Gold, Wall Street surged on hopes of soft CPI after mixed PPI

·         After a huge negative revision for March and the overall trend of core PPI data, the market is now expecting a 0.3% sequential rate of core CPI vs an earlier 0.4% (which came true later)

On Monday, Wall Street Futures and gold inched down on fading hopes of an early Fed pivot amid hawkish Fed jawboning, hotter inflation expectations, and softer consumer confidence. Earlier lower USD/US bond yields helped Wall Street and gold to some extent as JPY surged on reports of less JBB bond buying by BOJ. But Wall Street sentiment was also affected by subdued Chinese economic data and China’s fiscal stimulus plan.

On Tuesday, the focus of the market was on US core/total PPI data along with Powell talks before the all-important US core CPI data to be released on Wednesday (15th May) along with retail sales data. The market usually tries to assume the core PCE inflation trend/sequential & annual rate through core CPI and core PPI data which is published around mid-month against core PCE at the month's end. In that sense, core PCE inflation data, which the Fed officially gives priority to gauze the trend & outlook of underlying inflation for any policy action is now a laggard indicator. But officially, the US Congress has given the Fed price stability target of +2% for headline inflation (total CPI, not PCE).

In his recent Congressional testimony, Fed Chair Powell acknowledged that headline/total CPI 2% consistently is Fed’s price target while facing an ‘angry’ Senator as the average price levels for various goods & services affect the daily life of ordinary Americans (vote box for any party) is still substantially higher by over +20% than pre-COVID levels in the election year, despite political blame game of Bidenflation, Putinflation, Corporate greedflation and also shrinkflation. As per the 2% headline CPI, there should be a 10% price increase in general over 5 years, not 20%. Also, real wage growth is now almost flat. All these caused lower Biden approval than Trump in the forthcoming Nov’24 US Presidential election.

On Tuesday, the BLS flash data (NSA) showed annual (y/y) U.S. core PPI (w/o food & energy) surged +2.4% in Apr’24, from +2.1% sequentially (downwardly revisited from +2.4%), in line with the market consensus of +2.4% and highest in 8-months.

On a sequential (m/m) basis (SA), the U.S. core PPI jumped to +0.5% in Apr’24 from a decrease of -0.1% in Mar’24, and way above the market expectations of +0.2% increase. The Mar’24 sequential rate was revised down from +0.3% expansion to -0.1% contraction. Overall, after the latest 5M revision, the 2024 (YTD) average of core PPI is now around +2.1% (vs prior +2.2%) against +2.9% in 2023, +7.8% in 2022, and pre-COVID levels around +1.5%; the rolling 6M rolling average is now around +2.1% (vs earlier +2.0%).

The 6M rolling average of sequential (M/M) core PPI is now around +0.2% in April against +0.2% in the March report; i.e. overall core PPI cooled slightly/almost stalled.

 

On Tuesday, the BLS data (NSA) also shows U.S. annual (y/y) total PPI surged to +2.2% in Apr’24 from +1.8% reading sequentially, in line with market expectations of +2.2% and the sharpest increase in one year.

On a sequential (m/m) basis, the U.S. PPI jumped +0.5% in Apr’24, from a downwardly revised -0.1% decrease in the previous month, above market forecasts of 0.3% after the sharpest increase in the last 8-months last month (since July’23).

In April, producer prices for services increased +0.6%, the most since July, following a downwardly revised -0.1% fall in March. A +3.9% advance in cost for portfolio management was a major factor, but prices also went up for machinery and equipment, wholesaling, residential real estate services, automobile retailing, guestroom rental, and truck transportation of freight. In April, goods cost rose +0.4%, rebounding from a -0.2% fall in March, with nearly three-quarters due to a +5.4% increase in gasoline. The cost of diesel fuel, chicken eggs, and electric power, nonferrous metals also rose.

Overall, after the latest revision, the 6M rolling average of US PPI is now around +1.4% against +1.3% prior.

Also, fine prints of BLS flash data show US core personal consumption for the PPI index, equivalent to core PCE increased around +0.3% in Apr’24 after a +0.0% advance in the previous month. If this trend/sequential average rate of around 0.3% holds in Apr’24 sequential core PCE/CPI data, the annual core PCE inflation would be around 2.8% in Apr’24 unchanged sequentially, while the core CPI should be around +3.6% from +3.8% (market consensus +0.4% m/m and +3.6% y/y).

Overall, fine prints of US PPI data indicate some cooling in core CPI data for April; thus Wall Street Futures, Gold surged, and USD stumbled after the initial knee-jerk move amid hotter than expected sequential core PPI; March sequential PPI data was revised significantly downwards. But huge revisions in US PPI data are also a matter of concern and make the data a little trustworthy. Also, the combination of lower PPI and higher CPI may indicate more pricing power in the hands of producers (service providers and manufacturers) and higher EBITDA/operating profit (greedflation), positive for equities.

On Tuesday, the US imposed the much-awaited additional import duties/tariffs (Biden-tax) on certain Chinese imports (over and above many other items having Trump-tax) ahead of the Nov’24 election as China’s supremacy now matters to almost every other major democracies like US, Canada, UK and also India. But the market stabilized after some initial knee-jerk reaction as the US clarified about exceptions also and no great retaliation effort by China. Recently Yellen visited China and may have explained Biden’s domestic political compulsions ahead of the Presidential election.

Ahead of the US election, both China and Russia as well as Iran will be very active in influencing US digital/social media in its favorable candidate. In this way, the US now is paying almost 15% of revenue as interest on public debt and thus needs higher revenue, whatever may be the political narrative. Neither Biden nor the Trump admin is now in a position to impose fresh direct taxes on individuals or corporations. Thus the easiest way to collect additional revenue from US consumers (household + business) is by imposing additional indirect taxes (import duties/tariffs) on the import of Chinese consumer and industrial goods.

And it’s not only China, maybe other SE, SA or even EU exporters. Chinese exports will not suffer significantly because of the progressive devaluation of CNY against USD in the last few years in anticipation of such US tariffs perpetually (under both Democrats and Republicans). Also, US consumers will not pay significantly higher due to currency/FX leverage. Thus overall, higher tariffs may not cause incrementally higher inflation in the US.

On Tuesday, the U.S. President Biden said:

·         New tariffs on Chinese goods (worth around $1B annually) will ensure our workers are not held back by unfair trade practices

·         For years, the Chinese government has cheated by pouring money into Chinese companies which then dump cheap products onto the market, hurting competitors who play by the rules

·          I’m announcing tariffs that will ensure American workers are not held back by unfair trade practices

·         The bottom line is that I want fair competition with China, not conflict

·         And we’re in a stronger position to win the economic competition of the 21st century against China or anyone else because we’re investing in America again

·         Trump's proposed across-the-board tariffs would drive up costs for families

·         I want fair competition with China, not conflict

·         China heavily subsidizes products that are dumped in foreign market

·         Biden expects minimal China tariffs response

·         China will probably try to figure out how to raise tariffs, possibly on unrelated products

·         US Trade Representative Tai: I will issue specific tariff timing, and exclusions next week

·         US Treasury Secretary Yellen: New Chinese tariffs won't result in significant price increases in the US

·         US Treasury Secretary Yellen Expects American-Made EV Prices to Decrease Over Time

·         US Yellen says new tariffs on China won't result in significant price rises in the US

·         China expresses strong dissatisfaction with US tariff hikes

·         China will take resolute measures to defend its rights and interests; Calls for the US to immediately correct course

·         Italy's Economy Minister Giorgetti: The G7 finance ministers' summit next week will discuss risks of global trade fragmentation after the "very tough" US tariffs against China

On Tuesday, Fed’s Mester said:

·         I am not eager to consider interest-rate hikes

·         The Fed is in a really good place to study the economy before charting the rate path

·         Fed in ‘Good Place’ to Study Economy Before Charting Rate Path

·         It’s too early to conclude that we stalled out or that inflation is going to reverse

·         There are definite signs that the real side of the economy is moderating, and that is helping to bring balance back to the economy

On Tuesday, Fed’s Powell said:

·         We've seen demand for workers cooling off pretty substantially; you also see wages coming down. I think that tells you that the policy is probably restrictive

·         The US continues to benefit from a strong pandemic response

·         The US economy has been performing very well

·         The US economy has a very strong labor market

·         Consumer spending and business investment are strong

·         There's still experiencing labor shortage in many industries, but overall it is a good picture looking at the US economic data so far

·         The labor market coming is back gradually into a better balance

·         The labor market is now about as tight as it was before the pandemic

·         There are signs of gradual cooling in the labor market, with supply and demand getting into better balance

·         Inflation in Q1 was notable for the lack of further progress

·         We did not expect a smooth road on inflation, we have to be patient and let policy do its work

·         We expect continued GDP growth, 2% or better

·         We expect the labor market to continue to rebalance but remain strong

·         My confidence in inflation moving back down is lower than it was

·         The Producer Price Index reading was quite mixed

·         The labor market is about as tight as it was before the pandemic in 2019

·         I wouldn't call the PPI reading hot, but sort of mixed

·         When asked if inflation will prove more persistent: The Fed doesn't know yet

·         Restrictive policy may take longer than expected to do its work, & bring inflation down

·         Time will tell if we are sufficiently restrictive on policy

·         I don't think it's likely that the next move would be a rate hike. It's more likely that we would hold the policy rate where it is

·         The housing inflation has been a bit of a puzzle

·         There are lags between the decline in market rates, and it showing up longer than we thought

·         Lags from current rents to CPI is longer than we thought

·         Non-housing services inflation is the one that may take the longest

·         I am confident we will get there though

·         We've made real progress on inflation

·         It looks like it will take longer to get inflation confidence

·         We've seen demand for workers cooling off pretty substantially; also see wages coming down. I think that tells you that the policy is probably restrictive

·         We did not expect this to be a smooth road. But these [PPI readings] were higher than I think anybody expected

·         We’ll need to be patient and let restrictive policy do its work

Bottom line: Summary

·         Fed may not cut rates before Nov’24 US election

·         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 stalled ahead of the Nov’24 election, while the unemployment rate and bond yields are ticking up

·         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 a Trump tantrum from Jan’25

Market impact:

On Tuesday, Wall Street Futures and gold surged after knee-jerk low even after hotter than expected US PPI report as negative revisions and an overall mixed nature indicated +0.3% sequential US core CPI pace in April rather than +0.4% market expectations presently. The odds for a Fed rate cut initially fell but then returned to the same level as they were before the PPI release, at 65% in September and 78% for November. Also, the combination of lower PPI and higher CPI may indicate more pricing power in the hands of producers (service providers and manufacturers) and higher EBITDA/operating profit (greedflation), positive for equities.

On Tuesday, Wall Street was boosted by techs, real estate, communication services, banks & financials, consumer discretionary, healthcare, utilities, and materials, while dragged by consumer staples and energy. Script-wise, Wall Street was boosted by Intel, JPM, American Express, Goldman Sachs, Amgen and Microsoft, while dragged by Walmart, Coca-Cola, Visa, Chevron, Merck, and IBM. Among other stocks, GameStop and AMC soared. On Holding, shares jumped on earnings beat, while Home Depot slid after a revenue miss. Also, Alibaba tumbled early Wednesday on an earnings miss.

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

Whatever may be the narrative, technically Dow Future (39545) has to sustain over 39800 for a further rally to 40000/40350-40450/40600 and even 40700-42600 levels in the coming days; otherwise, sustaining below 39750, DJ-30 may again fall to 39500/39200-39000/38800 and further to 38600/400-38100/37950-37650/37450*, and further fall to 37300*/37200-37050/36600 and 36300/36300 and even 35700 levels in the coming days.

Similarly, NQ-100 Future (18280) has to sustain over 18400 for any recovery/rally to 18600/18750-18800/18900*-19100/19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18350-18250 may again fall to 18100/18000 and 17800/17700-17600-17500 and 17400/17300-17100/17000* and 16890/16700-16595*-16100/15900 in the coming days.

Also, technically Gold (XAU/USD: 2359) has to sustain over 2385-90/97 for a further rally to 2400/2410-2425/2435* to 2455-2475/2500; otherwise sustaining below 2380-2370, may again fall to 2355/2345-2335/2325 and further to 2315/2300-2290/2270* and 2255/2235*, and 2180/2145*, and further to 2120*/2110-2100/2080-2060/2039 and 2020/2010-2015 in the coming days.