US real GDP may grow around 3% in 2024 vs Fed estimate of 2%

·         Wall Street surged on hopes of an imminent Gaza and Ukraine war ceasefire and dual stimulus under Trump 2.0 while maintaining a moderate policy tantrum

On Wednesday (27th November) some focus of the market was also on US GDP data as it’s an indication of whether the US economy is set for hard or soft landing while trying to restore the price stability mandate. The BEA data (2nd estimate) shows U.S. real GDP for Q3CY24 was around $23386.7B (seasonally adjusted at an annualized rate) against $23223.9B sequentially (+0.7%) and $22780.9B yearly (+2.7%). 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, slightly above the 1st estimate ($23386.2B) of +2.8%. In the previous QTR, the U.S. Real GDP grew at an annualized rate (seasonally adjusted) of +3.0%

Overall, the US real GDP for Q3CY24 edged up slightly in the 2nd estimate from the 1st estimate. In the advance estimate, the increase in real GDP was also 2.8 percent. The update primarily reflected upward revisions to private inventory investment and nonresidential fixed investment as well as downward revisions to exports and consumer spending. Imports, which are a subtraction in the calculation of GDP, were revised down.

In Q3CY24, the increase in real GDP primarily reflected increases in consumer spending, exports, federal government spending, and non-residential fixed investment. Imports, which are a subtraction in the calculation of GDP, increased.

Compared to Q2CY24, the deceleration in real GDP in the third quarter primarily reflected a downturn in private inventory investment and a larger decrease in residential fixed investment. These movements were partly offset by accelerations in exports, consumer spending, and federal government spending; Imports accelerated.

As per the 2nd estimate, the US economy expanded an annualized 2.8% in Q3CY24, almost the same as in the 1st estimate, compared to 3% in Q2CY24. Personal spending increased at the fastest pace since Q1CY23 although it was revised slightly lower from the advance estimate (3.5% vs 3.7%). US personal spending was boosted by a 5.6% surge in consumption of goods (vs 6% in the advance estimate) and robust spending on services (2.6%, the same as in the advance estimate). Government consumption growth was unrevised at 5%.

In addition, the contribution of net trade was slightly lower, with both exports (7.5% vs 8.9%) and imports (10.2% vs 11.2%) revised lower. On the other hand, private inventories dragged less than the advance estimate. Also, fixed investment rose more than anticipated (1.7% vs 1.3%). 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) drags -4% on an average.

The Fed is now focusing on PDFP (Private Domestic Final Purchase; which is Personal Consumption Expenditure-PCE+ Gross Private Domestic Investment; i.e. core real GDP, constituting almost 87% of overall real GDP. The seasonally real PDFP has grown +3.0% in Q3CY24 on an annualized basis, slumped from +3.9% in Q2CY24. If we consider the overall TTM average, the annualized growth rate of real PDFP was around +3.0% against overall real GDP growth of +2.6%.

The Fed is viewing the average core real GDP growth at 3.0% as a sign of above-trend growth, but at the same time also of the view that the productivity of the US economy at around +4.0%, running higher than the core real GDP growth +3.0% on an average, it’s ensuring goldilocks nature of the US economy rather than causing overheating. The productivity of the US economy is running around +4.0% on average and higher than the real core GDP growth of +3.0%, which ensures the goldilocks nature of the economy, without causing any overheating and inflation.

The US nominal GDP (at current prices) increased +4.7% (seasonally adjusted annualized rate) to around $29354.3B in Q3CY24 against +5.5% in the previous QTR. On seasonally not adjusted (NSA) and quarterly rate (not annualized), the actual US Real GDP was around $5866.7B at Q3CY24 vs $5817.2B sequentially (+0.9%) and $5724.1B annually (+2.5%).

Overall, the U.S. real GDP may grow around 3.0% in 2024 to over $23.5T, higher than the Fed’s estimate and trend rate around +2.1%. But in Q4CY24, US GDP may be also negatively affected due to a higher negative impact of net trade as US imports of goods, especially from China may have soared in recent months to beat any potential fresh tariffs after Trump takes charge of the White House from 20th January’25.

On Tuesday (26th November), the Minneapolis Fed President Kashkari said:

·         It is still appropriate to consider another interest-rate cut at the December FOMC meeting

·         The government must take steps to achieve a sustainable fiscal path

·         The natural rate may be higher and policy not as restrictive

·         Considering the 25-basis-point cut in December: reasonable debate

·         Rate Cut Next Month is Reasonable to Consider

·         Big Question Mark on Neutral Rate

·         Consideration for the December rate cut

·         Government Must Take Steps Towards Achieving Sustainable Fiscal Path

·         Tit-for-Tat Tariffs May Lead to Inflation

·         Geopolitical risks remain forefront of the economic outlook

·         Watching China's Economic Issues Closely

·         Neutral interest rate potentially higher, policy less restrictive

·         Geopolitical risks are a primary concern for economic forecast

·         Suggests rate cut in December

·         No stance on Bessent Treasury nomination

·         Suggests neutral rate could be higher, Fed policy less restrictive

·         Government Needed to Put US on a Sustainable Fiscal Path

·         Waiting to see new administration policies

·         Monitoring China's Domestic Economic Challenges Closely

·         Sees Inflation Gently Trending Down

On Tuesday (26th November), the Chicago Fed President Goolsbee said:

·         Interest rates will be lower by the end of 2025

·         We're closer the to median on neutral rate estimates

·         I caution against focusing on inflation in any one-month

·         Rates have a fair way to go before they get to neutral

·         Interest rates will be lower by the end of 2025

Conclusions:

As US core disinflation may have stalled around 3.0% (CPI+PCE average) in Q4CY24 after Q3, while the unemployment rate remains stable around 4.0% and economic activities including GDP growth resilient, the Fed may pause in December’24 after cutting rates 75 bps cumulative in September and November’24. And then depending upon actual core inflation and employment trajectory, if there is no major surprise on any side, the Fed will gradually cut rates from March’24 for every alternate meeting (QTR end) till at least H1CY27. Fed may cut cumulative 100 bps each in 2025-26 and 59 bps in 2027 for a longer-term neutral repo rate of 3.00%.

The market is still now discounting around 53% of the 25 bps Fed rate cut in December’24. Although it stumbled from around 85% in the last two weeks after less dovish Fed talks including comments by Powell, the Fed may ensure around 0% by December 1st week before going for a blackout for the 18th December FOMC meeting. Thus Wall Street Futures and Gold may slip in the days ahead and the market/Fed will now focus on November NFP/BLS job data before the blackout period and also core inflation data during the blackout period.

Apart from data and its outlook, the Fed may also pause in December, January, and February as may need time to assess the actual politics & policies of Trump 2.0, especially on tariffs, illegal/legal immigration, and also election narrative of mass deportations, which may affect US labor market and eventually inflation.

Bottom line:

Looking ahead, the control of Wall Street may be more with Trump’s Twitter/truth handle rather than Feed/Powell. Wall Street is already hovering above the extreme bubble zone of TTM PE 30 on hopes of dual stimulus and an imminent end of the Gaza & Ukraine war under Trump 2.0. As the Fed rate cut cycle of around -250 bps cumulative from Sep’24 to Sep’26 is almost discounted by the market, looking ahead, the focus of the market may be on the Fed’s end of QT (expected by H1CY25) and Trump’s actual policies.

During the Biden era, the control of Wall Street was basically with Fed/Powell, but now under Trump 2.0, as we have seen during Trump 1.0, the control of the US/Global market will be with Trump’s Twitter/truth handle, rather than Fed. Although this may be a great change from the Fed’s rate action monotonous/monopoly to the duopoly of Trump and Fed/Powell, Trump’s unpredictable bellicose policies or even Twitter/truth rhetorics may be negative for Wall Street in totality even after considering fresh tax cuts, huge infra spending (?) and deregulation, especially in banks & financials and follil duel/oil sector (fracking). Trump trade war 2.0 narratives may be enough for the market to have some healthy correction.

Market Impact:

Wall Street surged in a shortened holiday trading session Friday, on hopes & hypes of an imminent Gaza war ceasefire, while undercut by also frequent violations of the Lebanon/Hezbollah war ceasefire. Since Thursday, as ‘pro-active’ steps, Israel bombed some known sites of Hezbollah used for launching rockets/drones. Israel promised to ensure Lebanon/Hezbollah war ceasefire with ‘fire’ if required.

Also, Putin’s frequent nuke rhetorics are undercutting stocks (Wall Street), while buoying Gold to some extent. And fading hopes of another Fed rate cut in December’24 are also undercutting both Wall Street and Gold. On Friday Wall Street was also boosted as Zelenskyy said he's willing to end the "hot phase of the war" with Russia – including temporarily ceding captured territory by Russia - in exchange for NATO membership that includes Ukraine's internationally recognized borders:

·         If we want to stop the hot phase of the war, we need to take under the NATO umbrella the territory of Ukraine that we have under our control.

·         We need to do it fast. And then, on the occupied territory of Ukraine, Ukraine can get them back in a diplomatic way.

·         A ceasefire was needed to guarantee that Putin would not come back to take more Ukrainian territory, or that he would come back.

Although Ukraine’s President Zelensky is now Zelenskyy offering to end the 'hot phase' of war in exchange for NATO membership, Putin may not oblige as it was one of the primary causes of Ukraine War 2.0.

On Friday, blue-chip Dow Jones Industrial Average (DJ-30 Future) surged +0.6% to scale a new life time high around 45250, broader SPX-500 Future edged up +0.4% to scale a fresh life time high around 6050, and tech-heavy Nasdaq (NQ-100) jumped +0.8% to almost 20950, but still lagging the life time high area 21375.

On Friday, Wall Street was boosted by consumer discretionary, techs, materials, industrials, consumer staples, communication services, energy, healthcare, and banks & financials to some extent, while dragged by real estate and utilities. Scrip-wise, Wall Street was boosted by Nvidia, Boeing, Honeywell, Amazon, Apple, Amgen, 3M, Walmart, Caterpillar, and Goldman Sachs, while dragged by Merck, J&J, Travelers, Cisco, Chevron, Walt Disney and JPM. Chip makers/hardware makers were in demand after reports that US restrictions on semiconductor equipment and AI memory chip sales to China would be less stringent than previously expected.

For November, the S&P 500 surged 5.6%, its best month of the year; the Dow Jones Industrial Average jumped 7.5%, its best month of the year; and the Nasdaq-100 zoomed 4.9% amid hopes & hypes of dual stimulus, moderate Trump 2.0 after Trump selected deficit hawk and Wall Street ‘Friend’ Bessent as new Secretary of Treasury who can ‘manage’ bellicose policies of Trump. USD, US bond yields slipped while US bonds gained to some extent. Trump’s pick for his Treasury secretary has fueled optimism that tariffs will be measured, boosting US stocks and bonds, and sapping USD strength; earlier USD was boosted as ‘Trade war currency’. Wall Street was also boosted by the Lebanon War ceasefire and hopes of an imminent ceasefire for Gaza and also Ukraine war.

Apart from the Bessent factor, USDJPY was also dragged by hawkish comments by BOJ Governor Ueda, who virtually warned that if Japan’s core CPI continues to be elevated above 2.0%, BOJ has no option but to hike to bring the rate near the neutral zone.

On late Friday, BOJ Governor Ueda said:

·         If underlying inflation hovers around 2% in the middle to H2 fiscal 2026, BoJ's policy rate will stand close to the neutral rate

·         Yen weakness will be a risk to the outlook if the currency falls further after inflation starts rising

·         Bank of Japan to focus on wages and other areas when deciding whether to hike interest rates

On Friday, export-heavy DJ-30 also boosted to some extent on lower USD; Wall Street was also boosted by lower bond yield; i.e. lower borrowing costs.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 45000) now has to sustain over 45500 for any further rally to 45800/46000-46200/46400 and 46800/47000-47500/48000 in the coming days; otherwise sustaining below 45450/45200, DJ-30 may again fall to 45000/44750-44650/44200, DJ-30 may again fall to 43900/43300-42600/41600 in the coming days.

Similarly, NQ-100 Future (20950) has to sustain over 21200 for a further boost to 21350-21500 and further to 21700/21900-22050/22500 and even 23000 levels in the coming days; otherwise, sustaining below 21150, NQ-100 may again fall to 20950/20850-20500/20300 and 20000/19800-19650/19350 in the coming days.

Technically, SPX-500 (CMP: 6050), now has to sustain over 6100 for any further rally to 6150/6200-6350/6500 in the coming days; otherwise, sustaining below 6075/6050 may again fall to 6000/5950-5900/5850 and 5675/5600-5550/5500 in the coming days.

Also, technically Gold (CMP: 2650) has to sustain over 2690 for a recovery to 2700-2725 and further 2735/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2685/2675-2660/2630 may again fall to 2605/2600 and 2590/2565 and further fall to 2550/2500-2470/2450 in the coming days (depending upon Fed rate cuts, Gaza/Ukraine war trajectory); Gold surged almost 75% in the last one year since Gaza war started back in October’23. Now it may retrace to $2100 levels if Trump indeed can mediate both Gaza and Ukraine war ceasefire by early 2025.