Wall Street in early Santa mood on hypes of dual stimulus

·         The market is now expecting synchronized global easing in 2025 by the Fed, PBOC, ECB, BOE, BOC, and even RBI along with Trump 2.0 fiscal stimulus

·         The latest JOLTS hiring data may be indicating a robust US labor market with +200K average NFP job addition for 2024 on an average

·         Techs helping Wall Street on hopes of less hawkish China Cold War policy under Trump 2.0 managed by  Musk & Company

Wall Street Futures were buoyed last week by hypes of an imminent Gaza war ceasefire after US President Biden successfully brokered the Hezbollah war ceasefire. Also, Trump’s selection of Bessent as the next US Treasury Secretary boosted UST, dragged USD/US bond yields to some extent, and buoyed US stocks, while undercutting Gold. But occasional breaches of the Lebanon/Hezbollah war ceasefire and Russian nuke narrative also buoyed Gold and silver, undercutting stocks. Lebanon Ceasefire may be also on the brink of collapse as tit-for-tat fire intensifies in the last few days soon after the Biden-sponsored deal.

Now from geopolitics to economics, on Tuesday BLS/JOLTS (Job Openings and Labor Turnover Summary) flash data shows the number of job vacancies/openings in the U.S. increased by +372K to 7744K in Oct’24 from 7372K sequentially; 8685K yearly, and above market expectations of +7480K. The job openings/labor force rate was at 4.6% in Oct’24 against 4.4% sequentially. The US JOLTS/NFP job openings and unemployed persons ratio (including NFP employees and self-employed) remained around 1 in 2024 against 2 on average in 2022-23. In Oct’24, the US JOLTS job openings were boosted by professional and business services (+209K), accommodation and food services (+162K), and information (+87K), while dragged by the Federal government (-26K).

 

Meanwhile, the number of hires and total separations changed a little to 5.3 million. Within separations, quits (3.3 million) and layoffs and discharges (1.6 million) changed little.

After the latest revisions in Oct’24, the YTM rolling average of JOLTS/NFP job openings to all unemployed persons (H/H survey) ratio was around 1 against the 2022-23 average of around 2; job openings/labor force rate was around 4.8% against 2023 average 5.6%. The 2024-YTM average JOLTS job openings were around 8066K in Oct’24 against 9351K in 2023 and 11187K in 2022, which shows the US job market is now normalizing after COVID-related distortions.

In 2022, the U.S. economy was suffering from an acute shortage of labor force due to various structural as well as cyclical issues including unfavorable demography, shrinkage of the workforce after COVID, early retirements, legal immigration issues, and lack of properly skilled workers, outsourcing, and an increasing number of multiple job holders/gig workers/freelancers.

In 2023, the US labor market was rebalanced to some extent as immigration increased/normalized after the lifting of all COVID-related restrictions. Overall, in 2024 YTM, one open job is available for around 21 potential workers (job applicants), 18 in 2023, and 15 in 2022... Also, layoffs & discharge rates remain low around 1.0% of total NFP employment levels.

Overall latest JOLTS job data details may indicate higher NFP/BLS job additions; i.e. we may see higher NFP job additions data in Nov’24 or the coming months as YTM net additions of official BLS NFP job additions are still lower by around -58K on an average till Oct’24.

In the US, JOLTS job openings refer to all positions that are open (not filled) on the last business day of the month. The survey is part of the Job Openings and Labor Turnover Survey (JOLTS). The survey collects data from around 16400 nonfarm establishments including retailers and manufacturers, as well as Federal, State, and Local government entities in the 50 states and the District of Columbia. The JOLTS assesses the unmet demand for labor in the U.S. labor market and gained attention in 2014 as one of the Fed’s favorite labor market indicators after former Fed Chair Yellen stressed it.

But the NFP job hiring data in the JOLTS survey may be also very useful in collaborating the same with official BLS/NFP job/hiring and potential NFP figures in the coming months as ideally JOLTS and official NFP job hiring by the same data collecting agency BLS should converge or reconciled. The BLS JOLTS NFP job data involves a much smaller sample size than the BLS Establishment survey and thus often diverges, but should eventually converge/reconcile.

On Tuesday (2nd December), Fed’s Goolsbee said:

·         Inflation data is a noisy series

·         I am watching housing inflation most closely

·         Inflation figures are a volatile series

·         Over the next year, rates should come down a fair amount from where they are now

·         My belief that rates will come down is rooted in the belief that inflation will come down

On Tuesday, Fed’s Kugler said:

·         Unclear if AI will not destroy or create jobs

·         The US may be around full employment, but needs to watch how potential trade, and immigration changes could change that

·         The NFP job report on Friday may well bounce back given the influence of storms and strikes on the prior report

·         A high rate of business formation could keep boosting productivity but need to be attentive to how other policies may change that

·         A high rate of business formation could keep boosting productivity but need to be attentive to how other policies may change that

·         Will make decisions meeting by meeting, policy not on a pre-set course

·         The policy is not on a preset course and will make decisions meeting by meeting

·         The US economy is in a good position, the labor market is solid, and inflation appears on a path to 2%

·         Higher productivity growth and immigration increase have driven surprising, largely desirable economic outcomes

·         October PCE inflation readings are consistent as of now with a return to the 2% goal but also show job is not yet done

·         Trade policy under the incoming administration, congress may affect productivity and prices; it is too soon to judge

·         Continuation of disinflation and modest job market cooling show Fed goals roughly in balance

·         Rate cuts so far were steps in removing policy restraint as the Fed is in the process of moving policy toward a more neutral setting

·         Current Fed policy is well-positioned to deal with uncertainties

On Tuesday, Fed’s Daly said:

·         I don't see any reason for a rate hike; the trajectory of change is down

·         Trade issues don't usually derail growth, economy adjusts

·         Even if we do another rate cut, the policy will remain restrictive

·         We knew inflation would be a bumpy ride, it is moving down gradually, but more work to do

·         The labor market is completely in balance, not a source of inflation

·         December rate cut is absolutely not off the table

·         The US economy is in a really good place

On Tuesday, Fed’s Williams said:

·         Labor Market Remains Soft but Still Strong

·         The Labour market is solid, in balance

·         Fed policy determined by incoming data

·         Inflation expected to gradually ease to 2%

·         The labor market is softer but still pretty solid

·         Retailers struggling to pass on higher costs

·         Companies have a decreasing capacity to raise the price

·         Monetary policy stays restrictive

·         The overall trend of rates coming down

·         Expect more rate cuts to happen over time

·         Right now, the economy is in a good place. The labor market is solid. Inflation is just above our 2 percent longer-run target—although there have been a few bumps along the way. And GDP growth continues to be strong, averaging about 3 percent per year over the past two years

·         Monetary policy remains in restrictive territory to support the sustainable return of inflation to our 2 percent goal. I expect it will be appropriate to continue to move to a more neutral policy setting over time

·         Our aim is to ensure that inflation continues its march toward 2 percent while sustaining the strength of the economy and labor market. We’ve come a long way, and we’re committed to getting the job done

The relevant text of NY Fed President Williams's prepared speech on 2nd December’24:

“Strong Demand, Strong Supply

In talking about where the economy has been and where it’s headed, it’s important to take stock of where we are. Right now, the economy is in a good place. The labor market is solid. Inflation (PCE) is just above our 2 percent longer-run target—although there have been a few bumps along the way. And GDP growth continues to be strong, averaging about 3 percent per year over the past two years.

As the economy has returned to balance and inflation has come down, the FOMC has taken steps to move its monetary policy stance from one that constrains demand toward one that is more neutral. In September, the Committee lowered the target range for the federal funds rate by half a percentage point, and last month it lowered it by another quarter of a point.

But with the strong growth that we’re seeing, I’m often asked the question: Why is the Fed cutting interest rates at all?

The simple answer is that while growth in demand has been strong, supply growth has been even stronger. Specifically, robust growth in both the labor force and productivity has meant that the economy can expand at a higher pace than we saw before the pandemic, without creating inflationary pressures. Importantly, our mandate is to achieve maximum employment and price stability. That means having demand in line with supply and keeping the risks to achieving our goals in balance. And now that we’ve achieved that balance, our job is to ensure the risks remain in balance.

On the Way to 2 Percent

So that’s the big-picture view. Before I go into more detail about monetary policy, I’m going to delve deeper into each side of our dual mandate, starting with inflation.

The onset of the pandemic in 2020 dealt enormous shocks to the global economy, resulting in extraordinary imbalances from high demand and unprecedented supply disruptions. That, along with Russia’s war against Ukraine and other factors, caused inflation to surge to a 40-year high of over 7 percent in June of 2022, as measured by the 12-month percent change in the personal consumer expenditures (PCE) price index. Inflation has now fallen to around 2-1/4 percent in the latest reading. Still, inflation remains above our 2 percent longer-run target, and it will take some time to achieve our inflation goal on a sustained basis.

But there are reasons to be confident that inflation is on its way to 2 percent. To start, it is helpful to look under the hood at various categories of goods and services. Inflation rates for goods and services excluding food, energy, and housing have slowed to levels that are roughly consistent with what we saw from 2002 to 2007, when core inflation was around 2 percent on average. Housing inflation, which largely encompasses rises in rents for rental units and implied rents for owner-occupied homes, remains elevated compared to that time frame. But I expect the disinflationary process to continue here, too, as lower rates of rent increases for new leases are increasingly reflected in the official inflation measures.

A recent analysis by researchers at the New York Fed reveals another contributing factor to inflation’s surge and subsequent decline. In 2021 and 2022, significant, simultaneous increases in wages and material input prices created a perfect storm in the traded goods sector. This extraordinary concurrence of outsized increases constrained the ability of businesses to adjust their input mix to mitigate the cost pressures they were facing. As a result, businesses passed more of those higher costs to the prices of their products.

But this dynamic began to subside in the middle of 2022, and it appears to be behind us now. This finding is consistent with what I am hearing in my discussions with business leaders in the Second District. Customers are increasingly pushing back against additional price increases, and margins are being compressed.

Another data point reinforcing my view that inflation is moving to 2 percent is that survey- and market-based measures show that inflation expectations remain well anchored. In particular, the latest Survey of Consumer Expectations shows inflation expectations have stayed within their pre-pandemic ranges across all horizons.4

Labor Market Equilibrium

While we are making strides to bring inflation down, the other side of our dual mandate—employment—has also come into balance. I’m sure many of you remember that in the aftermath of the pandemic, there were far too many job openings and not enough people to fill them. Since then, labor supply has increased meaningfully, and demand has eased.

Now, a wide range of metrics—including measures of vacancies, quits, and hires rates, surveys of job and worker availability, and job finding and layoff rates—indicate a cooling in the labor market from the very tight conditions we’ve seen in the past few years. My discussions with business leaders in the region also bear this out.

In addition, researchers at the New York Fed have developed a measure—the Heise-Pearce-Weber (HPW) Tightness Index—that provides a useful summary of the overall state of the labor market. This Index has declined for 10 consecutive quarters. And it is now at the level it was in early 2017, a time when the labor market was solid but not overheated. This decline also has been accompanied by slowing wage growth, which is in line with the model’s prediction. If the HPW Index remains near its current level, the growth rate of the Employment Cost Index should come in at levels that are broadly consistent with 2 percent inflation. To cut to the chase, the labor market is unlikely to be a source of inflationary pressures going forward.

Shifting to Neutral: What does this all mean for monetary policy?

The target range for the federal funds rate currently stands at 4-1/2 to 4-3/4 percent. Monetary policy remains in restrictive territory to support the sustainable return of inflation to our 2 percent goal. I expect it will be appropriate to continue to move to a more neutral policy setting over time.

The path of the policy will depend on the data. If we’ve learned anything over the past five years, it’s that the outlook remains highly uncertain. Our decisions on future policy actions will continue to be made on a meeting-by-meeting basis. They will be based on the totality of the data, the evolution of the economic outlook, and the risks to achieving our dual mandate goals.

From what we know today, I expect real GDP growth to come in at about 2-1/2 percent for this year—or maybe a bit higher—reflecting solid supply-side growth. I anticipate the unemployment rate will run between 4 and 4-1/4 percent over the coming months. And I expect inflation to be around 2-1/4 percent for the year as a whole. Looking ahead, I expect inflation to gradually come down to our 2 percent objective, although progress may be uneven at times. 

The Journey Continues

The word I’ve been using lately to describe the state of the economy is equipoise, which is a fancy way of saying equilibrium. And the journey to equipoise has been extraordinary. Inflation that was once unacceptably high is now close to our 2 percent longer-run goal, and a labor market that was once exceptionally tight is now in balance. Our aim is to ensure that inflation continues its march toward 2 percent while sustaining the strength of the economy and labor market. We’ve come a long way, and we’re committed to getting the job done.”

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.

Looking ahead, the focus of the market will be on the Nov’24 US NFP/BLS job report and also the core CPI inflation report; if there is no meaningful rise in the unemployment rate and an unusual drop in core CPI inflation, the Fed may pause on 18th Dec’24.

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it will maintain 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 Dec’25 and then 2.0% core inflation and 3.5% unemployment rate by Dec’26 to achieve its mandate of maximum employment and price stability.

From Jan’25, 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 fossil fuel/oil sector (fracking). Trump trade war 2.0 narratives may be enough for the market to have some healthy correction.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 45100) 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 (21450) has to sustain over 21200 for a further boost to 21500 and further to 21700/21900-22050/22500 and even 21450 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 2660-2680 for a recovery to 2700-2725 and further 2735/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2655-2630 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.