 bps rate cut from Sep’24, but Fed’s Williams made it almost clear that the Fed will stick to a 25 bps cut each QTR end

Wall Street Futures were under pressure for the last few days on suspense about the Fed rate cut in September ahead of the vital NFP/BLS US job report Friday. On Tuesday, Wall Street Futures tumbled on lingering suspense about the Fed’s rate cut probability in September after July core PCE inflation stalled and August PMI Manufacturing PMI data by both ISM and S&P indicates rising input cost inflation, and also subdued manufacturing employment. It’s a known fact that the US is suffering long from subdued manufacturing recession-like conditions for various structural issues and thus subdued employment in this sector is not unexpected.

However, rising input cost inflation of goods was not expected as it may stall the overall disinflation pace. The market was expecting a -50 bps cut in September followed by another -50 in December for a cumulative -100 bps rate cut in 2024. But overall core inflation data and unemployment numbers may be showing that the Fed may continue patience till at least Dec’24 if Aug’24 unemployment figure does not surge above 4.3-4.5%; it may even fall towards 4.0%.

On Tuesday, techs tumbled led by Nvidia after a report that the US DOJ sent subpoenas to the company (antitrust issues). Wall Street Futures were also undercut by a CNBC report that Democrat Presidential Candidate and current US VP Harris may have a plan to impose capital gain tax even on unrealized stock gains (MTM) on super rich (net worth over $100M). Also, subdued US constriction spending and ISM Manufacturing PMI data in August again raised the concerns of a hard landing even as the US continues to be in a state of manufacturing recession for a long due to various structural issues; the US is mainly a service-oriented economy.

On early Wednesday, Wall Street Futures recovered to some extent mainly for some short covering after a plunge Tuesday as Nvidia denied that to date, the company has not received any DOJ subpoena notice. Also, than expected JOLTS job opening number in July boosted the hope for a September rate cut. But Wall Street Futures also stumbled in late day trading Wednesday to edge lower in red as the fine print of the JOLTS job opening report indicates Goldilocks US labor market, not a recession-like situation as the layoff ratio was almost stable around 1%.

The unexpected surge in the US unemployment rate to 4.3% in July may be mainly due to some transient/exceptional factors like temporary layoffs due to storm Beryl, an unexpectedly higher number of addition of labor force, subdued employment figure for government jobs, and an increasing number of multiple job holders. In August, we may see a better employment situation than in July and the Fed may not cut in Sep’24 if the August unemployment rate indeed falls back towards the 4.0% baseline; but at the same time, the Fed may also cut by -25 bps if unemployment rate further surges above 4.3-4.5%.

As of now, there is no real probability of any jumbo Fed rate cut by -50 bps as the 6M rolling average of the US unemployment rate is now around 4.0% against the Fed’s maximum unemployment red line of 4.5%. As part of its maximum employment mandate, the Fed’s target is a 3.5% unemployment rate. On the other side, average US core inflation (CPI+PCE) was around +3.1% in July, which needs to further go down by -1% to +2.0% for the Fed’s price stability mandate.

Thus for the sake of its dual mandate of maximum employment and price stability along with another dual mandate of financial stability and bond yield stability, the Fed will act in a prudent balanced way, ensuring no policy mistake; US average core inflation may not reach +2.0% targets before Dec’25-Mar’26 at present average disinflation pace of around 0.08% per month, which may further slowdown in the coming months due to rising RM  & shipping cost, comparatively lower immigration and addition of workers/labor force in 2024 compared to 2023, elevated labor cost (wage) and lingering geopolitical tensions, especially rising Russia-Ukraine war which may boost oil and other commodities in the coming days.

Also, due to rising immigration and rising population, the overall demand of the US economy is increasing in the US without adequate increase of supply capacity due to subdued infra spending amid lingering US political & policy paralysis-this is causing higher demand/supply imbalance and also structurally causing higher inflation. The US also needs ‘cheap’ immigrant workers (skilled/unskilled) to keep the goldilocks nature of the labor market and to ensure no meaningful wage inflation.

On Thursday, 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 +99K payroll jobs in August from +111K sequentially (m/m) and +135K yearly (y/y), way below the market expectations of +145K, and also lower than the +165K NFP/BLS Private Payroll expectations by the market (to be released Friday). The Aug’24 ADP private payroll of US job addition at +99K is the lowest sequential addition since Feb’21 and the 5th consecutive month of sequential decline. The annual (y/y) wage growth remained flat at +4.8% for job-stayers and 7.3% for job-changers.

As per ADP, in August, the U.S. private services sector added +72K jobs in the service-producing sectors, led by education & health services (+29K); financial activities (+18K); trade/transportation/utilities (+14K); and leisure & hospitality (+11K) while job losses occurred in professional & business services (-16K) and information (-4K). Meanwhile, the goods-producing sector added +27K jobs led by construction (+27K) and natural resources & mining (+8K) while manufacturing shed -8K jobs. The ADP flash data shows the number of US Private employees (using ADP payroll software) reached around 132442K in Aug’24 against NFP Private Employees around 135384K IN July’24.

The ADP said:

·         The labor market continued to cool in August. Job creation among private employers slowed for the fifth straight month and wage growth was stable

·         The job market's downward drift brought us to slower-than-normal hiring after two years of outsized growth

·         The next indicator to watch is wage growth, which is stabilizing after a dramatic post-pandemic slowdown

As per the ADP survey, the nominal number of U.S. private employees was around 132442K in August against 132343K sequentially. The 2024 YTM average of private job additions as per the ADP survey is now around +151K against the 2023 average of +209K, while the 6M rolling average is now around +154K against +160K as per NFP/BLS survey data (till July’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.

Overall, the ADP Private payroll job report was softer than expected, and subsequently, Gold and Wall Street Futures were boosted to some extent on hopes of an early Fed pivot/rate cuts from Sep’24 rather than Dec’24, but soon stumbled after hotter than expected S&P Global and ISM service PMI data. Also for various seasonal adjustments and some structural differences in methodology, often ADP payroll data comes opposite to BLS/NFP, although that divergence has been reduced significantly over the last few months.

On Thursday, the market focus was also on ISM and S&P Global service PMI data to have an early assessment of the health of service industry heavy US economy:

The ISM data shows services PMI in the US edged up to 51.5 in August from 51.4 sequentially, above market expectations of 51.1 and the highest expansion in the last three months. New orders extended the prior month’s rebound (53 vs 52.4 in July) to reflect robust demand from clients, although production levels rose at a softer pace (53.3 vs 54.5) despite the fresh depletion in the backlog of orders (43.7 vs 50.6). In the meantime, employment levels edged marginally higher (50.2 vs 51.1), just enough to prevent the sixth monthly contraction of the year. Still, the ISM’s price gauge accelerated further (57.3 vs 57), ahead of market expectations of a slowdown, amid higher costs in construction services, electrical equipment, food, and labor.

The ISM said:

·         Ten industries reported growth in August

·         The Services PMI has expanded in 18 of the last 20 months dating back to January 2023, and the August reading is equal to the 51.5 percent index average for 2024

·         The increase in the Services PMI® in August is due to all directly factoring indexes (Business Activity, New Orders, Employment, and Supplier Deliveries) with readings close to or above 50 percent

·         The Supplier Deliveries Index was in mild contraction (faster) territory in August. For a second straight month, the slow growth indicated by the Services PMI reading was reinforced by panelists’ comments

·         Slow-to-moderate growth was cited across many industries, while ongoing high costs and interest-rate pressures were often mentioned as negatively impacting business performance and driving softness in sales and traffic

·         Although the Inventories Index increased by 3.1 percentage points into expansion territory in August, many respondents indicated their companies are still actively managing their inventories

On Thursday, final data shows S&P Global Service PMI for the U.S. was revised higher to 55.7 in August, against a 55.2 flash estimate and 55.0 sequentially. The Aug’24 US service PMI growth is strongest since Mar’22. The US private business (service) activity rose at the fastest pace in almost two-and-a-half years amid stronger new order inflows. Also, companies were able to keep on top of workloads and outstanding business was broadly stable.

On the other hand, in August, the US private service employment decreased following two months of job creation. Input costs continued to increase sharply amid higher supplier charges and rising salaries. However, the rate of selling price inflation eased to a seven-month low; i.e. output price inflation slowest since Jan’24. Finally, service providers were again optimistic that their business activity would rise over the coming 12 months, with confidence often reflecting expectations that new orders will continue to increase.

Finally, the S&P Global data shows US composite PMI was also revised higher to 54.6 in August from the flash estimate of 54.1 and higher from 54.3 sequentially. The latest S&P Global survey composite PMI reading signaled the 19th consecutive month of expansion in the US private sector (business activity) at a solid pace.

The August PMI growth was led by the service sector (PMI at 55.7 vs 55 in July), which experienced its fastest pace of activity since March 2022. Meanwhile, manufacturing activity (PMI at 47.9 vs 49.6) contracted for the second month in August and at a marked pace. New orders growth in services outweighed a decline in manufacturing.

In the meantime, in August, the private staffing levels were down for the first time in three months, as both sectors reported declines. As for prices, input costs continued to rise sharply in August, though the rate of selling price inflation slowed to a seven-month low, driven by a more modest increase in the services sector.

The S&P Global said about US PMI in August:

“An improvement in the headline services PMI to its highest for nearly two-and-a-half years provides further encouraging evidence that the US economy is enjoying robust economic growth in the third quarter, adding to signs of a ‘soft landing’. The faster service sector expansion means the PMI surveys are signaling GDP growth of 2-2.5% in the third quarter. At the same time, the August survey data signaled a further cooling of selling price inflation, notably in the service sector, which has now eased close to the average seen before the pandemic and a level consistent with the Fed’s 2% inflation target.

Services growth has been buoyed in particular by the prospect of lower interest rates, but there are several headwinds that could dampen growth in the months ahead. Business optimism and investment are being subdued by uncertainty regarding the outcome of the Presidential Election. Hiring is meanwhile being constrained by labor shortages, which also continue to put upward pressure on wages.

However, perhaps more worryingly, the recent downturn in manufacturing activity is showing some signs of spilling over to the broader economy, notably via stalled orders for industrial services. It will therefore be important to monitor whether the service sector succumbs to the recent weakening of factory activity or whether looser monetary policy creates a rising tide to lift all boats.”

Overall, both S&P Global and ISM PMI indicate another quarter (Q3) of robust economic growth coupled with rising input cost pressure amid higher borrowing costs, elevated RM and shipping costs along with labor costs as the US service sector still facing some labor shortage due to not only availability of workers but also lack of appropriate skills.

Conclusions:

On early Friday, the much-awaited US NFP/BLS job data shows NFP payroll job addition at +142K in August vs 114K sequentially and +165K estimate, while the headline unemployment rate edged down to 4.2% from 4.3% and in line with market expectations.

The US labor market has gradually cooled in 2023-24 from the very hot situation in 2022 but may be still running at a goldilocks pace, while average core inflation may have to fall more for the Fed’s full confidence about launching the cycle of 11 QTR rate cuts. Thus Fed may like to maintain the wait & watch stance till Dec’24 as it has to evaluate actual data for Q3CY24, which would be fully available by Oct’24. But if the Aug’24 unemployment rate indeed surges further above 4.3-4.5%, then the Fed may have to launch the rate cut cycle from Sep’24 by -25 bps for the next ten QTRs end (total 11 rate cuts -25 bps cumulating -2.75% rate cuts).

Overall, after Fed’s Williams comments, it seems that the Fed will start the rate cut cycle from Sep’24 by cutting -25 bps and not -50 bps as expected by the market to some extent. Fed may join ECB, BOE and BOC which cut rates just ahead of respective general elections in their jurisdiction/countries. If the Aug’24 core inflation pace is not stalled or even not edged up, then the Fed may go for rate cuts from Sep’24 rather than Dec’24 for the next 11 QTRs by -25 bps, which may be already discounted by the market.

Market wrap:

On Thursday, Wall Street Futures, Gold stumbled from a soft ADP high after hotter than expected service PMI report. But on early Friday, it recovered after a subdued US job report on hopes & hypes of a -50 bps rate cut from Sep’24. But Fed’s Williams almost made it clear that Fed will cut by -25 bps if Aug’24 core inflation data supports and as of now, there is no question about -50 bps jumbo cuts. The market is now expecting almost -150 bps rate cuts by Dec’24, but the Fed may cut only -50 bps @-35 bps each in Sep & Dec’24. Subsequently, Gold stumbled from around 2530 to almost 2507; it scaled just after the NFP data. Wall Street Futures got some boost after panic selling in the last few days amid renewed hopes of a soft landing.

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

Whatever the narrative, technically Dow Future (41260) has to sustain over 41500 for any further rally to 41650/41750*-41950/42100* and 42700/41900-43050/44250-44500/44800 in the coming days; otherwise sustaining below 41450, DJ-30 may again fall to 41000/40700-40500*/40300 and 40150/40000*-39700/39450 and further 39350/39200-39100/38900 and 38500*/38300-38000/37600 in the coming days.

Similarly, NQ-100 Future (19790) has to sustain over 20100-20200 for any further rally to 20300*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20050. NQ-100 may again fall to 19750/19650*-19550/19400 and 19300/19100-18800/18700* and further 18550/18450-18200/17950 and may further fall to 17650/17450-17300/17000 in the coming days.

Technically, SPX-500 (5650), now has to sustain over 5700 for any further rally to 5725/5750*-5850*/5900 and 6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5650 may again fall to 5575/5550-5450/5400* and 5440/5300-5250/5100* and further 5050/4950*-4850/4750 and 4550/4450-4350*/3850 in the coming days.

Also, technically Gold (XAU/USD: 2510) has to sustain over 2540 for a further rally to 2560*/2575-2600/2650 in the coming days; otherwise sustaining below 2535-2520, may fall to 2490/2480-2460/2445* and 2435/2420-2410/2400 and further to 2375/2350*-2325/2300 in the coming days.