Gold jumped on soft ISM Service PMI and Israel-Iran tension

On Tuesday, Wall Street Futures, Gold slumped on hotter than expected JOLTS job openings and factory order data coupled with the Fed’s indication of rate cuts in H2CY24, most probably from July/Sep’24 and lower than expected B/S size ($6.55-6.50T vs earlier estimate $7.00-6.95T). Fed may go for rate cuts along with ongoing QT (even at a slower pace-tapering)-this is less dovish than simple rate cuts. The cumulative effect of B/S reduction through QT by around $2.5T over 2.5-3.5 years is equivalent to 50-75 bps rate hikes (higher bond yields), which is almost equivalent to estimated 75 bps rate cuts in H2CY24.

Thus Fed’s overall plan of rate cuts + QT may be less dovish than earlier expected despite Fed attempts to downplay the effect of QT; US bond yields also surged to multi-week highs around +4.35%, almost at +4.50% Fed red line. The Fed’s B/S size is now falling below $7.50T; i.e. below 25% of the estimated CY24 US nominal GDP of $30.00T, which is a red zone (20-25%) for US funding/money market liquidity as we have seen during late 2019 QT tantrum. The SOFR is now around +5.35% against an effective FFR of +5.33%.

In any way, on late Tuesday Wall Street Futures, Gold also recovered from Fed’s QT tantrum panic low after Fed’s Mester said she is not completely ruling out the possibility of a June rate cut. Subsequently, the FFR swap implied probability indicated around 65% chance of a rate cut in June against 50% earlier in the session and almost 90% a few months ago. But if we minutely read comments by both Fed speakers Mester and Daly at the SF Fed conclave, both stressed no rush to cut rates and continue to advocate higher for longer policy for the time being. Fed may not go for any rate cuts in H1CY24 and may go for the same only from Sep’24 after observing actual H1CY24 data (core inflation, employment, and GDP), which will be published in mid/end July (core CPI + core PCE inflation).

On Tuesday, Gold, oil was also boosted by escalating Gaza war/Middle eat geopolitical tensions after Israel destroyed the Iranian consulate in Syria’s Damascus. Although, Iran is publicly vowing for ‘revenge’, the U.S. is ensuring no escalation through back channel diplomatic talks with Iran & allies. Additionally, Oil is also getting a boost from OPEC+ production cut compliance and the conspiracy theory that Putin & Co may ensure oil above $100 by Sep’24 to keep US incumbent President Biden under public pressure ahead of the Nov’24 election. Fed may also face some issues for planned rate cuts if oil indeed jumps and stays around the $100 mark for long.

On Wednesday, Fed’s Bostic said:

·         The economy is maintaining the strong momentum that it's had

·         I am not in a rush to disrupt the economy's dynamic as long as inflation is moving towards our target rate. That said, if employment starts to degrade I would have to take that on board

·         My contacts are not giving me any concerns about employment through

·         The road is going to be bumpy, over the last several months inflation hasn't moved very much relative to 2023

·         I think we won't be back to the 2% inflation target until 2026

·         My outlook right now is inflation will drop incrementally through 2024

·         If the economy evolves as I expect, I think it's appropriate to cut rates in Q4 this year

·         We are going to have to watch and wait and see how things evolve

·         That's partly why I changed my forecast as the Fed would have to be more patient than expected

·         But in that environment, inflation would come down much slower than expected

·         I am still forecasting one rate cut this year

·         I think you can still get growth and get inflation to continue to come down

·         Over a longer arc, the economy does need to slow to get to longer-run potential

·         The economy is maintaining the strong momentum it has had

·         The economy is maintaining the strong momentum that it's had; it Sees a Q4 rate cut

On Wednesday, Fed’s Chair Powell said in his opening remarks on the US economic outlook and Fed independence at a conclave at Stanford:

“It is a pleasure to be here today. I will begin with the economy and the road ahead for monetary policy before briefly discussing the Federal Reserve's monetary policy independence.

Over the past year, inflation has come down significantly but is still running above the Federal Open Market Committee's (FOMC) 2 percent goal. In February, headline inflation was 2.5 percent over the past 12 months based on the personal consumption expenditures (PCE) index. A year earlier, it was 5.2 percent. Core inflation, which excludes the volatile food and energy components, stood at 2.8 percent; a year ago, it was 4.8 percent. While this progress is welcome, the job of sustainably restoring 2 percent inflation is not yet done.

Tight monetary policy continues to weigh on demand, particularly in interest-sensitive spending categories. Nonetheless, growth in economic activity and employment was strong in 2023, as real gross domestic product expanded by more than 3 percent and 3 million jobs were created, even as inflation fell substantially. This combination of outcomes reflects significant improvements in supply that offset to some extent the effects on demand of tighter financial conditions. The healing of global supply chains helped address pent-up demand for goods, particularly in sectors that had faced considerable shortages, such as autos. In addition, labor supply increased significantly, thanks to rising participation among 25-to-54-year-olds, as well as a strong pace of immigration.

Recent readings on both job gains and inflation have come in higher than expected. The economy added an average of 265,000 jobs per month in the three months through February, a faster pace than we have seen since last June. The higher inflation data over January and February were above the low readings in the second half of last year.

The recent data do not, however, materially change the overall picture, which continues to be one of solid growth, a strong but rebalancing labor market, and inflation moving down toward 2 percent on a sometimes bumpy path. Labor market rebalancing is evident in data on quits, job openings, surveys of employers and workers, and the continued gradual decline in wage growth. On inflation, it is too soon to say whether the recent readings represent more than just a bump. We do not expect that it will be appropriate to lower our policy rate until we have greater confidence that inflation is moving sustainably down toward 2 percent. Given the strength of the economy and progress on inflation so far, we have time to let the incoming data guide our decisions on policy.

We have held our policy rate at its current level since last July. As shown in the individual projections the FOMC released two weeks ago, my colleagues and I continue to believe that the policy rate is likely at its peak for this tightening cycle. If the economy evolves broadly as we expect, most FOMC participants see it as likely to be appropriate to begin lowering the policy rate at some point this year.

Of course, the outlook is still quite uncertain, and we face risks on both sides. Reducing rates too soon or too much could result in a reversal of the progress we have seen on inflation and ultimately require an even tighter policy to get inflation back to 2 percent. However, easing policy too late or too little could unduly weaken economic activity and employment. As progress on inflation continues and labor market tightness eases, these risks continue to move into better balance.

As conditions evolve, monetary policy is well-positioned to confront either of these risks. We are making decisions meeting by meeting, and we will do everything we can to achieve our maximum employment and price stability goals.

That brings me to my second topic. The Fed has been assigned two goals for monetary policy—maximum employment and stable prices. Our success in delivering on these goals matters a great deal to all Americans. To support our pursuit of those goals, Congress granted the Fed a substantial degree of independence in our conduct of monetary policy. Fed policymakers serve long terms that are not synchronized with election cycles.

Our decisions are not subject to reversal by other parts of the government, other than through legislation. This independence both enables and requires us to make our monetary policy decisions without consideration of short-term political matters. Such independence for a federal agency is and should be rare. In the case of the Fed, independence is essential to our ability to serve the public. The record shows that independent central banks deliver better economic outcomes.

We recognize that we need to continually earn this grant of independence, and we do so by carrying out our work with technical competence and objectivity, in a transparent and accountable manner, and by sticking to our knitting.

By technical competence, I mean that Fed policymakers use the most up-to-date information and research to deepen our understanding of the ever-evolving economy and to reliably deliver on our assigned goals. We are supported by a highly capable staff. We also draw on the insights and experiences of a wide array of business, academic, community, and labor leaders, as well as others engaged in the economy. And by objective, I mean that our analysis is free from any personal or political bias, in service to the public. We will not always get it right—no one does. But our decisions will always reflect our painstaking assessment of what is best for our economy in the medium and longer term—and nothing else.

Transparency and accountability are fundamental for any government agency in a democracy but are especially important for one granted policy independence. The Fed has a special obligation to explain ourselves clearly—to describe what we are doing and why we are doing it. We are always striving to improve on this communication, and it is a job that is never complete. But we have come a long way. Before 1994, the FOMC did not even announce our monetary policy decisions. Today we announce those decisions and explain the thinking behind them in our post-meeting statement and press conference.

We publish detailed minutes of our deliberations and a quarterly summary of the economic and policy projections of each FOMC participant. We publish a monetary policy report twice a year, and the Chair appears before Congress to present that report and answer any and all questions that are on the minds of our oversight committee members.

In 2020, we completed a yearlong public review of our monetary policy framework, and late this year, we will begin another such review. My colleagues and I explain our views on the economic outlook and monetary policy in speeches like this one, and in visits to communities across the country, as part of extensive outreach in which we seek input from individuals and groups throughout society. Transparency is an affirmative and proactive commitment to the public.

To maintain the public's trust, we also need to avoid "mission creep." Our nation faces many challenges, some of which directly or indirectly involve the economy. Fed policymakers are often pressed to take a position on issues that are arguably relevant to the economy but are not within our mandate, such as particular tax and spending policies, immigration policy, and trade policy. Climate change is another current example.

Policies to address climate change are the business of elected officials and those agencies that they have charged with this responsibility. The Fed has received no such charge. We do, however, have a narrow role that relates to our responsibilities as a bank supervisor. The public will expect that the institutions we regulate and supervise will understand and be able to manage the material risks that they face, which, over time, are likely to include climate-related financial risks. We will remain alert to the risk that there will be pressure to expand that role over time. We are not, nor do we seek to be, climate policymakers.

In short, doing our job well requires that we respect the limits of our mandate.

Thank you. I look forward to our discussion”.

Highlights of Powell’s Q&A comments:

·         The policy has gotten to a pretty good place

·         Inflation wasn't just a question of demand overheating but involved the supply side too

·         AI should increase productivity

·         Fed projections assume 1-1.5% productivity growth

·         I don't think inflation is reversing higher

·         There are risks to cutting rates too soon as well as waiting too long

·         Supply-side recovery is stimulating new demand and supply

·         It is too soon to conclude disconnect in monetary transmission

·         I do think monetary policy is working

·         The capacity of the economy moved up perhaps more than the output

·         Higher inflation wasn't a question of demand overheating but involved the supply side too

·         Inflation expectations are consistent with 2% inflation

·         The labor market is rebalancing

·         There may be more supply-side gains to be had

·         Monetary policy is tight

·         Inflation wasn't strictly from demand overheating

·         If the economy evolves as expected, most on FOMC see the beginning of cuts this year

·         On climate, the Fed has a narrow role as a bank supervisor, which over time is likely to include climate-related financial risks

·         The economy is still one of solid growth, a strong but rebalancing labor market, inflation moving down to 2% on a sometimes bumpy path

·         Labor market rebalancing seen in data on quits, job openings, employer and worker surveys, and continued gradual decline in wage growth

·         The outlook is still quite uncertain, the Fed faces risks on both sides of its mandate. Those risks continue to move into a better balance

·         The Fed continues to believe the policy rate is likely at its peak for this cycle

·         To keep the public’s trust, the Fed must avoid mission creep

·         The Fed has time to let incoming data guide its policy decisions; the central bank makes decisions by meeting

·         Recent readings on job gains and inflation are higher than expected but do not materially change the overall picture

·         Too soon to say whether recent inflation readings are more than just a bump

·         If the economy evolves as the central bank expects, most Federal Open Market Committee participants see it as likely appropriate to begin cutting policy rates at some point this year

·         the Fed has time to assess data before deciding to cut

On Wednesday, Fed’s Governor Kugler said:

·         My expectations for Fed Funds consistent with March FOMC projections

·         Consumer spending was soft in January and February, suggesting we are on track for lower consumption growth in Q1 vs the second half of 2023

·         I expect GDP growth this year to be solid but slower than the 2023 pace of 3.1%

·         It appears supply networks are adapting to the port of Baltimore disruption

·         My baseline expectation is that further disinflation can be accomplished without a significant rise in unemployment

·         I suspect strong population growth "helps resolve the puzzle" of labor market growth and strong consumption even as inflation eases

·         I expect consumption growth to slow some this year

·         Wage growth must be consistent with 2% inflation over time; the US is moving back toward that kind of wage growth; Such an outcome is not assured.

·         Anchored inflation expectations are evident in consumer and business surveys

·         The policy is currently restrictive, and my baseline expectation is that disinflation will continue without a broad economic slowdown

·         Inflation progress has sometimes been bumpy

·         Annual core PCE at 2.8% represents considerable progress but is still meaningfully above the Fed's 2% target

·         Data on new tenant rent agreements suggest that housing inflation broadly will continue to cool

·         Continued disinflation will indeed require further progress in housing and non-housing services

·         The labor market has moved into a better balance

·         My policy rate expectation is consistent with the March FOMC meeting policymaker projections

·         If disinflation and labor market conditions proceed as I am currently expecting, then some lowering of the policy rate this year would be appropriate

Full text of Kugler’s opening remarks: The Outlook for the U.S. Economy and Monetary Policy

“The Federal Open Market Committee (FOMC) has been working to lower inflation in the context of our dual mandate of maximum employment and price stability. Today I will discuss economic developments in the U.S. and how I view the current stance of monetary policy in light of recent data and longer-run trends. Since I am an economist, you will not be surprised that I will talk about recent economic developments by highlighting the dynamics of supply and demand.

As you all know, inflation began to rise in 2021. By mid-2022, 12-month inflation, based on the personal consumption expenditures (PCE) price index, was around 7 percent—much too high and far above the FOMC's 2 percent longer-run objective. But since that time, PCE inflation has slowed significantly, declining to 5.4 percent at the end of 2022, then to 2.6 percent at the end of 2023, and then to 2.5 percent in February.

Inflation can sometimes be hard to read from overall PCE inflation figures due to the volatility of food and energy prices. For that reason, it is sometimes helpful to focus on "core" PCE inflation, which excludes those categories and is a better guide to the direction of inflation. Core PCE inflation peaked at a rate above 5-1/2 percent in early 2022 but fell rapidly during 2023. In fact, the core PCE disinflation we saw last year was the fastest since the early 1980s. The progress has sometimes been bumpy from month to month, and, indeed, January and February of this year showed a bit of firming in the inflation data. But the January numbers, in particular, featured some atypical or seasonal factors that suggest a need to withhold judgment. The 12-month core PCE rate now stands at 2.8 percent. That rate represents considerable progress, but it is still meaningfully above the FOMC's 2 percent target.

I like to think about core PCE inflation in terms of three main components: goods, housing services, and non-housing services. Twelve-month inflation for core goods peaked first, reaching about 7-1/2 percent in early 2022. But goods inflation cooled quickly, and in February goods prices were nearly half a percentage point below their level a year ago.

Services inflation peaked later and has cooled less quickly. Within services, housing services—a measure of the cost of rent, and the equivalent for owner-occupied housing—rose above 8 percent early last year but was 5.8 percent in February. Housing services inflation is naturally persistent because tenant rents often have year-long lease agreements, and estimates of owner-occupied housing costs are imputed based in large part using those tenant rents. Data on new tenant rent agreements suggest that housing inflation broadly will continue to cool.

Finally, inflation in core non-housing services hovered between 4-1/2 and 5-1/2 percent from mid-2021 through mid-2023 but began cooling after that, reaching 3.3 percent in February. Continued disinflation will indeed require further progress in housing and non-housing services.

The rise and subsequent easing of inflation in recent years were related to both supply and demand factors. This development has been confirmed by granular, "bottom-up" statistical research looking at price and quantity changes within narrow product categories. Roughly speaking, if a price goes up while quantity goes down, that is an indication that a negative supply shock is dominating; if price and quantity move in the same direction, that is an indication that a demand shock is dominating.

Research using this method finds that, for the economy broadly, demand shocks accounted for roughly two-thirds of the 2021 pickup in, and 2023 slowing of, core PCE inflation, with the remaining one-third related to supply. The role of supply is somewhat larger in a narrower analysis focused on the domestic manufacturing sector. "Top-down" research looking at aggregate time-series data also found significant contributions for both supply and demand factors.

Let me be a bit more concrete about this point by discussing supply and demand for goods and services in turn. Supply in some goods-producing industries, like motor vehicles, was held down for some time by pandemic-related plant shutdowns, shortages, and transportation bottlenecks. And demand for goods surged during the pandemic when consumers shied away from in-person services. Businesses frequently highlighted shortages of materials as having held down production during the period when supply was tight and demand was strong. Those pressures have eased considerably (though perhaps not completely).

Supply chains and production have largely recovered, and there are signs that goods demand growth since then has eased. For example, the share of consumer spending devoted to goods rather than services has moved back closer to its pre-pandemic trend after rising sharply in 2020.

Regarding services, particularly non-housing services, the most important input to services production tends to be labor. For that reason, it is useful to talk about supply and demand for labor. Labor supply was held down significantly in the early stages of the pandemic as workers voluntarily and, in some cases, involuntarily stayed out of the workforce. Older workers, in particular, left the labor force in a wave of early retirements, and, tragically, COVID‑19 caused a rise in mortality. Additionally, many prime-age workers—those between the ages of 25 and 54—stayed out of the labor market for a time, perhaps because of health concerns or family care challenges. And immigration was relatively low during the pandemic.

But the labor supply has been recovering. While most older individuals have not, as a whole, returned to the labor force, many prime-age workers have. Prime-age women, in particular, have significantly increased their labor force participation, which reached an all-time high last year and remains close to that all-time high. Moreover, the Congressional Budget Office (CBO) estimates that net immigration increased to above 2-1/2 million in 2022 and 3-1/2 million in 2023. If the CBO analysis is correct, population growth has been a sizable contributor to overall labor force growth.

A more subtle source of labor supply improvement has been improved quality of matches between workers and firms—how well-suited particular workers are, by talent, experience, and preferences, to their employers. In the wake of, and until the end of, the pandemic, we saw a heightened pace of workers quitting their jobs and finding new ones, a process that economists generally believe improves matches. Indeed, evidence suggests workers and firms have been fairly efficient at finding each other over the past couple of years. High-quality job matches act like additional labor supply: Both firms and workers are likely to be more productive when workers' skills and preferences are a good match for their employers' needs.

On the demand side, labor demand was strong in 2021 and 2022. Demand was so strong that the job openings rate—that is, the monthly number of job openings relative to total employment—ran almost 50 percent above its pre-pandemic record from July 2021 through July 2022.

But the job openings rate has declined roughly 30 percent from its peak, a sign that labor demand—while still robust—has cooled significantly. So the labor market has moved into better balance. Importantly, given the strong labor supply growth, supply–demand imbalances can continue to ease even amid a solid pace of net job growth, as we have been seeing. Indeed, I suspect that strong population growth helps resolve the puzzle that forecasters have faced over the past year, in which measures of labor market growth—and growth of other economic variables, like consumption—have been solid even amid easing inflation.

As labor markets have moved into better balance, wage growth has cooled—which means that increases in the main cost business in the services sector have slowed, easing inflationary pressures. Workers and families do not reap the benefit of higher wages if those gains are eaten up by inflation. For that reason, it is important that wage growth be consistent with 2 percent inflation over time.

The U.S. economy is moving back toward that kind of wage growth, including in services industries: The 12-month growth of average hourly earnings in private services has come down to about 4 percent from a peak pace above 6 percent in early 2022. And despite the cooling of wage growth, with inflation easing over the past year, we have seen broader wage increases again outpacing price gains, that is, real wage gains.

But you may ask: What role has the FOMC played in all of this? While supply conditions are beyond the control of monetary policymakers, the FOMC can influence the pace of inflation by tightening monetary policy to slow the growth of aggregate demand. The FOMC began raising its policy interest rate in early 2022 and proceeded expeditiously. These actions have damped aggregate demand, with the most pronounced effects on interest rate–sensitive sectors. For example, in 2023, the level of residential investment was about 19 percent below its 2021 level, reflecting a much lower pace of home purchases.

And business investment in machines has seen somewhat tepid growth lately, even contracting a bit last year, though I note that the construction of new factories has been surging, perhaps partly related to recent legislation, which will boost supply over the longer run. More broadly, financial conditions have been a drag on aggregate demand, as suggested by the Federal Reserve Board's FCI-G (Financial Conditions Impulse on Growth) index, which estimates the overall effect on gross domestic product (GDP) of changes in financial conditions, including interest rates, asset prices, and exchange rates. This measure moved well into restrictive territory in mid-2022 and remained quite restrictive for some time, though it has become less restrictive recently.

In addition to the direct actions taken to tighten monetary policy, the FOMC has also helped cool inflation through its communication with the public. In particular, the FOMC's stated commitment to bring inflation back to 2 percent, coupled with its actions to tighten policy, has helped ensure that longer-term inflation expectations remain anchored—that is, that households and firms believe that inflation will return to the Committee's target.

Anchored expectations are evident in surveys of consumers conducted by the University of Michigan and the New York Fed. Separately, a Richmond Fed survey shows a close relation between firms' expectations of overall inflation and their price-setting plans. As the effects of earlier supply and demand shocks fade, firms with anchored inflation expectations will bring their price-setting decisions back into alignment with the FOMC's inflation target. One way they might do so is by adjusting their prices less frequently.

Before the pandemic, the typical price lasted more than 10 months, but by early 2022, it was lasting fewer than 5 months while inflation was near its recent peak. Since then, the frequency of price adjustments has slowed considerably, and by the fourth quarter of last year, the typical price had lasted more than 7 months.

Let me now turn to the outlook for this year. Given my thinking about the role of supply and demand in recent inflation dynamics, as well as the role anchored inflation expectations are playing in bringing price-setting behavior back to normal, I expect the disinflationary trend to continue.

There is still a bit of room for further supply improvement, especially in the services sector, where solid labor supply growth will continue to ease wage and inflation pressures. On the demand side, I expect consumption growth to slow some this year, as households have drawn down large balances of excess savings accumulated during the pandemic and are facing restrictive financial conditions. We may already be seeing some of that slowing; consumer spending was soft in January and February, on average, suggesting that we are on track for lower consumption growth in the first quarter than we saw during the second half of last year.

With less support from consumers, I expect GDP growth this year to be solid but slower than last year's strong 3.1 percent pace. Even with demand growth cooling, given the backdrop of solid supply, my baseline expectation is that further disinflation can be accomplished without a significant rise in unemployment.

That said, the future is uncertain, and I am attentive to risks—both upside risks to my inflation outlook and downside risks to the outlook for economic activity. For upside risks, global developments such as the wars in Europe and the Middle East could spark an increase in commodity prices or further disruptions to shipping networks. The tragic recent bridge collapse in Baltimore and its effects on the Port of Baltimore could also pose some risk, though it appears that shipping networks are adapting.

Additionally, consumption growth could turn out to be stronger than expected, particularly because of the wage gains we have seen across all income groups—but especially among the lowest earners who have an especially high propensity to spend out of their income. Indeed, consumption was surprisingly strong last year and made solid contributions to GDP growth in the third and fourth quarters, though some of that strength may have been related to strong population growth which, more generally, was likely disinflationary.

But there are also downside risks to economic activity. Measures of consumer credit delinquencies have been on the rise, which might point to a more significant slowing of consumer spending than expected. And labor markets can sometimes deteriorate very quickly, without much warning in closely watched spending data. The February employment report featured a rise in the unemployment rate, half of which was accounted for by layoffs. I study a range of layoff indicators, both in the official data and in measures based on information contained in publicly traded firms' earnings reports or Google searches, and I will continue to watch a whole range of indicators closely.

Finally, let me briefly discuss monetary policy. As I have noted, policy is currently restrictive, and my baseline expectation is that disinflation will continue without a broad economic slowdown—though such an outcome is not assured.

In considering the appropriate path of monetary policy, I am guided by the FOMC's dual mandate of maximum employment and price stability. After the March FOMC meeting, the Committee said that it "does not expect it will be appropriate to reduce the target range until it has gained greater confidence that inflation is moving sustainably toward 2 percent."

After that meeting, we also published the Summary of Economic Projections, which summarizes the forecasts of FOMC participants. Most FOMC participants expect that it will be appropriate to begin lowering the federal funds rate sometime this year. My expectation is consistent with that; if disinflation and labor market conditions proceed as I am currently expecting, then some lowering of the policy rate this year would be appropriate. However, I will remain attentive to the totality of the data and be prepared to change my economic and policy outlook if conditions change.”

Market impact:

On Wednesday, Wall Street Futures, Gold, and UST briefly slid on hotter-than-expected ADP private payroll job data (184K vs 156K prior; 148K estimate) including wage growth (+5.1%).  But Wall Street Futures, Gold, and UST eventually recovered and surged on softer than expected ISM Service PMI report (51.4 vs 52.6 prior; estimate 52.7); also overall S&P Global Service PMI data (51.7 vs 52.3 prior) indicates slowing private service activities, although Manufacturing may be out of recession. Thus S&P Global Composite PMI remained steady at 62.1 in March against 52.5 scaled in February (8-months low). Also, there was a sharp drop in input cost prices for the service providers in the PMI survey boosted the risk-on sentiment further on hopes & hopes of an early Fed pivot/cut (from June 24).

But Wall Street Futures also stumbled again from the session high in late-day trading after Fed’s Powell, Bostic, and Kugler sounded more hawkish than expected as all of them indicated rate cuts in H2CY24 provided core inflation dips as being expected; Bostic even reiterated his assumption of only -25 bps rate cut (once) in H2CY24. Eventually, Wall Street Futures closed almost flat for the day; DJ-30 slumped -100 points, while SPX-500 was almost flat and tech-heavy NQ-100 edged down -0.1%. But Gold ($2300) and oil ($86.50) surged in the war of words between Israel and Iran after the destruction of the Iranian Consulate in Damascus (Syria) by Israel, which is blaming Iran as the main state sponsor of various terrorist groups (Hamas, Hezbollah, Houthi, etc) involved in attacking Israel.

On Wednesday, Wall Street was boosted by the communication sector, energy (higher oil), materials (hopes of Chinese recovery), industrials, consumer discretionary, techs, and real estate to some extent, while dragged by consumer staples, utilities, healthcare, and banks & financials. Scrip-wise, Wall Street was boosted by Caterpillar, IBM, Amazon, Goldman Sachs, Verizon, Travelers, American Express, Apple, Walmart, Chevron, Meta, Netflix and Spotify.

Bottom line:

Fed may continue QT (even at a slower pace) and go for a rate cut cycle at the same time despite these two policy actions being contradictory. Thus the Fed may go for rate cuts of -75 bps cumulatively in September, November, and December’24 for +4.75% repo rates from the present +5.50%. Fed may bring down further its B/S size from present around $7.5T to $6.55T through QT tapering by May-Dec’25 to keep minimum/ample liquidity for the US funding/money market and also to prepare itself for the next cycle of QE, whatever may be the recession excuse. The market is now expecting 5 rate cuts (-125 bps) in 2025 against the Fed’s official 2-3 rate cuts; the Fed may go for 4 rate cuts in 2025 if Trump comes to power/White House or even under Biden.

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

Whatever may be the narrative, technically Dow Future (39575), now has to sustain over 39600/39800 and may again scale 40000/40200-40600/40700 levels for any further rally to 42600  levels in the coming days; otherwise, sustaining below 39550 may again fall to 39250/38700-38200/37950 levels in the coming days.

Similarly, NQ-100 Future (18400) now has to sustain over 18350/18500-18600/18700 levels for any rebound towards 19000/19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18800-18700, NQ-100 may gain or fall to around 18000/17500-17200/16875 in the coming days.

Also, technically Gold (XAU/USD: 2300 now has to sustain over 2325-2330 for any further rally to 2355/2375-2400/2425; otherwise sustaining below 2320/2315-2305/2300, may again fall to 2290/2270-22245/2240, may again fall to 2220/2210 and 2200/2195-2190/2180 and 2175/2145*, and further to 2120/2110-2100/2080-2060/2039 and 2020/2010-2000-1995/1985-1975 and even 1940 may be on the card.