US stocks gained on soft landing and China stimulus optimism

On Friday, Wall Street Futures and gold slid, while USD/US bond yield surged on hotter than expected U.S. NFP/BLS job report. Additionally, increasing global/UN pressure on Israel and the US to end the Gaza war immediately boosted SPX-500/Wall Street and dragged Gold and bonds (safe-haven assets). However, the overall impact was limited as the U.S. labor market is now running colder than earlier or in Goldilocks mode, which may keep the Fed a balanced approach in 2024. The Fed may go for the much-awaited rate cuts from July’24 rather than March’24 or Oct’24. Wall Street Futures also got some support from the kneejerk panic low after UM data showed lower 1Y inflation expectations at around +3.1%.from prior +4.5% along with higher US consumer sentiment. Wall Street got a boost of soft landing optimism while bringing inflation down towards target.

Fed is expected to continue the hawkish hold stance on 14th December too and hold the repo rate at +5.50% till at least June’24 (H1CY24). If core CPI indeed falls below +3.0% and Fed is confident that average core CPI would be around +3.0% in H2CY24, then Fed may gradually cut rates by -1.00% in H2CY24 for a repo rate at +4.50%, which will translate a real repo rate around +1.50% (4.50-3.00) - in line with present restrictive policy stance to bring core CPI back to below +2.00% by Dec’25. Now all focus is on core CPI data on 12th December (Tuesday), and finally Fed MPC/decision on 14th December (Thursday) and the December SEP/DOT-PLOTS to gauze Fed’s projections of core inflation and rate actions (cuts) in 2024.

In the early Monday European session, Wall Street Futures and gold slipped further, while USD surged after a report that BOJ is not in a hurry to exit its ‘powerful’ NIRP (Negative Interest Rate Policy) and YCC (Yield Curve Control) policy in Dec’23 or Jan’24 or even shortly amid insufficient evidence of wage inflation. As a reminder, unlike all the major global central banks including the Fed and ECB, BOJ will only exit/tighten when JP wage growth sustains above +2.0% along with core inflation.

At present, Japan’s 6M average core CPI is around +4.2%, while annual wage growth is +1.5% and Japan’s PMO is virtually pleading with the private sector to increase wages appropriately as real wage growth turned negative. However, due to deflation and lack of pricing power, Japan’s corporates are not in a great profit cycle and thus also not interested in hiking wages above productivity levels. Thus Japan remains in a vicious cycle of deflation, while also one of the worst victims of high imported inflation amid currency devaluation (divergent policy between Fed and BOJ) and dependent on both imported fuel & food.

In any way, BOJ is now trying desperately to defend currency (JPY) by sheer jawboning (bluffing) like the BOJ Governor is visiting PMO to discuss FX or the BOJ office is dialing FX dealers to enquire about FX (USDJPY) levels. Usually, the market is always in the short position of JPY and whenever such ‘hawkish’ BOJ talks/reports about ‘exit’ surfaces, JPY jumps as a result of huge short covering but soon gets back to the original track. A recent example was last week when USDJPY stumbled from around 151 to 141 levels in a matter of two weeks; the journey of 147 to 141 happened last Friday, when ‘The Bank of Jokers’ (BOJ) Governor visited PMO and also made some less dovish comments.

BOJ’s ‘powerful’ forward guidance (jawboning/bluff) about ‘exit’ has been going on for the last decade as a part of Abenomics/Kurodanomics without any meaningful modification in monetary policy and thus in the last decade or so, USDJPY almost doubled from around 75 to 150; while higher USDJPY is positive for Japan’s export, it’s also causing higher imported inflation, higher cost of living or ordinary Japanese, lower consumer spending, lower capacity utilization, lower corporate profits, lower private CAPEX, lower productivity and the cycle of deflation goes on.

As overall demand in the economy is still far lower than production, BOJ still sees no proof of sustainable inflation and thus continues the never-ending hold stance, although at around +4.0% core CPI and repo rate +0.30%, BOJ’s real interest (repo) rate presently around -3.70% is the most negative among G10 central banks. Japan pays around 11-15% of tax revenue as interest on public debt, which is quite high in AE standard; the US pays around 10%, while EU/Europe and China 5.5%. Thus Japan can’t afford higher bond yield/borrowing costs and thus BOJ has no option, everything being equal.

On Monday, Wall Street Futures recovered from BOJ panic low on renewed hopes of a soft landing after NY Fed inflation expectations data also came softer than expected (like the UM survey) amid lower oil and house rent. The 1YUS inflation expectations fell to +3.4% in November, the lowest since April’21 from +3.6% sequentially. While remaining elevated, year-ahead price growth expectations eased for fuel (4.5% vs 5% in October) and rent (8.1% v 9.1%), with the latter dropping to its lowest since January’21. Meanwhile, inflation expectations remained stable at 3% for the three-year horizon and at 2.7% for the five-year horizon.

On Monday, Gold further slid on softer-than-expected 1Y inflation expectations data by the NY Fed. But late Monday, Gold recovered from a session low around 1975 to 1981 on lower bond yields after a strong bond auction for 10Y USTSY ($37B), US 3-Month Bill Auction (for $77B) and also some other bonds.

On Monday and also for the last week, the ongoing Gaza war is not affecting Wall Street or even boosting Gold, because the war may be very close to the end, most probably before X-Mas by 24th December, so that both the US, Israel, Europe and also Palestine can have a ‘peaceful celebration’. There is now huge pressure on Israel and also U.S. for a permanent ceasefire as 80% of Gaza City is now almost destroyed, comparable to the destruction in WW-II days.

On Monday, the Israeli defense minister Gallant indicated the 2-months war may be very close to ending:

·         Hamas close to ‘breaking point’ in northern Gaza

·         Hamas fighters have two options: “surrender unconditionally or death”

·         Eliminating Hamas politically and militarily and returning the detainees are the goals of the war, and we will implement these goals

·         We are deepening the achievements and besieging the last strongholds of Hamas in Jabalia and Shujayea

·         Israel has no intention of staying permanently in the Gaza Strip

·         Israel is open to discussing alternatives as to who will control Gaza after the war, as long as it is not hostile to Israel

·         Israel is open to an agreement with Hezbollah that would include a safe zone along the border with Lebanon and security guarantees

On Monday, there was a media leak involving Israeli PM Netanyahu’s discussion with his war cabinet:

·         Palestinian Authority (PA) wants to destroy Israel in stages

·         The difference between Hamas and the PA is only that Hamas wants to destroy us here and now, and the PA wants to do it in stages

·         I do not view the Ramallah-based authority PA as a viable option to rule Gaza following the war amid  indirect support for terror through education and the payment of stipends to families of terrorists

·         Gaza will be under Israeli military control

·         After the war, a civilian administrator will operate in Gaza and the Strip will be rehabilitated under the leadership of the Gulf States. We will not give in to international pressures

Market wrap:

On Monday, Wall Street (US stocks) was boosted, while Gold slid by hopes of an early end of the Gaza War, and softer than expected 1Y inflation expectorations; but Gold also recovered to some extent after stronger than expected US bond auction. Blue Chip Dow Jones Index (DJ-30) surged around +150 points, tech-heavy Nasdaq (NQ-100) jumped almost +0.85%, while broader SPX-500 inched up +0.30% and 50-stocks under it scaled a 52-week high led by Macy’s on hopes of delisting (after getting $5.8B offer from an investor group). Chip-making stocks surged led by Broadcom and Nvidia on analyst/Citi upgrade. Hopes & hypes of Chinese stimulus after negative CPI data also boosted Wall Street (although core inflation was steady at +0.6% y/y).

On Monday, Wall Street was boosted by consumer staples, industrials, materials, energy (hopes of Chinese stimulus), banks & financials, utilities, healthcare, techs, real estate, and consumer discretionary, while dragged by communication services/social media companies. Dow Jones was boosted by Intel, Honeywell, Nike, Cisco, Home Depot, and Boeing, while dragged by Verizon, Apple, United Health, Microsoft and Walgreens Boots. Oil was boosted by hopes of Chinese stimulus, US SPR buying and strict compliance with the OPEC+ cut in 2024.

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

Whatever may be the narrative, technically Dow Future (36443), now has to sustain over 36550 levels for a further rally to 36850/37050-37350/37500 levels in the coming days; otherwise, sustaining below 36400-36200, DJ-30 Future may fall to 36050/36000-35800/35500 and may further fall to 35350/35250-35000/34800 and 34650/34120-34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (16243) now has to sustain over 16300 for a further rally to 16750-16800 zones; otherwise sustaining below 16250, may fall to 16100/16050-15700/15400, and further 15100-14140 in the coming days.

Also, technically Gold (XAU/USD: 1982) now has to sustain over 1975-1995 for any recovery to 2010/2015-2035/2045 and further rally to 2065/2075-2130/2150 areas.; otherwise sustaining below 1970, may fall to and further to 960/1950 and 1928/1908-1895/1885 and 1850/1810 in the coming days (if there was a permanent Gaza war ceasefire and Fed sounds more hawkish than being expected on 14th December).