Wall Street, Gold waved ahead of Fed’s expected 25 bps cut

·         The latest US retail sales data shows a resilient US economy, solid consumer spending, robust labor market, and controlled inflation

·         Fed may cut another 100 bps in 2025 and 50 bps in 2026 for a longer-term terminal repo rate of 3.00% against inflation 2.0% and 3.5% unemployment targets

·         Fed may also announce a definitive plan to end QT as the Fed balance sheet is now approaching around 22% of projected nominal GDP for 2025

On Tuesday (17th December), some focus of the market was also on US retail sales as consumer spending is the backbone of the US economy and the Fed also watches this data closely for an assessment of overall economic activities along with GDP data. On Tuesday, the CB flash data (SA) showed seasonally adjusted U.S. retail sales (goods and food services) for November’24 were around $724.6B against 719.7B sequentially (+0.7%) and 796.1B yearly (+4.1%); i.e. the U.S. retail sales increased around +0.7% in November’24 sequentially (m/m), against +0.5% in the prior month and higher than the market consensus +0.5% increase, increased +4.1%. annually (y/y). The latest US retail sales data continues to point to robust consumer spending led by the holiday shopping season.

In November’24, the US retail sales were boosted by motor vehicles and part dealers (2.6%), non-store (online) and also offline (physical) retailers (1.8%) coupled with sporting goods, hobby, musical instrument, & book stores, building material & garden equipment supplies dealers (0.4%); furniture (0.3%); electronics and appliances (0.3%); and gasoline stations (0.1%). In contrast, the Nov’24 US retail sales were flat at health and personal care stores and declined at miscellaneous store retailers (-3.5%); food services and drinking places (-0.4%); food and beverages stores (-0.2%); clothing (-0.2%); and general merchandise stores (-0.1%).

Meanwhile, US retail sales excluding food services, auto dealers, building materials stores, and gasoline stations, which are used to calculate the PCE of GDP, the so-called US super core retail sales (used in real GDP calculation-consumer spending) increased by +0.4% in November’24 sequentially. The US Retail sales data is not adjusted for inflation and includes mostly goods and food services.

Overall, after the latest revisions the average/month retail sales are now around $708.3B in 2024 (YTM) against an earlier average of $706,5B in the prior report and the 2023 average of $692.2B (still revising even after one year!). The current 2024 (YTM) US retail sales nominal growth is now around +2.5% against the 2023 rate of +3.6%. The US retail sales growth although cooled, remained strong despite higher borrowing costs and higher cost of living as the broader labor market is still robust. Adjusted inflation (CPI), the underlying real retail sales has contracted around -0.5% in 2024 against -0.6% in 2023.

The US retail sales continue to hover around 29% of nominal GDP as overall, the goldilocks nature of the U.S. economy remains intact. The 3M rolling average of US core retail sales (w/o food and fuel) grew +4.0% annually.

Conclusions:

As US core inflation (CPI+PCE) almost stalled or even edged up in H2CY24 around +3.0% on average, while the unemployment rate remains stable at around 4.0% along with resilient Real GDP and PDPF growth around 2.9% on average, the Fed should pause in December’24. But the market is now still expecting a -25 bps rate cut on 18th December as the Fed may have missed the opportunity of two rate cuts in H1CY24. Thus to make up, the Fed may also cut -25 bps in December’24 for a cumulative -100 bps cut in CY24 (by front-loading to stay ahead of the curve). Fed has to also synchronize with BOC, ECB, BOE, SNB, and various other European and APC central banks, most of which are in rate-cutting sprees like in a crisis to avert a looming stagflation or even an all-out recession.

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.

Ideally, the projected Fed rate cut of 25 bps in Dec’24 may not be assured as US core disinflation may have stalled in Q4CY24 too, while average unemployment remains around 4.0%. Thus the Fed may also give a pause in Dec’24 as the Fed may also want to see Trump 2.0 policies, especially on immigration and tariffs, both of which may affect US price stability (inflation) and the goldilocks labor market. Thus for the last few weeks, the Fed was also actively trying to talk down the implied market probability of a rate cut, but after some downward move, it again surged to almost 100%. Usually, the Fed never takes any rate action without keeping the market into confidence to avoid disorderly market movement or an unusual volatility.

Thus despite supportive data including November core PPI data indicating stalled core PCE disinflation for November/Q4CY24, and other reasons (need time to assess actual Trump policies), the Fed may cut 25 bps in December’24 if it did not try to talk down (indirect in the blackout period) the rate cut probability at least below 80-50%  in the last days.

Thus the Fed may 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 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.

Bottom line:

Despite unfavorable data, and Trump policy uncertainty Fed may 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. 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 alternate meeting till June’26 for a repo rate of +3.00% from +4.75% at present.

Market Impact:

Wall Street Futures were mixed for the last few days as China-savvy DJ-30 was under stress on Trump trade war 2.0 tantrums, while tech-heavy NQ-100 was boosted by Trump’s initiative to bring $100B startup fund from Soft Bank. The US President-Elect Trump announced Monday that SoftBank Corp. would invest $100 billion in the US and create "100,000 American jobs at the minimum" while adding that the deal was reached because of the company's optimism based on his election victory.

Trump previously met with SoftBank CEO Masayoshi Son and officially confirmed earlier reports of the company's plans for a major investment in the US at a joint press conference at Mar-a-Lago. "This historic investment is a monumental demonstration of confidence in America's future," said Trump, adding that it "will help artificial intelligence and emerging technologies are built created, and grown right here in the US." Commenting on the agreement, Masayoshi praised Trump's election, saying it would help grow the US economy.

The market also now assumes that in reality, Trump 2.0 may be less hawkish than Trump 1.0, especially for tariffs as Musk may ensure a moderate Trump. Musk has business interests in China, while also maintaining a ‘good relationship’ with Russia’s Putin despite some Ukraine-related rhetorics.

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 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.