Wall Street almost flat on stagflation concern; Gold surged

·         The UM flash data indicated the highest inflation expectations and lowest consumer sentiment in the last 6 months ahead of the US election; Bidenomics in risk

On Thursday, Wall Street Futures and gold surged, while the USD slumped on renewed hopes of an early Fed rate cut (from September 24) after hotter-than-expected initial jobless claims data. On Friday, the UM (University of Michigan) flash data shows US consumer sentiment slumped to 67.4 in May from 77.2 in April, the lowest in six months and below market expectations of 76.0. The US consumer sentiment topped around 101 in Feb’20, just before COVID, and subsequently plunged to a low around 50.0 in June’22 (post-COVID) and gradually scaled high around 79.4 in Mar’24, mostly in line with the US inflation trajectory (cost of living expenses).

Also, both current conditions (68.8 vs 79 in April) and expectations (66.5 vs 76) declined. U.S. consumers are now quite worried about the higher cost of living (still around +20% higher than pre-COVID levels), higher unemployment and elevated borrowing costs ahead of the Nov’24 Presidential election; i.e. there is some anti-incumbent wave against ruling/incumbent party Democrats (Biden admin). Biden’s opponent Trump (republican) is now consistently running ahead in any approval rating. Trump is also advocating against rampant immigrant labor (legal or illegal), which is affecting the job prospects of native Americans.

The UM flash data also shows US1Y (one year ahead) inflation expectations surged to +3.5% in May from +3.2% sequentially (m/m), higher than the market consensus of +3.2% and the highest in 6-months as the US disinflation pace stalled in the last few months.

Also, the flash UM data shows the US5Y five-year inflation expectations surged to +3.1% for May from +3.0% sequentially, higher than the market consensus of +3.0% and the highest in six months.

The UM said:

“Consumer sentiment retreated about 13% this May following three consecutive months of very little change. This 10 index-point decline is statistically significant and brings sentiment to its lowest reading in about six months. This month’s trend in sentiment is characterized by a broad consensus across consumers, with decreases across age, income, and education groups. Consumers in western states exhibited a particularly steep drop. While consumers have been reserving judgment for the past few months, they now perceive negative developments on a number of dimensions. They expressed worries that inflation, unemployment and interest rates may all be moving in an unfavorable direction in the year ahead.

Year-ahead inflation expectations rose from 3.2% last month to 3.5% this month, remaining above the 2.3-3.0% range seen in the two years prior to the pandemic. Long-run inflation expectations inched up, from 3.0% last month to 3.1% this month. Although they have been within the narrow 2.9-3.1% range for 30 of the last 34 months, long-run inflation expectations remain elevated relative to the 2.2-2.6% range seen in the two years pre-pandemic.

All of these patterns are visible when looking at trends within phone interviews alone or web interviews alone, and thus they are not an artifact of the survey’s methodological transition.”

Overall, US consumer confidence fell to a 6-month low, while inflation expectations (both 1Y and 5Y) surged to a 6-month high in the May survey; i.e. US consumers now expecting subdued economic activities and elevated inflation in the coming years, which is stagflation (incrementally lower GDP growth, higher inflation and higher unemployment) like scenario.

Lower consumer confidence along with higher inflation expectations are not good news for the economy; although consumers may advance their spending on discretionary goods & services for relatively lower prices (amid the concern of potentially higher prices in the coming days), which will boost inflation more (higher demand). Also, producers/manufacturers may get/feel higher pricing power in line with higher consumer inflation expectations and increase prices of their goods & services more than normal.

On Friday, Fed’s Bowman said:

·         Fed policy should proceed carefully and deliberately

·         We have continuing momentum in the economy

·         I don't see rate cuts as warranted this year

·         If we saw unexpected shocks, that would be a case for a rate cut

·         I want to see a number of months of better inflation data

·         It's probably a number of meetings before I'm ready to cut

On Friday, Dallas Fed’s President Logan said:

·         Q1 inflation data is disappointing

·         We've made substantial progress on inflation, with the labor market and the economy strong

·         There are uncertainties if the policy is sufficiently restrictive

·         It is too early to think about cutting rates

·         It is not a soft landing yet

·         I still see good reasons why inflation will hit 2%

·         The neutral interest rate level may have risen

·         The strong economy could be a sign of a higher neutral rate

·         The economy's resilience is surprising given the high rates

·         Fed has made substantial progress on inflation

·         We want to see everybody testing the discount window

On Friday, Fed’s Kashkari again popped up and said:

·         The Fed is interested in AI because it contributes to productivity

·         A strong US tech sector underpins why the USD has the world's reserve currency

·         The current baseline is that strong productivity rates will moderate

·         The US has a long-term housing supply challenge

·         Higher rates will lead to less housing supply in the short term

·         am cautious about how restrictive monetary policy is

·         I am in wait-and-see mode about the future of monetary policy

·         The bar is high for another rate hike, but can't rule it out

·         The Fed will keep rates steady if inflation data warrants

On Friday, Chicago Fed’s President Goolsbee said:

·         The Fed's 2% inflation target acts as an anchor on expectations

·         Short-run inflation expectations aren't what matters

·         At this time not much evidence that inflation is stalling out at 3%

·         We hit an inflation bump this year, and now we wait

·         We're relatively restrictive on policy

·         I'm hesitant to focus too much on the recent inflation data; we've made a lot of progress

·         Given the uptick in inflation, we have to wait and see on policy

·         Fed inflation target acts as an anchor on expectations

·         If the uptick in inflation means overheating, the Fed has to do whatever we have to do to get inflation to 2%

·         Housing remains a significant inflation challenge

·         If housing inflation comes down, there will be an "optimistic lane" towards 2% inflation

·         I don't accept we are stuck at the "last mile" of inflation

·         The supply chain is mostly healed, but the benefits of the increase in labor supply may last until 2024

On Friday, SF Fed’s President Daly said:

·         Inflation is going to be a bumpy ride

·         The last three months have left considerable uncertainty about the next few months of inflation

·         There is considerable uncertainty about inflation in the next 3 months

·         I am getting different signals from firms who say consumers seem to be getting choosy but input prices are not yet declining

·         The balance sheet offers no signal about monetary policy

·         Right now no evidence that the labor market is approaching a worrisome position

·         I still see a healthy labor market and inflation that is too high

·         Risks to employment and inflation goals are balanced

·         Fed policy is restrictive but it may still take time to bring inflation down

·         Other issues for the framework will likely be the neutral level of rates, probability of hitting zero lower bound on rates, and path of potential output

·         2% is the inflation target and the Fed is not going to change the goalpost while it is trying to reach it

·         A softening labor market would be getting back to normal growth

·         If the labor market falters, I would think about adjusting the rate

·         Can't count on productivity to save the US from inflation

·         It is far too early to declare the labor market fragile and faltering

·         Still seeing disinflation underway; no doubt things are slower now than last year

·         I am still seeing supply improvements; there is no evidence the Fed has to push the economy down

·         Inflation expectations are well anchored, and consumers are becoming price-sensitive

On Friday, Fed’s Bostic said:

·         I still feel the Fed is on track for a single interest rate cut this year, though the timing is uncertain

·         Most firms say pricing power is at or near its limit, with wage growth moving to pre-pandemic levels

·         Optimistic disinflation will continue, though the path back to the Fed's 2% target may take until late next year or early 2026

·         I am thinking less about the extent of rate cuts this year and more on getting the timing right for the start of easing

·         Job growth needs to slow to be consistent with the 2% target, though that does not mean unemployment will spike

·         A gain of 175K jobs in April might be low for a pandemic, but it's still above what the economy requires accounting for population and labor force growth

·         Fed is still on track to cut rates this year but the timing is uncertain

On Friday, the U.S. Treasury Secretary Yellen said:

·         Inflation has come down substantially, but it's not where it needs to be

·         Inflation has fallen substantially, but not enough for rate cuts yet

·         The US-China relationship has improved decidedly over the past year

On Friday, the WH Economic Advisor (CEA) Brainard said:

·         We must end 2017 tax breaks for the ultra-wealthy

·         Corporate tax rates are too low for the country's fiscal health

·         Debt ceiling fights have been unproductive

·         Debt ceiling fights have been unproductive

·         Pres. Biden is set to quadruple tariffs on Chinese EVs

Bottom line: Summary

·         Fed may not cut rates before Nov’24 US election

·         Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may/may not cut rates in Dec’24; Fed may revise dot-plots in June meeting.

·         At present, Fed’s Mar’24 dot-plots show: 75 bps rate cuts each in 2024, 2025, 2026, and -50 bps in 2027 for a neutral repo rate of +2.75%

·         But the Fed may now show the June’24 dot-plots as -100 bps rate cuts each in 2025, 2026, and -50 bps in 2027 for terminal neutral repo rate +3.00%

·         Another scenario: Fed may also cut -50 bps in Dec’24 or even in Jan’25 after the Nov’24 US election to avoid any political controversy and also to assess overall inflation and employment data for the whole of 2024

·         Fed is now quite confused about the rate cut narrative from H2CY24 as the disinflation pace stalled ahead of the Nov’24 election, while the unemployment rate and bond yields are ticking up

Fed’s mandate is to maintain price stability (2% inflation), maximum employment (below 4% unemployment rate), and also to ensure financial (Wall Street) stability (maintaining min SPX TTM PE at 25) coupled with the lowest possible borrowing cost for the government (usually below 10% of core tax revenue as interest on public debt)’

Although the Fed is quite successful in maintaining the first three mandates, it’s now having a tough time in maintaining lower borrowing costs of the ‘Uncle Sam’ reckless deficit spending’. In FY23, the US government has paid around 15% of core tax revenue as interest on public debt against an earlier average of 10% and an EU/China average of around 6%; the US is set to hit almost 19% by FY25.

US public debt is now around $33T, growing more than even nominal GDP growth; more public debt, even in LCU means more money printing, more inflation, and higher inflation/cost of living. This is also boosting Gold, having limited physical supplies. Thus Central Banks like PBOC (China), and RBI (India) are now scrambling for Gold at every major fall, adding to their reserves and diversifying from USD.

Although the US Treasury controls most of the Gold holdings of Ukraine and Israel (in exchange for grants), reckless USD deficit spending/printing is now also eroding the value of USD (even though USD remains at the top of preferred global reserve currency, having perpetual global demand).

The US is taking more debt to meet mainly higher social security expenses and also higher defense expenditures, most of which are grants to Ukraine and now Israel. The US is spending little on infra capex, which is creating supply constraints against higher demand of the economy amid a growing population, migrant workers and growing middle class (solid wage growths and social security money/corruption/leakages etc).

As the US is mainly a tech-savvy innovative superpower/economy, having the advantage of USD as the global reserve currency, every other major G20 central bank including ECB, BOE, BOC, RBI, RBA and even PBOC and BOJ has to follow the Fed and thus all are fumbling in the global election year and creating more confusion than clarity in their 24/7 communications (jawboning) to bring down inflation without causing an all-out recession; i.e. to ensure soft landing.

Market impact:

On Thursday, Wall Street Futures, US bonds, and USD stumbled on increasing concern about stagflation amid higher inflation expectations and lower consumer sentiment. But Gold surged as it may be a major beneficiary of stagflation; also various central banks led by PBOC/China may be actively buying Gold at every major dip to gradually diversify from USD and also to strengthen LCU (local currency unit). Gold was also boosted by lingering suspense about the Gaza war ceasefire and a fresh offensive by IDF/Israel at Rafah to pressure Hamas either to accept the current cease-fire proposal on the plate or face another all-out war in Rafah crossings. Gold reached a high of almost 2378, before closing around 2360.

Wall Street Futures also stumbled from earlier day high on hopes & hypes of an early Fed pivot and mixed report card. Blue chip DJ-30 inched up around +0.32% at around 39615 after slipping from a day high of 39717; broader SPX-500 edged up +0.16%, while tech-savvy NQ-100 edged up +0.26%. On Friday, Wall Street was boosted by consumer staples, techs, banks & financials, healthcare, materials, and industrials, while dragged by consumer discretionary, energy, real estate, utilities, and communication services. Script-wise, Wall Street was boosted by McDonald’s, 3M, Verizon, United Health, Caterpillar, Visa, JPM, Microsoft, Nvidia and JPM, while dragged by Nike, Boeing, Amazon, Amgen, Intel, Apple (AI optimism), Home Depot, Goldman Sachs and Tesla.

On Friday, biotech giant Novavax surged after the vaccine maker announced a multi-billion dollar deal with Sanofi to co-commercialize its Covid vaccine starting next year. Novavax and Sanofi Announce Co-exclusive Licensing Agreement to Co-commercialize COVID-19 Vaccine and Develop Novel COVID-19-Influenza Combination Vaccines.  Chinese EV maker Zeekr zoomed above its IPO price of $21 a share, marking a strong debut for the company. For the week, the S&P 500 gained +1.3%, the Dow Jones surged +1.9%, and the Nasdaq edged up +0.5%.

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

Whatever may be the narrative, technically Dow Future (39615), now has to sustain over 39800 for a further rally to 40000/40350-40450/40600 and even 40700-42600 levels in the coming days; otherwise, sustaining below 39750, DJ-30 may again fall to 39500/39200-39000/38800 and further to 38600/400-38100/37950-37650/37450*, and further fall to 37300*/37200-37050/36600 and 36300/36300 and even 35700 levels in the coming days.

Similarly, NQ-100 Future (18250) now has to sustain over 18400 for any recovery/rally to 18600/18750-18800/18900*-19100/19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18350-18250 may again fall to 18100/18000 and 17800/17700-17600-17500 and 17400/17300-17100/17000* and 16890/16700-16595*-16100/15900 in the coming days.

Also, technically Gold (XAU/USD: 2359) now has to sustain over 2385-90/97 for a further rally to 2400/2410-2425/2435* to 2455-2475/2500; otherwise sustaining below 2380-2370, may again fall to 2355/2345-2335/2325 and further to 2315/2300-2290/2270* and 2255/2235*, and 2180/2145*, and further to 2120*/2110-2100/2080-2060/2039 and 2020/2010-2015 in the coming days.