Gold slip on less dovish Powell talks and hotter retail sales

·         Powell indicated despite some progress, the Fed needs to have more confidence in Q3 for the pace of disinflation; the Fed may not cut from Sep’24

·         Wall Street surged on soft landing and Trumponomics (tax cuts & deregulation) optimism

On Friday, Wall Street Futures and Gold stumbled from a softer CPI high to some extent after a hotter-than-expected US PPI report and lower consumer confidence. But still, the market-implied probability of a Sep’24 rate cut odds is hovering around 88%; very high. Looking ahead, if the Fed doesn’t want to start the rate cut cycle from Sep’24, just ahead of the Nov’24 election, then the Fed has to jawbone hard (mawkishly) to talk down the rate cut probability. Overall, Wall Street and Gold surged for the week on hopes & hypes of an early Fed rate cut from Sep’24 rather than Dec’24. The market is now expecting -50 bps rate cuts in H2CY24 against the Fed’s June dot plots of -25 bps.

On Monday, all focus of the market was on Fed Chair Powell’s interviews/comments at the Economic Club of Washington after 2-days of Congressional Testimony last week, where Powell said although the Fed is little more confident now about improved pace of disinflation after core inflation data in Q2CY24 compared to Q1CY24, still it’s not confident enough for any rate cut and thus would be in wait & watch mode to evaluate further data & outlook thereof. Powell has highlighted the improvement in inflation data and said they're getting data that makes them more confident lately for a soft landing; i.e. to bring inflation down to +2.0% levels in a sustainable manner without hurting the labor market too much.

On Monday, Powell also said almost the same thing as his last few public comments: The Fed is getting incrementally additional/higher confidence for inflation data in Q2CY24 after getting no additional confidence in Q1CY24:

“On inflation, we’ve had three better readings including the last one, and if you average them, that’s a pretty good pace--so turning on the policy--those figures do add somewhat to confidence that inflation is slowing sustainably-- what we've said is that we didn't think it would be appropriate to begin to loosen policy until we had greater confidence that inflation was moving sustainably down to 2%--- we've been waiting on that—I would say we didn't gain any additional confidence in the first quarter but the readings in the second quarter including the one from last week do add somewhat to confidence—“

On Monday, Fed Chair Powell said: (Highlights/Summary of comments)

·         The economy performed remarkably well last couple of years

·         This year expected the economy to slow and inflation to continue to make progress; something like that is happening

·         This year expected the economy to slow and inflation to continue to make progress; something like that is happening

·         The second quarter of inflation does represent progress with three better readings

·         Now that inflation has come down we will look at both mandates

·         If we were to see an unexpected weakening in the labor market, that would merit a reaction from us

·         If the Fed waits for inflation to get to 2% to cut, it has waited too long

·         Initial inflation was driven by demand for goods and initially looked like it would be fleeting; the Fed overestimated how fast the economy would return to normal

·         I have always felt that there was a path to lower inflation without the kind of labor market pain that has been typical of past tightening cycles

·         We'd be happy to have more upside surprises for the economy

·         A hard landing is not the most likely scenario

·         The economy performed well over the last couple of years

·         I will stay in office until May of 2026

·         The policy is restrictive though not severely so; the neutral rate has probably risen.

·         When the Fed gets confidence in inflation it will be time to move

·         We don't want to be too risk-averse

·         It's very hard to know what the economy is going to do

·         I have always felt there was a pathway to getting inflation back to 2% without the kind of pain that has been typical

·         A hard landing scenario isn't a likely scenario

·         I am very happy doing this job

·         When the Fed gets confidence in inflation it will be time to move

·         The Eurozone went through a significant period of lower growth and is in a different position than the US

·         There are little differences in timing between global central banks but when the history is written, it will be about the commonalities in policy

·         The Fed meeting is usually over by 11 am before the decision

·         Fed has the authority it needs, Fed Reserve Act is in a 'fine place'

·         I'm worried 'over' about the levels of US deficits but not the Fed's job to advise policy

·         The economy performed well over the last couple of years

·         Not going to send any signal on any particular meeting---will make decisions based on evolving data and outlook--

·         On inflation, we’ve had three better readings including the last one, and if you average them, that’s a pretty good pace—so turning on the policy--those figures do add somewhat to confidence that inflation is slowing sustainably-- what we've said is that we didn't think it would be appropriate to begin to loosen policy until we had greater confidence that inflation was moving sustainably down to 2%--- we've been waiting on that—I would say we didn't gain any additional confidence in the first quarter but the readings in the second quarter including the one from last week do add somewhat to confidence—

·         We've also said that you know we have had a dual mandate for a long time since inflation arrived it's been appropriate to focus mainly on inflation but now that inflation has come down and the labor market has indeed cooled off--- we're going to be looking at both mandates they're much in better balance and that means that if we were to see an unexpected weakening in the labor market then that-- might also be a reason for reaction us.

·         I am not going to be sending any signals one way or the other on any particular meeting meeting so just to ruin the fund right at the beginning. I simply you know we're going to make these decisions meeting by meeting and we're going to make them based on the data as they come in the evolving data the evolving Outlook and also the balance of risks now that the two mandates are close to being in Balance all right there are--- the first quarter we didn't make any more progress the second quarter uh actually we did make some more progress---

·         The economy performed well over the last couple of years. This year expected the economy to slow and inflation to continue to make progress. Something like that is happening--labor market no tighter than before the pandemic---2Q of inflation does represent progress with three better readings--Now that inflation is coming down will look at both mandates. If we did see an unexpected weakening in the labor market, that would merit a reaction from us---

·         The Fed's undertaking is to make decisions on data and only on data, not politics. If the Fed waited for inflation to get a 2% to cut it has waited too long. We want to have greater confidence that inflation is moving sustainably down toward 2%. What increases their confidence is better inflation data, we have been seeing that lately

On Monday, Fed’s Daly said:

·         More information is needed before making a rate decision

·         Confidence is growing that we are getting nearer to a sustainable pace of getting inflation to 2%

·         I see a policy adjustment over the coming term (? Years)

·         Some normalization of policy is a likely outcome

·         The US economy is slowing

·         Inflation is lower but we are not there yet

·         We are nearer the time of achieving our goals

Bottom line: Summary

·         As per the present run rate/trend, the 6M rolling average of core CPI may not fall to around +3.0% confidence levels from the present +3.6% (June 24) before Dec’24

·         Thus Fed may not cut rates before Nov’24 US election despite some pressure from Democrats, financial journalists/analysts, and also a section of the media.

·         Fed may not also cut  rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may cut rates in Dec’24

·         The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct ’24

·         Fed has to also consider the fiscal plan of the next Government, especially if it’s Trump.

·         In the Sep’24 Fed meeting, the Fed may say it is now getting enough confidence for going for rate cuts from Dec’24 to keep both Democrats and Republicans as well as Wall Street and also Main Street happy; bond yield should slip considerably even three months before the actual rate cuts.

·         One month of weak/strong job/inflation data may not change the Fed’s narrative about higher for longer stance as the 6M rolling average of headline unemployment at 3.9% average is still below 4.5%, while core CPI inflation is still around +3.6%, above +3.0% Fed’s confidence levels.

·         At present trend, the 6M RA of core CPI may further fall to around +3.0% by Dec’24, when the Fed may feel enough confidence to start the 11 rate cuts cycle from Dec’24, just after the Nov’24 election, so that both Democrats and Republicans will be happy, while Fed stays as politically neutral, acting by only economic data, not political.

·         The Fed will be in ‘wait & watch’ mode till at least Dec’24. 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 or allow SPX 500 TTM PE to fall below 22-20 fair value range.

·         In Brief, Trump may be positive for USD/US bond yields and negative for Equities (higher borrowing costs, China/EU trade tantrum, and nationalistic policies), and also positive for Cryptos to some extent; but overall, there may be limited ability for a monumental change in policies by Trump and even Biden due to various checks & balances in the US political & policy system.

·         Trump’s policies are seen as inflationary due to attempted tax cuts, tighter immigration, and higher import tariffs (import taxes), but tax cuts and deregulation (if any) are positive.

Market impact:

On Monday US bond yields, Wall Street, and Gold slips after less dovish Powell/Fed talks, indicating wait & watch stance at least for another QTR (Sep’24) to assess the disinflation pace. The implying probability of a July rate cut is now almost nil, but the same for Sep’24 remains high around 90%. Although Powell refrained from any specific forward guidance, the Fed may clear the stance on the 31st July meeting that the Fed will assess the inflation data for at least another QTR (Q3CY24) before getting the required confidence to go for the 11 QTR rate cuts cycle from Dec’24.

On Monday Powell said recent inflation data add somewhat to confidence that inflation is returning to +2.0% targets and that the central bank will not wait until inflation hits 2% before cutting rates. Markets have almost fully priced in a September rate cut, with two more reductions seen before the end of the year; i.e. total of -75 bps in H2CY24 against the Fed’s dot-plot projections of -25 bps. Meanwhile, rising odds of a 2nd Trump presidency amid a sympathy wave following a failed assassination attempt provided some support to USD/US bond yields. Trump’s policies are seen as inflationary due to tax cuts, tighter immigration and higher import tariffs.

On early Tuesday Asian Session, BTCUSD surged further by $65,000, the highest in a month after US Presidential candidate Trump picked crypto-friendly Senator Vance to be his running mate (VP Candidate for Republicans). The Ohio Republican Vance has disclosed that he owns over $100,000 in bitcoin (BTC) and has been critical of the US SEC’s regulatory crackdown on the crypto industry. Bitcoin has now gained over 10% since Friday driven largely by stronger prospects of a 2nd Trump presidency following a failed assassination attempt; Trump has emerged as the pro-crypto candidate leading up to this year’s US presidential election.

BTCUSD was also boosted by hopes & hypes of an early Fed rate cut (from September 24) and as the German government concluded its bitcoin/crypto sales on 12th July; concerns over the Mt. Gox reimbursement plan receded and BlackRock, JPM, GS, and other influential big market participants, although in the absence of any tangible/intangible underlying assets and any fundamental narrative, BTC/Cryptos may be going for another bubble in the coming years, causing next wave of the financial crisis.

On Monday, Wall Street surged but also slipped to some extent in the last hour of trading on hopes & hypes of an early Fed pivot and Trumponomics optimism. The S&P 500 (SPX-500) and the Nasdaq (NQ-100) added 0.3% and 0.4%, respectively, while Dow Jones (DJ-30) added +210 points to close at fresh record; Trump Media & Technology Group Corp. surged, Goldman Sachs jumped to a record high after reporting upbeat report card. Macy's plunged after rejecting a $6.9 billion buyout offer from Arkhouse & Brigade.

On Monday, Wall Street was boosted by energy, banks & financials, industrials, techs, real estate, and communication services, while dragged by utilities, consumer staples, healthcare, consumer discretionary and materials. Script-wise, Wall Street was boosted by Caterpillar, Goldman Sachs, JPM, American Express, Apple, Chevron, Visa, Travelers, and United Health, while dragged by Nike, Boeing, Verizon, P&G and Amazon. China savvy stocks were under stress on the concern of the 2017-18 like the Trump trade war tantrum.

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

Whatever the narrative, technically Dow Future (40500) has to sustain over 40700 for any further rally to 41000/41300-41500/41800 and 42000-42700 in the coming days; otherwise sustaining below 40650, DJ-30 may again fall to 40400/40200-40000/39900 and further 39800/39600-39400/39200 and 39000/38800-38600/38300 in the coming days.

Similarly, NQ-100 Future (20600) has to sustain over 21050 for a further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 21000/20900-20700/20300 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5680), now has to sustain over 5750 for any further rally to 5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5700/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2410) has to sustain over 2435 for a further rally to 2455*/2475-2500/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2425/2390-2375/2355, may further fall to 2320/2300-2290/2275* in the coming days.