Gold, Silver surged on Gaza war escalation, but stumbled

·         Fed’s Kashkari almost poured cold water on any rate cut in 2024; Hamas again offered another fresh ceasefire proposal by Israel after the Rafah attack

On Thursday, Wall Street Futures and gold plunged on fading hopes of a Fed rate cut from Dec’24 after hotter-than-expected S&P Global Service PMI data for May, well into the expansion zone after a brief dip around the contraction zone in April. Also, hawkish Fed talks dragged the risk trade. Gold made a two-week low around 2330, while Dow Future also made a multi-day low around 39075, but also recovered to some extent on the negative revision of US/UM 1Y inflation expectations final data.

On Friday, the UM final data showed the year-ahead (1Y) US inflation expectations rose to a six-month high of 3.3% in May, from 3.2% sequentially but below the flash estimate of 3.5% (after actual inflation/CPI data dips in April). Also, the five-year (5Y) US/UM inflation expectations stood at a five-month high of 3% in May, unchanged from April and below the flash estimate of 3.1%.

On Monday, in a holiday-thinned market, Gold and silver surged on an escalation of Gaza war tensions:

·         Israel's IDF Strikes Hamas Compound in Rafah on Sunday

·         Israel launched a massive attack on Rafah, killing several civilians in a relief camp by ‘mistake’; (despite Hamas offering another ceasefire proposal)

·         Hamas also fired a barrage of missiles/rockets targeting Tel Aviv and refused to join ceasefire talks

·         Meanwhile Egypt military confirmed that a soldier was killed in a "shooting incident" that occurred between Israeli and Egyptian forces on the Gaza border (Rafah crossings)

·         IAEA: Iran ramps up uranium enrichment to near-weapons-grade levels

·         Houthis launch new attacks in the Indian Ocean, Red Sea

·         Israel and Hamas to resume talks next week

·         Israeli Broadcasting Corporation: Today, Israel submitted to the mediators its proposal to resume truce negotiations

·         North Korea reportedly launched another missile drill toward the Japanese Sea area

Gold and silver may be also getting an additional boost as the Central Banks of China, India, and Russia are buying Gold to diverge away from the USD. On Monday, Yellen said:

·         US Unwilling to Sign Tax Deal Before Details Resolved

·         G7 makes progress on global tax agreement details

·         Russia's asset plan requires approval from all EU countries

·         G7 moves closer to leveraging Russia's assets plan

·         Yellen and BOE Governor Bailey discuss methods to unlock the value of Russian assets

·         Higher interest rate path increases need to raise revenue

·         The ratio of Net Real Interest to GDP Should Not Exceed 2%

·         No set rule for the maximum net real interest ceiling

On Monday, Chinese, Japanese, and South Korean leaders met in Seoul:

·         Japan's PM Kishida agrees that North Korea's denuclearization is beneficial for all

·         South Korea's Yoon emphasizes the need for North Korea's denuclearization

·         North Korea's Planned Rocket Launch Violates UN Ban

·         Japan's PM Kishida focuses on people exchanges, cooperation with ASEAN

·         Japan's prime minister Kishida expresses a desire to discuss the FTA

·         Japan PM Kishida discusses summit with China and South Korea in Seoul

·         Japan's PM Kishida announces cooperation agreement in multiple areas

·         Chinese Premier Li advocates against protectionism and decoupling

·         Premier Li calls on Japan and South Korea to uphold free trade

·         Li urges Japan and South Korea to reject divisive politics

·         Li urges Japan and South Korea to uphold the spirit of autonomy

·         China calls for resumption of cooperation with Japan and South Korea

·         Li highlights stable relations between China, Japan, and South Korea

On Monday, Fed’s Waller said:

·         I haven't changed the view neutral rate (r*) is relatively low

On Monday, Fed’s Bowman said:

·         Fed would have benefited from an earlier decision to taper, and end QE in 2021

·         It's important to keep reducing the balance sheet size to reach ample reserves as soon as possible and while the economy is strong

·         It's important to communicate any change to the run-off rate does not reflect a change in the Fed's monetary policy stance

·         In the future, when the Fed conducts QE to restore market functioning or financial stability it should communicate that purchases will be temporary and unwound when market conditions have normalized

·         The FOMC would have benefited from an earlier decision to taper and end GE in 2021; it would have allowed for earlier rate hikes

·         In my view bank reserves are not yet near ample levels given the still-sizable take-up of on-RRP

·         I strongly support the principle of balance sheet holdings primarily being composed of treasuries

·         Emphasizes the need to keep reducing the Fed balance sheet

·         Suggests supporting a later slowdown of QT or tapering the pace

On Monday, Cleveland Fed’s President Mester said:

·         I expect that the Fed will consider communications as part of its next monetary policy framework review

·         Scenario analysis should also be incorporated as a standard part of Fed communications

·         I would like the Fed to publish an anonymized matrix of economic and policy projections so market participants can see the linkage between each participant's outlook and their view of appropriate policy associated with that outlook

·         It would be preferable for FOMC statements to use more words to describe the current assessment of the economy, how that influences the outlook and the risks to that outlook

·         Fed can improve communication with the public

·         Urges for increased transparency in Fed statements and projections

On Tuesday, Minneapolis Fed’s President Kashkari said:

·         Inflation has moved sideways recently

·         We need to wait and see and get more confidence in prices

·         We shouldn't rule anything out on the policy path

·         The Fed is in a good position because of a strong labor market

·         The US economy has remained remarkably resilient

·         I don't see a need to hurry and cut rates

·         I want to see many more months of positive inflation data before a rate cut

·         No hurry to cut interest rates

Conclusions: Summary

·         Fed is much more concerned about the slow pace of disinflation amid still elevated rent, housing inflation, and strong consumer spending (robust labor market); also goods inflation is again ticking up as the supply chain boost effect may be over now

·         Fed is now changing its narratives and nullifying the probability of a Sep’24 rate cut; accordingly, the implied probability of a Sep’24 rate cut has fallen from 80% a few weeks ago to 40% now

·         But to keep US bond yield under control and also Wall Street, the Fed is also toying with the idea of a Dec’24 rate cut, although it may more look like a signal/formality; the Fed is ensuring US10Y bond yield below 5.00-4.7%% red zone at any cost to lower US borrowing cost

·         Overall, the Fed is now changing its tone and gradually preparing the market for no rate cuts in 2024, especially from Sep’24 to avoid any political controversy just ahead of Nov’24 US election as Powell has to again face another highly probable Trump tantrum from Jan’25

·         Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may/may not cut rates in Dec’24; Fed may revise dot-plots in June meeting.

·         At present, Fed’s Mar’24 dot-plots show: 75 bps rate cuts each in 2024, 2025, 2026, and -50 bps in 2027 for a neutral repo rate of +2.75%

·         But the Fed may now show the June’24 dot-plots as -100 bps rate cuts each in 2025, 2026, and -50 bps in 2027 for terminal neutral repo rate +3.00%

·         Another scenario: Fed may also cut -50 bps in Dec’24 or even in Jan’25 after the Nov’24 US election to avoid any political controversy and also to assess overall inflation and employment data for the whole of 2024

·         Fed is now quite confused about the rate cut narrative from H2CY24 as the disinflation pace was almost stalled in Q1CY24, ahead of the Nov’24 election, while the unemployment rate and bond yields are ticking up;

·         Average US inflation is now higher by over 20% from pre-COVID (Jan’20) levels, while under normal conditions, it should be around +8%; higher cost of living is creating some anti-incumbent wave against Biden admin before Nov’24 election; thus both White House and Fed are now prioritizing to keep inflation under control and not ready to risk of surging inflation by cutting rates just ahead of the election

·         Like in India, the US Presidential election in Nov’24 may be also acting as a big/moderate fiscal stimulus amid huge election spending, which may likely boost inflation again or prevent the disinflation process, making the Fed’s job harder to cut rates even in Dec’24

·         This year, the U.K. is also going for an early election in July, and thus BOE may also not hike rates in 2024

·         BOC may not cut rates in 2024 as Canada is also going for an election in the coming months

·         Thus almost all major G20 Central Banks including ECB, BOE, BOC, RBI, and even PBOC may not cut rates in 2024 if Fed remains on hold; no central bank will go against the Fed irrespective of any narrative/rhetorics and make LCU weaker against USD, causing higher imported/total/core inflation in the process; all central banks led by Fed will continue the 24/7 jawboning to keep bond yields under control (indirect YCC like BOJ) and a vibrant financial/money/FX market, ensuring robust employment globally

Market impact:

On Friday, Wall Street eventually closed mixed ahead of the long weekend; tech-heavy NQ-100 surged to a new life time high amid AI chip optimism (NVIDIA), while broader SPX-500 gained around +0.7% and blue chip DJ-30 was almost flat; Apple and Alphabet also helped. Wall Street was boosted by communication services, techs, utilities, materials, consumer discretionary, banks & financials, industrials, consumer staples, energy, and real estate, while dragged by healthcare.

On Friday, Script-wise, Wall Street was boosted by Intel, JPM, Apple, Boeing, American Express, Walt Disney, Walmart, Verizon, Microsoft, Goldman Sachs, Chevron, and 3M, while dragged by Salesforce, J&J, United Health, Merck & Co, Caterpillar, Cisco, Amgen, and Amazon. Nvidia has cut the price of the most advanced AI chip it developed for the China market. Legendary Bond Jing Bill Gross also warned about a Trump win: higher government spending, higher deficits, and higher rates.

On Monday, Gold, Silver, and also oil got some boost in a holiday-thinned light market on escalated Gaza War tensions but stumbled early Tuesday on hawkish Fed talks and some progress of Gaza war ceasefire talks.

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

Whatever may be the narrative, technically Dow Future (39100) has to sustain over 39000 for any recovery to 39200//39300-39400*/39700 and 39800/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 38900 may further fall to 38750/38550-38450/38250 and 38100*/37900-37600/37400 in the coming days.

Similarly, NQ-100 Future (18975) has to sustain over 19100 for a further rally to 19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 19050/19000 may fall to 18850-18750, may again fall to 18350/18100-18000/17900 and 17800/17700-17600-17500 and further 17400/17300-17100/17000* in the coming days.

Also, technically Gold (XAU/USD: 2340) has to sustain over 2330 for any recovery to 2355/2365*-2375/2385 and further rally to 2400/2425-2435/2455* and 2475-2500; otherwise sustaining below 2325, may further fall to 2315/2300-2290/2275* and further to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.