Gold, Dow, and EUR slip despite softer ADP job data; USD surged

On Tuesday, Wall Street Futures closed mixed on mixed economic data; i.e. hotter than expected ISM service PMI and colder than expected JOLTS job opening data. Overall, Wall Street Futures and gold slip on fading hopes of an early Fed rate cut in 2024 as the market focuses more on Chair Powell’s written remarks Friday (1st December).

On Wednesday, some focus of the market was also on ADP private payroll job data ahead of official NFP job data on Friday. Now all focus is on U.S. NFP/BLS job data to be released on 8th December, core CPI data on 12th December, and finally Fed MPC/decision on 14th December and the SEP/DOT PLOTS to gauze Fed’s projections of core inflation and rate actions/cuts in 2024.

Fed is expected to continue the hawkish hold stance on 14th December too and hold the repo rate at +5.50% till at least June’24. If core CPI indeed falls below +3.0% and Fed is confident that average core CPI would be around +3.0% in H2CY24, then Fed may gradually cut rates by -1.00% in H2CY24 for a repo rate at +4.50%, which will translate a real repo rate around +1.50% (4.50-3.00) - in line with present restrictive policy stance to bring core CPI back to below +2.00% by Dec’25.

Most of the Fed policymakers now prefer a hawkish hold stance; i.e. maintaining the possibility of another +25 bps rate hike if it appears that core inflation is not cooling as fast as expected. Also, most of the Fed policymakers are now not thinking about any rate cuts in early 2024 to ensure tighter financial conditions and lower inflation expectations.

But as the Fed is already talking about (discussing) rate cuts and core inflation is cooling quite fast, the market is now expecting -100 bps Fed rate cuts cumulatively in H2CY24; i.e. -25 bps each in July-September-November and December (if U.S. core CPI indeed falls around +3.0% in H1CY24 on an average). The present Fed repo rate is at +5.50%, while the average core CPI was around +5.40% in H1CY23 and expected +4.0% in H2CY23. Thus the real repo rate would be around +1.50% (5.50-4.00) by Dec’23.

On Wednesday, the ADP flash data shows Private nonfarm payrolls in the U.S. (only private establishment/business employees) added +103K payroll jobs in November from +106K sequentially (m/m) and +212K yearly (y/y), lower than the market expectations of +106K, and also lower than the +155K NFP/BLS Private Payroll expectations by the market (to be released on Friday). Meanwhile, pay growth continued to slow, with job-stayers seeing a +5.6% pay increase, the smallest since September 2021. Job changers saw pay gains of +8.3%, the least since June 2021.

In November, the U.S. private services sector added +117K jobs, led by trade, transportation & utilities (+55K); education & health (+44K); financial activities (+11K), other services (+15K) and information (+4K) while job losses occurred in leisure and hospitality (-7K) and professional/business services (-5K).

In November, the U.S. private goods sector shed -14K jobs, due to manufacturing (-15K) and construction (-4K) job loss, while Natural resources and mining added +5K jobs. In Nov’23, the U.S. large establishments (big corporates) added +33K jobs. On the other hand, small companies (SMEs) added +6K jobs and mid-sized ones (MSMEs) added +68K jobs.

The ADP said: “Restaurants and hotels were the biggest job creators during the post-pandemic recovery. But that boost is behind us, and the return to trend in leisure and hospitality suggests the economy as a whole will see more moderate hiring and wage growth in 2024”

As per the ADP survey, the nominal number of U.S. private employees was around 129254K in November against 129151K sequentially. The YTM average of private job additions as per the ADP survey is now around +211K against the NFP/BLS survey of around +180K (assuming November job additions are around 155K).

Although overall, the ADP Private payroll job report was softer than expected, Gold and Wall Street Futures were briefly boosted before stumbling again as this may not change the Fed’s stance of a hawkish hold on 14th December and higher for longer policy. Also, most of the time, there are significant divergences between ADP and NFP private payroll data. As the YTD average of ADP private payroll job addition is still far higher than the BLS/NFP, we may see 200+ K additions in BLS/NFP data on Friday instead of +155K being estimated by the market along with positive revision for the last two months, so that by Dec’24, both ADP and BLS/NFP data converges to some extent.

Market wrap:

On Wednesday, Wall Street Futures and gold stumbled despite softer-than-expected ADP private payroll job data as USD surged on dovish talks by ECB policymakers, indicating a -150 bps rate cut in 2024 (against the Fed’s -100 bps rate cut) from Q1CY24. Wall Street was also affected by energy-related scrips as oil tumbled to almost $69, at a multi-month low amid the concern of lower demand from the U.S. and China and higher supplies by the U.S. Although OPEC+ reportedly produced/supplied lower sequentially in November and lowest since July’23, it was offset by higher supplies/exports from Iran.

On Wednesday, blue chip DJ-30 Future slumped around -70 points, tech-heavy NQ-100 dipped almost -0.60%, while broader SPX-500 edged down -0.40%. Wall Street was dragged by energy (lower oil), techs (lingering concern of US-China tech war), banks & financials, communication services, real estate, consumer staples, materials (Chinese slowdown concern), and consumer discretionary, while boosted by utilities, industrials, and healthcare to some extent. Dow Jones was boosted by Boeing, Walgreens Boots, 3M, Home Depot, Walt Disney, Nike and Caterpillar, while dragged by Intel, American Express, J&J, Walmart, JPM, Microsoft, Salesforce, IBM, Apple and Amgen. Nvidia dragged Nasdaq and big techs as Biden admin may not provide an exception for the company on the issue of export restriction of high-end AI chips to China.

On the Gaza war front, the market is now presuming that despite continuing ‘genocide’ like military operations (including Southern Gaza), Israel and the U.S. may be compelled to end the war and call for a permanent ceasefire in the coming days (as X-Mas gift to Palestine?) amid growing pressure from almost all major global powers/nations and UN. Thus the market is now almost calm (including Gold) on fading concern of an all-out regional war.

On Wednesday, the U.S. NSA Sullivan said:

·         The US has discussed the Gaza war timeline with Israel

·         I will just say that we’ve talked through with them what they’re thinking in terms of the duration of the war

·         The US has also spoken with Israel about how its military operation in Gaza falls into a longer-term strategy for addressing this issue that goes beyond just military means

Notably, U.S. President Biden said on Tuesday: “I’ve been working with a number of people in and out of government to figure, what after Gaza? I think the only available solution is a two-state solution.”

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

Whatever may be the narrative, technically Dow Future (36116), now has to sustain over 36400 levels for a further rally to 36850/37050-37350/37500 levels in the coming days; otherwise, sustaining below 36350, DJ-30 Future may fall to 36050/36000-35800/35500 and may further fall to 35350/35250-35000/34800 and 34650/34120-34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (15813) now has to sustain over 16250 for a further rally to 16750-16800 zones; otherwise sustaining below 16200, may fall to 16100/16050-15700/15400, and further 15100-14140 in the coming days.

Also, technically Gold (XAU/USD: 2025) now has to sustain over 2040 for any further rally to 2050/2075-2130/2150 areas.; otherwise sustaining below 2035, may fall to 2025/2020-2008*/1995, and further to 1985/1975-1960/1950 and 1928/1908-1895/1885 and 1850/1810 in the coming days (if there was a permanent Gaza war ceasefire and Fed sounds more hawkish than being expected ON 14th December).

Technically Oil (69.25) now has to sustain over 67.00 for a rally to 73.00/76.30-77.75/79.50 for a further rally to 82.50/84.50-90.50/95.50; otherwise sustaining below 66.50. may fall to 66.50-64.95* in the coming days.