Gold, Wall Street wobbled on less dovish Fed cut, and Iran

·         Iran may launch another revenge attack on Israel by the next few days, while Qatar may be distancing itself from Hamas as Trump set to take charge of WH

·         Fed/Powell kept open the possibility of a pause in December’24 open-ended after cutting 75 bps in September and November meeting

·         The US core disinflation has almost stalled in Q3, while the employment situation remains solid even after considering the October NFP/BLS job report distorted by various transitory factors

·         Although Trump may cause another episode of a global trade war, influential Musk may refrain Trump from doing so

On Wednesday, apart from the US election and Trump 2.0, some focus of the market was also on the FOMC meeting and the Fed’s policy decisions. As highly expected, on Wednesday (7th November), Fed cut all of its key policy rates by 25 bps; i.e. the target range for the Federal Fund's Rate (FFR-interbank rate) at 4.63%% (median of 4.50-4.75%); primary credit rate (repo rate) at +4.75%; IOER (reverse repo rate) at +4.65%; overnight repurchase agreement rate (ON RP) at +4.75% and ON RRP (Overnight Reverse Repurchase Agreement Rate) at +4.55%.

On Wednesday, the Fed lowered the federal fund's target range by 25 basis points to 4.5%-4.75% at its November 2024 meeting, following a jumbo 50 bps cut in September, in line with expectations. But the Fed removed the previous phrase it gained ‘greater confidence’ in inflation moving sustainably toward the 2% target. Also, in the Fed presser (Q&A), Chair Powell almost poured cold water on the next expected rate cut of 25 bps in December’24. Powell also left the door open for a pause in December as policymakers will have to see where the data leads, but it doesn't rule ‘out or in’ a December rate cut.

Powell also noted that the election (Trump 2.0) will have no effect on Fed policy decisions in the near term and that the Fed does not guess, speculate, or assume what future government policies will be, but is ready to take into account any unexpected policy change into its analytics/simulation model for making appropriate stance/policy. But when Powell was grilled about any likely Trump tantrum 2.0 about the Fed Chair position and Fed independence, Powell visibly fumbled but tried to defend the Fed Chair post and overall Fed independence from any political interference.

Gold surged after a brief knee-jerk reaction amid a less dovish Fed cut as Trump may try to ‘fire’ Powell, although Powell strongly defended that his appointment and duration were approved by US Congress and thus it’s not legally tenable for President Trump alone to fire him. Overall, Powell is seen as a more hawkish Fed Chair than some of his colleagues. And Trump may also try to appoint someone less hawkish or even a dove for the next Fed Chair instead of Powell.

Full text of Fed’s statement: 7th Nov’24- Federal Reserve issues FOMC statement

“Recent indicators suggest that economic activity has continued to expand at a solid pace. Since earlier in the year, labor market conditions have generally eased, and the unemployment rate has moved up but remains low. Inflation has made progress toward the Committee's 2 percent objective but remains somewhat elevated.

The Committee seeks to achieve maximum employment and inflation at the rate of 2 percent over the longer run. The Committee judges that the risks to achieving its employment and inflation goals are roughly in balance. The economic outlook is uncertain, and the Committee is attentive to the risks to both sides of its dual mandate.

In support of its goals, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point to 4-1/2 to 4-3/4 percent. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. The Committee will continue reducing its holdings of Treasury securities agency debt and agency mortgage‑backed securities. The Committee is strongly committed to supporting maximum employment and returning inflation to its 2 percent objective.

In assessing the appropriate stance of monetary policy, the Committee will continue to monitor the implications of incoming information for the economic outlook. The Committee would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of the Committee's goals. The Committee's assessments will take into account a wide range of information, including readings on labor market conditions, inflation pressures and inflation expectations, and financial and international developments.

Voting for the monetary policy action were Jerome H. Powell, Chair; John C. Williams, Vice Chair; Thomas I. Barkin; Michael S. Barr; Raphael W. Bostic; Michelle W. Bowman; Lisa D. Cook; Mary C. Daly; Beth M. Hammack; Philip N. Jefferson; Adriana D. Kugler; and Christopher J. Waller.”

 

Implementation Note issued November 7, 2024: Decisions Regarding Monetary Policy Implementation

Decisions Regarding Monetary Policy Implementation

The Federal Reserve has made the following decisions to implement the monetary policy stance announced by the Federal Open Market Committee in its statement on November 7, 2024:

·         The Board of Governors of the Federal Reserve System voted unanimously to lower the interest rate paid on reserve balances to 4.65 percent, effective November 8, 2024.

As part of its policy decision, the Federal Open Market Committee voted to direct the Open Market Desk at the Federal Reserve Bank of New York, until instructed otherwise, to execute transactions in the System Open Market Account in accordance with the following domestic policy directive:

"Effective November 8, 2024, the Federal Open Market Committee directs the Desk to:

·         Undertake open market operations as necessary to maintain the federal funds rate in a target range of 4-1/2 to 4‑3/4 percent.

·         Conduct standing overnight repurchase agreement operations with a minimum bid rate of 4.75 percent and with an aggregate operation limit of $500 billion.

·         Conduct standing overnight reverse repurchase agreement operations at an offering rate of 4.55 percent and with a per-counterparty limit of $160 billion per day.

Roll over at auction the amount of principal payments from the Federal Reserve's holdings of Treasury securities maturing in each calendar month that exceeds a cap of $25 billion per month. Redeem Treasury coupon securities up to this monthly cap and Treasury bills to the extent that coupon principal payments are less than the monthly cap.

Reinvest the amount of principal payments from the Federal Reserve's holdings of agency debt and agency mortgage‑backed securities (MBS) received in each calendar month that exceeds a cap of $35 billion per month into Treasury securities to roughly match the maturity composition of Treasury securities outstanding.

Allow modest deviations from stated amounts for reinvestments, if needed for operational reasons.

Engage in dollar roll and coupon swap transactions as necessary to facilitate settlement of the Federal Reserve's agency MBS transactions."

In a related action, the Board of Governors of the Federal Reserve System voted unanimously to approve a 1/4 percentage point decrease in the primary credit rate to 4.75 percent, effective November 8, 2024. In taking this action, the Board approved requests to establish that rate submitted by the Boards of Directors of the Federal Reserve Banks of Boston, New York, Philadelphia, Cleveland, Richmond, Atlanta, Chicago, Minneapolis, Dallas, and San Francisco.”

Full text of Fed Chair Powell’s opening statement: 12th Nov’24

“My colleagues and I remain squarely focused on achieving our dual mandate goals of maximum employment and stable prices for the benefit of the American people. The economy is strong overall and has made significant progress toward our goals over the past two years. The labor market has cooled from its formerly overheated state and remains solid. Inflation has eased substantially from a peak of 7 percent to 2.1 percent as of September. We are committed to maintaining our economy’s strength by supporting maximum employment and returning inflation to our 2 percent goal.

Today, the FOMC decided to take another step in reducing the degree of policy restraint by lowering our policy interest rate by 1/4 percentage points. We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2 percent. We also decided to continue to reduce our securities holdings. I will have more to say about monetary policy after briefly reviewing economic developments.

Recent indicators suggest that economic activity has continued to expand at a solid pace. GDP rose at an annual rate of 2.8 percent in the third quarter, about the same pace as in the second quarter. Growth of consumer spending has remained resilient, and investment in equipment and intangibles has strengthened. In contrast, activity in the housing sector has been weak. Overall, improving supply conditions have supported the strong performance of the U.S. economy over the past year.

In the labor market, conditions remain solid. Payroll job gains have slowed from earlier in the year, averaging 104 thousand per month over the past three months. This figure would have been somewhat higher were it not for the effects of labor strikes and hurricanes on employment in October. Regarding the hurricanes, let me extend our sympathies to all the families, businesses, and communities who have been harmed by these devastating storms. The unemployment rate is notably higher than it was a year ago but has edged down over the past three months and remains low at 4.1 percent in October.

Nominal wage growth has eased over the past year, and the jobs-to-workers gap has narrowed. Overall, a broad set of indicators suggests that conditions in the labor market are now less tight than just before the pandemic in 2019. The labor market is not a source of significant inflationary pressures.

Inflation has eased significantly over the past two years. Total PCE prices rose 2.1 percent over the 12 months ending in September; excluding the volatile food and energy categories, core PCE prices rose 2.7 percent. Overall, inflation has moved much closer to our 2 percent longer-run goal, but core inflation remains somewhat elevated. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. We see the risks to achieving our employment and inflation goals as being roughly in balance, and we are attentive to the risks to both sides of our mandate.

At today’s meeting, the Committee decided to lower the target range for the federal funds rate by 1/4 percentage point, to 4-1/2 to 4-3/4 percent. This further recalibration of our policy stance will help maintain the strength of the economy and the labor market and will continue to enable further progress on inflation as we move toward a more neutral stance over time.

We know that reducing policy restraint too quickly could hinder progress on inflation. At the same time, reducing policy restraint too slowly could unduly weaken economic activity and employment. In considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks. We are not on any preset course. We will continue to make our decisions meeting by meeting.

As the economy evolves, monetary policy will adjust in order to best promote our maximum employment and price stability goals. If the economy remains strong and inflation is not sustainably moving toward 2 percent, we can dial back policy restraint more slowly. If the labor markets were to weaken unexpectedly or inflation were to fall more quickly than anticipated, we can move more quickly. The policy is well-positioned to deal with the risks and uncertainties that we face in pursuing both sides of our dual mandate.

The Fed has been assigned two goals for monetary policy—maximum employment and stable prices. We remain committed to supporting maximum employment, bringing inflation sustainably to our 2 percent goal, and keeping longer-term inflation expectations well anchored.

Our success in delivering on these goals matters to all Americans. We understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission. We at the Fed will do everything we can to achieve our maximum employment and price stability goals. Thank you. I look forward to our discussion.”

Highlights of Fed and Chair Powell’s statements/comments in the Q&A: 12th Nov’24

·         The Fed cut rates by 25 bps, as expected. The decision was unanimous this time, unlike the September meeting.

·         US Interest Rate Decision Actual 4.75% (Forecast 4.75%, Previous 5%)

·         Committee judges risk to employment and inflation goals are roughly in balance

·         Powell downplayed the removing the ‘greater confidence’ phrase about disinflation pace: Removing language about ‘greater confidence’ on inflation is characterized as a drafting step; it got rid of something that had been used to explain that the test for cutting, in Sept, had been met

·         The statement changes weren't designed to serve as forward guidance

·         This isn't a tight economy. A lot of the inflation we've seen this year has been catch-up inflation

·         The Fed is prepared to adjust its assessments of the appropriate pace and destination for rates as the outlook evolves

·         The right way to find neutral is carefully, patiently

·         Not---permitted--- under the law when Powell was asked: Can the president demote you or other leadership personnel at the Fed?

·         Powell coldly says he won't quit if asked by Trump

·         No---when asked: Would you leave the Fed if the president asked you to go?

·         Powell will not resign as Fed Chair even if President Trump asked for his resignation; I would not resign if asked to

·         Fed is now no longer following the pre-COVID theme of average inflation targeting as too much low inflation or deflation may cause various other problems.

·         We believe we can complete the inflation task while keeping the labor market strong.

·         One or two bad data months on inflation won't change the process

·         We're not at the stage where bond rates need to be taken into policy

·         Geopolitical risks are elevated

·         I have said many times, the US fiscal path is unsustainable, but the public debt amount is not a big issue.

·         Inflation is on a sustainable path down to 2%

·         We expect there to be bumps in inflation

·         Growth in consumer spending has remained resilient

·         Improving supply conditions has supported the economy

·         Hiring would be somewhat higher if not for storms, strikes in October

·         Wage growth has eased

·         Labor market conditions are less tight than pre-pandemic

·         The labor market is not a source of inflation pressures

·         Core inflation remains elevated

·         Risks to achieving goals roughly in balance

·         A rate cut will help maintain the strength of the economy

·         If the economy remains strong, and inflation not moving to 2%, we can dial back policy more slowly

·         Policy is well positioned relative to risks

·         In the near term, the election will not affect policy

·         It is possible that any administration, or congress policies could have an effect that matters, those effects would be taken into account among others

·         It appears that moves in higher bond yields are not mostly about higher inflation expectations, but may reflect higher growth expectations

·         We're not at the stage where bond rates need to be taken into policy consideration

·         Since the September meeting, in the main, economic activity data has been stronger

·         The overall takeaway is a sense that downside risks of activity have been diminished

·         The change in statement omitting confidence was not meant to convey anything about the stickiness of inflation

·         We have gained confidence in inflation moving toward 2%

·         We are attentive to risks on both sides of the mandate

·         We don't want to do a lot of forward guidance

·         The Fed doesn't comment on fiscal policy

·         Monetary Policy is still restrictive

·         The labor market has cooled a great deal, it is now essentially in balance

·         Labor market conditions have generally eased, unemployment rate has moved up but remains low

·         Economic activity has continued to expand at a solid pace

·         We will continue reducing bond holdings at the previously announced pace

·         The vote in favor of the policy was unanimous

·         Inflation has made progress toward 2%, but the core remains somewhat elevated.

Conclusions:

On Wednesday, although Fed omitted the line about ‘confidence: ‘The Committee has gained greater confidence that inflation is moving sustainably toward 2 percent, and judges that the risks to achieving its employment and inflation goals are roughly in balance” in its official statement; but Powell retained the same in a slightly different language: “We continue to be confident that with an appropriate recalibration of our policy stance, strength in the economy and the labor market can be maintained, with inflation moving sustainably down to 2 percent”

Also, Powell downplayed this change of text as a formality rather than any forward guidance about rate actions in December’24 or 2025-26. Thus Wall Street, Gold recovered from the initial ‘less dovish Fed cut’ knee-jerk reaction. Moreover, the market may be now also concerned about Trump’s Fed or Powell tantrum 2.0 (like we have seen during Trump 1.0). Politicians, especially Trump always want very low or even zero borrowing costs to fund never-ending deficit spending and thus want to deploy a ‘trusted dovish’ Central Banker. Thus Gold, Wall Street got some additional boost from more Fed rate cuts during Trump 2.0

As US core inflation almost stalled in Q3CY24 around +3.0% on average, while the unemployment rate remains stable at around 4.0% along with resilient Real GDP and PDPF growths around 2.8-3.0% on average, the Fed should have paused in Nov’24 and cut -25 bps in Dec’24 rather than another jumbo -50 bps. But the market was still expecting a -25 bps rate cut each in November and December as the Fed may have missed the opportunity of two rate cuts in H1CY24. Thus to makeup, the Fe cut -25 bps in Nov’24 and may also cut another -25 bps in Dec’24 for a cumulative -100 bps in CY24 (by front-loading planned rate cuts in H2CY26) to stay ahead of the curve).

As per Taylor’s modified rule, considering the desired real REPO rate of +1.0%, core CPI inflation targets of +2.3%, unemployment targets of 3.5%, and real GDP growth targets of 3.0% and expected 2024 average levels, the Fed should cut REPO rate from present +5.0% to 4.0% by Dec’25. But the Fed may cut -25 bps both in Nov and Dec’24 despite core disinflation almost stalled in Q3CY24, while the unemployment rate remains stable around 4.0% and economic activity remains resilient.

Fed may quicken QT tapering to close the same by June’25 to keep itself ready to combat the next GFC:

Fed has already reduced its B/S from around $7.70T in Dec’24 to almost $7.00T in Oct’24. For Financial stability, the Fed may keep its B/S size at around 22% of the estimated US nominal GDP of $30T by CY25. Fed may quicken the QT rate to close the QT to ensure full transmission of rate cuts as QT and rate cuts are two contradictory tools, whatever may be the Fed narrative. Fed has already accelerated the actual QT pace to around $0.11T in September-October’24 from the prior pace of $0.08T/M during August-September’24 and $0.01T/M before June’24. At the present rate of around $0.10T, the Fed may be able to bring down the B/S to around $6.60-6.50T by March-June’25 and close the QT for better transmission of lower interest rates to the real economy.

Despite Fed’s rate cut of 75 bps in the last three months and projections of at least 225 bps more cuts by 2027, US10Y bond yields are hovering around 4.50% instead 3.50/3.75% (repo rate 4.75%) as average core CPI is now around 3.50% and also the fact that Fed has quickened the QT pace; i.e. supply of US10Y TSY bonds has increased and bond yield remains at elevated levels. Also, Trumponomics 2.0 theme; i.e. higher fiscal deficit and higher public debt; i.e. high supplies of US bonds is causing higher bond yields.

Bottom line:

The projected Fed rate cut of 25 bps in Dec’24 may not be assured as US core disinflation may have stalled in Q3CY24, while average unemployment remains around 4.0%; Fed should cut -25 bps in December’24 after a pause in Nov’24, but as Fed didn’t try to go against almost 100% implied market probability of a-25 bps rate cut in Nov’24, Fed may also give a pause in Dec’24 even after favorable data for any cuts as Fed may also want to see Trump 2.0 policies. But Powell may not take such a huge risk and irritate Trump by going for a pause in December’24. Thus Fed may cut or may not cut in December’24, but should continue to cut every alternate meeting (QTR end with a fresh SEP/Dot-plots) in 2025-26 to H1CY27 for a longer term terminal repo rate around 3.0% against projected core inflation (CPI+PCE) around 2.0% for a real REPO rate +1.0%.

Market Impact:

A permanent Gaza war ceasefire may take time even under Trump 2.0:

On early Thursday, Wall Street Futures continued record-breaking rally on Trumponomics 2.0 optimism (tax cuts, no capital gain tax on unrealized profit and hopes for banking deregulation. But Wall Street Futures stumbled, while Gold, Silver and oil surged after a report that a Squadron of US F-15E fighter jets are en route to Israel ahead of expected Iran attack as soon as this week. This comes after the Iranian leadership promised retaliation for the Israeli attacks of October 26, themselves a reaction to the Iranian ballistic missile strike of October 1. Earlier this week, the US defense secretary, Austin, ordered several B-52 bomber aircraft, tanker aircraft and Navy destroyers deployed to the Middle East. Last month, the US rushed its advanced THAAD system to Israel adding to its anti-missile defenses.

As per the report, the Israeli-Palestinian peace plan 2020 advanced by President-elect Trump during his first term will likely be back on the table when he returns to the White House on 20th January’25. The Trump peace plan envisioned Israel being able to annex all of its settlements in the West Bank while granting the Palestinians a pathway to a semi-contiguous state on the remaining territory. The plan was already rejected by the Palestinian Authority, while Israeli PM Netanyahu welcomed the plan with some reservations. His political allies, who are now part of his coalition, rejected the Trump proposal due to its inclusion of a potential Palestinian state, while Saudi Arabia and also Iran said normalization with Israel is off the table without the establishment of a Palestinian state.

Overall, fading hopes of an imminent Gaza and Ukraine war ceasefire and jumbo Fed rate cuts in 2025 may keep Wall Street under stress and extremely overvalued DJ-30, SPX-500 and NQ-100 may stumble from Trump high in the coming days. Also, the market will now focus on Trump’s election promises and actual policies/legislation going forward.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (42000) now has to sustain over 41800 for any recovery and further rally to 42900/43050-43250/43500* and 43700/44000-44500/44800 in the coming days; otherwise sustaining below 41750, DJ-30 may further fall to 41500/41400*-41200/41000* and further 40700/40300-40100/40000* and even 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (20150) has to sustain over 20400 for a recovery to 20600/20800*-20900/21000* and further rally to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20350, NQ-100 may again fall to 20000/19900 *and 19800/19700-19600/19350 to 19100/18900 in the coming days.

Technically, SPX-500 (5750), now has to sustain over 5725 for any recovery to 5935/5950*-5975 and further rally to 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5700, may again fall to 5675/5650*-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also, technically Gold (XAU/USD: 2745) has to sustain over 2760 for a recovery to 2775/2795*-2605/2615* and further rally to 2825/2850-2875/2900 and 2925/2950-2975/3000 in the coming days; otherwise sustaining below 2755-2745, Gold may again fall to 2725/2700* and 2675/2650-2625/2600 and 2590/2575-2540*/2500 and further to 2470*/2440-2425/2400-2375/2330-2275 in the coming days (depending upon Fed rate cuts,  Gaza/Ukraine war trajectory and US election outcome); under Trump 2.0, Wall Street/Gold and even oil may be more influenced by Trump’s almost daily bellicose comments rather than Fed and OPEC talks).