US stocks surged on softer core CPI and JPM earnings boost

·         Gold surged on last-minute hurdles of Gaza war ceasefire amid domestic coalition political compulsion of Israel, but ceasefire should start by Sunday

·         The market is now again expecting one Fed rate cut in Q1CY25 after softer US core inflation data for Dec’24, but overall core CPI inflation remains around 3.3% in 2024 against the target 2.3%

On Monday, Wall Street Futures recovered from hot NFP data panic low amid short covering and value buying coupled with renewed hopes of an imminent Gaza war ceasefire; but Gold is still in a buoyant mood on last-minute suspense. On Tuesday, Wall Street Futures again got some boost on hopes of softer core CPI reading for Dec’24 after colder core PPI data; but techs were under pressure ahead of Trump's inauguration and an escalation of Trump tech war 2.0.

On Tuesday, the focus of the market was on U.S. inflation data for Dec’24 as it may influence the Fed's decision for any rate cut action in the coming months. Fed will also consider an overall 6/3-month rolling average of data for both core inflation (CPI+PCE) and employment situation report/unemployment rate.

On Wednesday, the BLS data (NSA) showed the annual (y/y) US core CPI inflation increased by +3.2% in Dec’24, eased from +3.3% sequentially and below the median market consensus of +3.3%. The US core CPI was unchanged at +3.3% for the last three months (September, October, and November) after stalling at +3.2% in July and August. The core CPI for November 24 is still substantially higher over Dec’19 (pre-COVID) and the Fed’s price stability targets for core CPI levels of +2.3%.

Overall, the average of US core CPI was at +3.4% in 2024 against +4.8% in 2023, and +6.2% in 2022, while the 3M/6M rolling average was around +3.3% (y/y) in October, unchanged from the previous month and the 3M/6M rolling average was 3.3%, remains the same as in the last report. Overall, the US core disinflation pace is almost stalled in H2CY24. As per current and projected sequential ruin rate, the US core CPI inflation may come down to around +2.3% Fed targets by December’26.

The US core CPI needs to go down at least 1.0%  from present levels of 3.3% for the Fed’s price stability target of core CPI inflation of around 2.3%, which is equivalent to core PCE inflation of around 1.5%. The Fed needs core CPI and core PCE inflation around 2.3% and 1.5% respectively so that overall average core inflation remains around 2.0%. And Fed also needs to keep the US unemployment rate at least around 4.0% on a durable basis for its maximum employment on a sustainable basis on an average for the longer term, but also has to keep it down around historically low unemployment levels of 3.5% (pre-COVID) for a dream combination of maximum unemployment and minimum price stability.

On Tuesday, the BLS data (SA) also showed the sequential (m/m) US core CPI increased +0.2% in Dec’24, easing from +0.3% in the preceding four months and below median market expectations of +0.3%. Fed needs an average sequential core CPI rate of around +0.2% consistently for 2.0-2.3% core CPI targets in the longer/medium term, but it stalled at +0.3% in the last four months since August’24. Overall, the 6MRA of US sequential core CPI was +0.3%, while the 3MRA was +0.3% and the 2024 average was +0.3% against +0.3% in 2023 and +0.5% in 2024.

The U.S. Core service inflation (w/o energy service) increased by +4.4% in Dec’24, eased from +4.6% sequentially, but is still substantially above pre-COVID December’19 levels of 3.0%. The Fed is now closely focusing on core service inflation, which is still quite elevated and sticky led by Shelter/Housing inflation amid higher demand for housing an increasing number of immigrant workers (increasing population), and the legacy issue of lack of adequate supply of affordable housing in the US.

Unlike China, the US is unable to create affordable housing (PPP model/private/public), smart cities, and high-speed railways for the increasing population due to a lack of political bipartisan consensus between Democrats and Republicans. The US has been suffering long from political & policy paralysis to increase the supply capacity of the economy (both social and traditional infra) to meet increasing demand and balance inflation.

Moreover, now homeowners are not ready to accept lower rent due to higher demand and higher borrowing costs (home/mortgage loans). And so far, President-Elect Trump’s election campaign promises didn’t share any meaningful plan to ensure more supply of affordable houses (like Democrats) as Trump may be more interested in the premium housing segment as Trump himself is a big building developer/promoter before becoming US President.

In Dec’24, the US Shelter inflation edged down to +4.6% from +4.7% sequentially, but still substantially above pre-COVID (Dec’19) levels of +3.2%.

In November’24, the BLS data also shows the US super core CPI inflation (w/o food, fuel/energy, shelter/housing, used cars & trucks) increased by +2.4% from +2.4% sequentially; i.e. unchanged, but remains substantially over December’19 (pre-COVID price stability) levels of +1.7%.

On Tuesday, the BLS data (NSA) also showed the annual (y/y) US total CPI inflation edged up to +2.9% in Dec’24 from +2.7% sequentially, but in line with the median market forecasts of +2.9% and the highest since July’24. The US total CPI inflation edged up for a 3rd consecutive month in Dec’24 to +2.9% against Dec’19 pre-COVID levels of +2.3%.

In Dec’24, the US food inflation edged up to +2.5% from +2.4%, while energy inflation fell by -0.5% from -3.2%. The US food inflation was around +1.8% in December’19 pre-COVID days, while energy inflation was around +3.4%, and total CPI (headline inflation) was +2.3%, at the Fed’s target and equivalent to total PCE inflation +1.5%.

 

Overall, the 2024 average US CPI was +3.0% against a yearly average of +4.1% in 2023; the 3MRA/6MRA total CPI was around +2.7% in Dec’24; officially the US Congress has given Fed price stability mandate of 2.0% CPI on a sustainable basis; not core CPI or core PCE and even total PCE inflation. However, the Fed usually takes the average of core PCE and core CPI inflation for any policy stance as core inflation generally gives a fair picture of underlying inflation (without volatile fuel/energy and food inflation); also there is always a difference of around 50-100 bps between core CPI and core PCE inflation. But ordinary Americans are now concerned with higher cost of living expenses, which is total CPI.

On Wednesday, the BLS data (SA) also showed the sequential (m/m) US CPI edged up to +0.4% in Dec24 from +0.3% in the prior month, above the median market expectations of +0.3% advance and highest since Mar’24. And the 6MRA of US sequential CPI was +0.2%, while the 3MRA was +0.3% and the 2024 average was +0.2% against +0.3% in 2023 and +0.5% in 2024.

Overall, the US total CPI is now around +22% higher than pre-COVID December’19 levels against the normal run rate of +10% (@2.0-2.5% per year). Higher cost of living and higher input costs for SMEs were some of the primary economic factors behind the anti-incumbent wave against the Biden-Harris admin and Trump’s win in the November’24 election.

Conclusions:

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed will now try to bring down average core inflation from around 3.0% to 2.5% by keeping the unemployment rate at least around 4.0% by December’25 and then 2.0% core inflation and 3.5% unemployment rate by December’26 to achieve its mandate of maximum employment and price stability.

As US core inflation almost stalled in H2CY24 at around +3.3% on average, while the unemployment rate remains stable at around 4.2% along with resilient Real GDP and PDPF growths around 2.8-3.0% on average, the Fed should have paused in December to asses more data and Trump policies on inflation and employment. But the Fed cut -25 bps in Dec’24 too (after September and November) to make up for previous policy mistakes and be able to be ahead of the curve despite core disinflation almost stalled in H2CY24, while the unemployment rate remains stable around 4.0% and economic activity remains resilient.

Despite unfavorable data, and Trump policy uncertainty Fed cut on 18th December’24 to catch up with synchronized global easing and also to keep differential with ECB, which cut -100 bps in 2024. Fed may have also made a policy mistake by not cutting rates by 50 bps in H1CY24 and thus now cutting 100 bps in H1CY24 to catch up.

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 +4.50% to 4.00% by Dec’25. Fed may like to keep the repo rate at 4.5% against average core CPI inflation for 2024 around 3.5% for a real repo rate +1.0%, moderately restrictive, but lower than 2.0% in H1CY24, when the repo rate was 5.50% against average core CPI inflation +3.5%. Looking ahead, the Fed may like to keep the core real rate around +1.00% and cut gradually every six months till Dec’27 for a repo rate of +3.00% from +4.50% at present.

Thus the Fed cut on 18th December for a cumulative rate cut of 100 bps in 2024 to a repo rate of 4.50% against the average core CPI of 3.5% for 2024, so that the real repo rate remains around +1.00%. Fed may have made a policy mistake by not cutting from H1CY24 when 3MRA of core CPI was around +3.5% on average. Thus Fed is now cutting 50 bps extra in H2CY24 to stay ahead of the curve.

But despite a 50 bps projected rate cut in 2025-26, the Fed may cut 75-100 bps each if Trump’s immigration and tariff policies are less hawkish in reality due to moderate Musk & Co., who may ensure good relations between Trump/US with China and Russia (Putin); Musk has not only good business relation with China but also a good ‘personal/diplomatic’ relation with Putin for the last few years.

Fed front-loaded 50 bps rate cuts for 2025 in H2CY24 and thus may cut only 50 bps in 2026. But the Fed may also change its stance in the coming months and go for 100 bps rate cuts in 2025 if the US unemployment rate ticked up towards 4.5%, while core CPI inflation ticked down below +3.0%. We have to keep in mind Fed often changes its goalposts to suit its narrative/stance/rate action even after contradictory jawboning. The Fed should maintain more credibility as the Fed is the de-facto central bank of the world and controls almost all types of financial asset classes, with USD being the undisputed preferred global trade & reserve currency.

In H1CY25, the Fed may also share some concrete plans to end the QT, which may be positive for UST and negative for US bond yields, USD. Fed is now cutting rates while doing QT, which is two contra monetary policy tools. As a result, bond yields remain elevated at around 4.50% and the real economy may not be getting the full effect of a 100 bps rate cut in 2024. The market usually discounts Fed rate cuts well in advance in line with regular Fed talks and official dot plots.

Thus Fed may close the QT first by June’25 at B/S size around $6.60-6.50T from present levels of around $6.89T. Fed may keep the B/S size around 22% of projected nominal GDP around $30T by 2025, which may be an ideal level for the Goldilocks nature of the US economy and may not cause another REPO/Funding market crisis as we have seen late 2019 under Trump and Powell-1.0.

Bottom line:

Fed may first close QT by June’25 and then resume the rate cut cycle for 50 bps cumulative in 2025. But the Fed also changes its narrative/goalposts quite frequently and thus its credibility is now at stake. Overall, the Fed now has to bring core inflation (PCE+CPI average) from present levels of 3.3% to 2.3% and unemployment rate from the present average of around 4.2% to 3.5% by Dec’27 to declare victory for its dual mandate of minimum price stability and maximum employment.

Market Impact:

Wall Street Futures surged Wednesday on renewed hopes of the next Fed rate cut from May/June’25 instead of earlier July. Also, hopes of an imminent Gaza war ceasefire boosted stocks to some extent along with an upbeat report card from banking major JPM. But last-minute reported hurdles by Hamas and domestic coalition political compulsion are also delaying approval of the Gaza war ceasefire and hostage exchange deal by the Israeli Parliament, boosting Gold, and undercutting stocks.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 42200) now has to sustain over 41800-41600 for any recovery and rally to 43000/43350-43800/45500 in the coming days; otherwise sustaining below 41600, DJ-30 may further fall to 41200/40600-40400/40000 in the coming days.

Similarly, NQ-100 Future (20990) has to sustain over 20700-21000 for recovery and rally to 21500/21900-22250/222500 and further 22700-23000/23300 in the coming days; otherwise, sustaining below 20700, NQ-100 may further fall to 20500/20300-20100/19250 in the coming days.

Technically, SPX-500 (CMP: 5865), now has to sustain over 5950 for any further recovery/rally to 6025/6050-6150/6200 and 6350/6500 in the coming days; otherwise, sustaining below 5925-5900, SPX-500 may further fall to 5800-5775 and 5700/5600-5475 in the coming days.

Also, technically Gold (CMP: 2690) has to sustain over 2705 for a further rally to 2725 and further 2735/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2700-2685 may again fall to 2655/2620-2605/2600 and 2595/2575-2535/2435 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 $2500-2400 levels if Trump indeed can mediate both the Gaza and Ukraine war ceasefire by early 2025.