Oil, Gold, Dow wobbled on hopes & hypes of Gaza war ceasefire

·         Also hotter than expected US GDP and core deflator data may support the Fed's stance of wait & watch till Dec’24

Oil stumbled over -6% in July (till date) on hopes & hypes of an imminent Gaza war ceasefire and Trump 2.0 optimism. Trump may deregulate various curbs on oil to encourage more US production, negative for oil. At the same time, the intention of the Biden admin to refill SPR and Russia/OPEC+ stance of continuing production cuts in 2025 (including higher cuts for previous compliance factors) buoyed oil, which stumbled from around 84.70 to almost 76.00. Trump, if again elected may also impose some sanctions on Iran, which is positive for the oil. Moreover, the latest data indicates tepid demand from Asia, including China and India (after the election). Also, Russia is reducing its oil exports to China and India due to higher refining activities back home.

The market may be now expecting an imminent Gaza war ceasefire before the US Presidential Election in Nov’24, although Hamas is still questioning about intention of Israeli PM Netanyahu for such a permanent ceasefire. On Wednesday (24th July), in his 1st speech since candidature withdrawal, Biden vows to work to end the Gaza war and get hostages home before his term ends by Dec’24. Biden attributed his decision to quit the Presidential race to the need to beat Trump: ‘The defense of democracy is more important than any title’; he repeats endorsement of ‘incredible partner’ Harris. Biden said ending Israel’s war with Hamas in the Gaza Strip would be one of his highest priorities as he ends his Presidency.

The White House issued an official statement Wednesday:

“President Biden will welcome Prime Minister Benjamin Netanyahu on July 25 to the White House. The leaders will discuss developments in Gaza and progress towards a ceasefire and hostage release deal and the United States’ ironclad commitment to Israel’s security, including countering Iran’s threats to Israel and the broader region. Following the leaders’ meeting, they will meet together with the families of Americans held hostage by Hamas. The Vice President will also meet separately with Prime Minister Netanyahu on July 25.”

On Thursday some focus of the market was also on US GDP data. The BEA flash data shows U.S. real GDP for Q2CY24 was around $22918.70B against $22758.80B sequentially (+0.7%) and $22225.40B yearly (+3.1%); all in 2017 constant prices and at seasonally adjusted annualized rates. In other words, the U.S. economy has expanded by around +0.7% sequentially (Q/Q), which is equivalent to a +2.8% annualized rate, above the market consensus of +2.0%. In the previous QTR, the U.S. Real GDP grew at an annualized rate (seasonally adjusted) of +1.4%.

The increase in Q2CY24 real GDP primarily reflected increases in consumer spending, private inventory investment, and nonresidential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased. The increase in consumer spending reflected increases in both services and goods. Within services, the leading contributors were health care, housing and utilities, and recreation services. Within goods, the leading contributors were motor vehicles and parts, recreational goods and vehicles, furnishings and durable household equipment, and gasoline and other energy goods. The increase in private inventory investment primarily reflected increases in wholesale trade and retail trade industries that were partly offset by a decrease in mining, utilities, and construction industries. Within nonresidential fixed investment, increases in equipment and intellectual property products were partly offset by a decrease in structures. The increase in imports was led by capital goods, excluding automotive.

Compared to the first quarter (Q1CY24), the acceleration in real GDP in the second quarter (Q2CY24) primarily reflected an upturn in private inventory investment and an acceleration in consumer spending. These movements were partly offset by a downturn in residential fixed investment.

The US nominal GDP (at current prices) increased +5.1% (seasonally adjusted annualized rate) to around $28629.20B in Q2CY24 against +4.5% in the previous QTR. Overall, the U.S. real GDP may grow around 2.5% in 2024, largely in line with the Fed’s estimate and trend rate. The U.S. real GDP got a boost of around $2T in 2023 after changing the base year from 2012 to 2017 constant prices. Consumer spending is the backbone of the US economy, contributing almost 69% of the real GDP, followed by private CAPEX/domestic investment (18%) and government spending (17%), while net trade (export-import) dragged -4%.

On seasonally not adjusted (NSA) and quarterly rate (not annualized), the actual US Real GDP was around $5737.20B in Q2CY24 vs $5573.10B sequentially (+3.9%) and $5569.50 annually (+3.0%). The actual nominal US GDP (NSA/NA) in Q2CY24 was around $7196.50 vs $6925.20B sequentially (+3.9%) and $6802.40B yearly (+5.8%).

The core price index for personal consumption expenditures (Core PCE) in the GDP data rose by an annualized +2.9% in Q2CY24, easing from the +3.7% increase in the previous QTR. The US GDP price index (GDP deflator) increased at +2.3% in Q2CY24 against +3.1% in the previous quarter.

Overall on Thursday, Wall Street Futures and Gold briefly slipped on hotter-than-expected real GDP growths in Q2CY24 and the core PCE index for consumption expenditure component in the GDP data, which may be indicating underlying robust consumer spending and hotter inflation.

Conclusions:

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump.

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, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Market impact:

On Thursday, Wall Street Futures initially surged, while Gold, Silver, and Oil slumped on hopes & hypes of an imminent Gaza war ceasefire, but reversed to some extent in the last hour of trading as Israel complained deal chances dented after US VP Harris vows to speak out on Gaza’s woes. Overall, Wall Street closed mixed Thursday after heavy selling a day before (worst since 2022) led by Techs amid a subdued report card, the growing tech war between the US and China, and the shifting of market/investor preference from techs/digital to real economy sectors ahead of Fed’s start of rate cuts from Dec’24 or even Sep’24 (?).

Also, if Trump wins again with a Congressional majority (Trifecta-WH, House, and Senate), then there may be not only an extension of 2017 tax cuts but also fresh tax cuts, deregulation and infra stimulus. The US  now needs to increase the supply capacity of the economy to match growing demand and ensure price stability/goldilocks nature of the economy (amid growing migrants, growing population and growing demand). Also, hotter than expected GDP growth reading in Q2CY24 may be indicating Fed may afford to wait & watch for at least another quarter (Q3CY24) before going for the 11-QTR rate cuts cycle from Dec’24 (after the US election Nov’24, which may also clear the fiscal stance of the incumbent government); soft landing optimism also boosted DJ-30.

On Thursday, the broader S&P 500 stumbled 0.5%, the tech-heavy Nasdaq 100 slid -1.0 %, while blue-chip DJ-30 eventually gained +81 points from around +500 points gain in the early session amid fading hopes of an imminent Gaza war ceasefire and Fed pivot. Although, the market is still expecting two Fed rate cuts in H2CY24, looking ahead Fed may not start the rate cuts from Sep’24, just ahead of the Nov’24 election to avoid any political controversy to help Biden & Co (Democrats). Also overall inflation and employment data narrative is still in favor of the Fed to maintain the ‘wait & watch’ stance if we consider the 6M rolling average of economic data.

On Thursday, Wall Street was boosted by energy, industrials, banks & financials, and materials, while dragged by communication services, techs, utilities, healthcare, real estate, consumer discretionary, and consumer staples to some extent. Script-wise, Wall Street was boosted by IBM, Salesforce, Caterpillar, Boeing, J&J, Chevron, Goldman Sachs, Home Depot, Cisco, and Nike, while dragged by Honeywell, Microsoft, Intel, Walmart, Apple, Amazon, Amgen, Microsoft, Alphabet, AMD, Nvidia, and Meta.

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

Whatever the narrative, technically Dow Future (40500) has to sustain over 40700-40900 for any further rally to 41000/41300-41500/41800 and 41950/42000*-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 (20000) has to sustain over 20200/20600-20800/21050 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 (5580), now has to sustain over 5650-5750 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.