Wall Street jumped on Fed pivot and hopes of Gaza war pause

On Wednesday Wall Street Futures recovered on Fed pause/pivot and soft landing optimism coupled with ease of Gaza war tensions as Israel may soon call for a humanitarian ceasefire amid increasing global pressure including the U.S. The Fed will be on hold with a hawkish stance in December too and hold the same at least till August 24; the Fed tightening cycle is now almost over (if there is no abnormal surge in core inflation in the coming months).

The average sequential rate for U.S. core CPI (seasonally unadjusted) was around +0.11% in 2020, +0.45% in 2021-22, and estimated +0.35% in 2023. At a current average sequential rate of +0.25% in the last few months, the annual core CPI should be around +4.3% in Dec’23 against +5.7% in Dec’22. Looking ahead, if the rate of average sequential core CPI further declines to around +0.25% in 2024 and +0.15% in 2025, then the annual core CPI would be around +3.0% by Dec’24 and +2.0% by Dec’25-in line with Fed’s present projections. Thus there is a need for a higher restrictive rate for longer policy at least till Aug’24. By Sep’24, U.S. core CPI should be around +3.0% and then the Fed may go for rate cuts of at least -50 bps a quarter.

Thus Fed is preparing the market for a hawkish hold stance in H1CY24 with an end to the current tightening cycle. Fed is going for a hawkish hold policy action/stance amid rising 10Y US bond yield. But the Fed may continue to project at least another hike in the coming months to continue its hawkish hold stance to ensure tighter financial conditions and also manage inflation expectations. The Fed is now preparing the market for higher for longer policy.

Fed may not hike further, keeping the terminal repo rate at +5.50% with a hawkish hold stance at least till H1CY24. Similarly, ECB and BOE will continue to be on hold with a hawkish bias at +4.75% and +5.50% respectively; i.e. we have a synchronized global hawkish hold stance by major G4 central banks (Fed, ECB, BOE, and BOC) to ensure tighter financial conditions, lower demand/economic activities and lower inflation expectations/lower inflation.

Looking ahead by June’24, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions (dovish jawboning) to cut from Sep’24 (Q3CY24) to ensure a soft landing while bringing down inflation. Also, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%. This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price stability and soft-landing.

Now from economics to geopolitics, on late Thursday, the Israeli military (IDF) said:

·         We have encircled Gaza City

·         The concept of a ceasefire is not on the table at all – the IDF is waging a war to dismantle Hamas completely

·         Gaza City is the center of Hamas activity

·         Israeli forces are attacking Hamas outposts, headquarters, launch positions and launch infrastructure and were engaged in face-to-face fighting as well as street fighting

On the other side, the White House confirmed the US exploring temporary pauses in Gaza fighting. On Thursday Kirby, a White House spokesman, was asked during a news briefing to explain what “humanitarian pauses” would look like in the Gaza Strip. Kirby explained: “We’re not just talking about one pause; what we’re trying to do is explore the idea of as many pauses that might be necessary to continue to get aid [in] and to continue to work to get people out safely, including hostages. The president already worked on one such pause, when we were able to get those two Americans out and that’s what we’re kind of looking at. And just to remind, when we’re talking about humanitarian pause[s], what we’re talking about is temporary, localized pauses in the fighting to meet a certain goal or goals. As I said, get aid in, get people out.”

Late Wednesday, U.S. President Biden also publicly called for a humanitarian pause in the Gaza war to pave the way for moving people out, aiding in and freeing hostages alive. Biden is now facing intense domestic political pressure from not only the Muslim community but also from Congress and some of his colleagues. But officially, the U.S. continues to reject mounting calls from the UN, human rights groups, Palestinian leaders and various countries around the world to demand an immediate ceasefire in Gaza to stop immense civilian suffering.

The U.S. Foreign Secretary Blinken is expected to push for “a series of brief cessations of military operations in Gaza” during a visit to Israel on Friday. But publicly, Blinken said he will seek ‘concrete steps’ to protect civilians. On Thursday, departing for Israel, Blinken did not confirm reports that he would push for humanitarian pauses in the fighting while meeting with Israeli leaders Friday.

Blinken said:

“We will be talking about concrete steps that can and should be taken to minimize harm to men, women children in Gaza. This is something the United States is committed to. I’m gonna get to the details here, but it’s pretty much on the agenda---my trip would also seek to deter a wider escalation of the fighting while focusing on freeing captives held in Gaza and helping more US citizens leave the territory. We will be talking about how we can set conditions for a durable sustainable peace, durable sustainable security for Israelis and Palestinians alike.”

Overall, White House officials are indicating that Blinken will request the Israeli PM Netanyahu for “brief cessations of the hostilities”, as it is said, to allow for two things: to get the captured people (captives/hostages) out and also to get humanitarian aid [supplies] in.

On Thursday, Sanders, an influential progressive Democrat/Independent U.S. Senator also called for humanitarian pauses in the Gaza war and insisted ‘disaster in Gaza cannot continue: “The disaster in Gaza cannot continue. The world must act to save innocent lives. But just as a humanitarian response is critical, it is equally important to lay out a path to a two-state solution and a democratic Palestine. Israel cannot bomb its way to a long-term solution.”

But Palestine/Hamas sympathizers are also insisting that all these ‘humanitarian pause and peace talks’ are U.S. political drama for “covering up for Israel as it is finishing its genocide” in the Gaza Strip.

Meanwhile, a Pentagon spokesperson reiterated U.S. support for humanitarian pauses, but no ceasefire: “You have heard the President say that the US government does support humanitarian pauses to enable humanitarian aid to get in for hostages to get out. But we do not support a ceasefire, and that gives time for Hamas to regroup, which is something that … would put Israeli citizens and others in danger.”

However political pressure is increasing in the U.S. for a sustainable ceasefire agreement in Gaza. On Thursday, another leading Democrat Senator Durbin, was asked whether a ceasefire “is needed now” in the Gaza Strip. He replied, “I think it is.” Durbin also added that releasing the captives held in Gaza would have to be part of any potential ceasefire agreement: “Let’s face it-- this has gone on for decades. Whatever the rationale from the beginning, it has now reached an intolerable level. We need to have a resolution in the Middle East that gives some promise for the future.”

On Thursday, another US senator Murphy urged Israel to ‘reconsider its approach’. Murphy said “It’s time for Israel’s friends to recognize that the current operational approach is causing an unacceptable level of civilian harm and does not appear likely to achieve the goal of permanently ending the threat from Hamas.” Although, Murphy reiterated U.S. official position of Israel’s “right and obligation to defend itself”, he also cited the deadly Israeli air strikes on the Jabalia refugee camp in north Gaza Tuesday: -- “which suggests that [Israeli forces] have not struck the right balance between military necessity and proportionality. The current rate of civilian death inside Gaza is unacceptable and unsustainable---Israel should immediately reconsider its approach and shift to a more deliberate and proportionate counterterrorism campaign”.

Bottom line:

Both the U.S. and Israel are now under intense pressure for a humanitarian ceasefire in Gaza with sustainable two-state solutions rather than humanitarian pauses and the vicious cycle of confrontation. We may soon see a softer U.S. and Israeli stance on the Gaza war.

Market wrap:

On Thursday, Wall Street Futures jumped on Fed pivot, lower US bond yields, and increasing hopes for a humanitarian pause or even a sustainable ceasefire in the Gaza war and a permanent two-state solution to avoid the vicious cycle of violence. Also FY end (October) portfolio and fund rejig boosted Wall Street; blue chip DJ-30 soared almost +550 points, while tech-heavy NQ-100 SURGED +1.39%, while broader SPX-500 added around +1.82%.

On Thursday, Wall Street was boosted by energy (higher oil), real estate, banks & financials, consumer discretionary, industrials, materials, utilities, techs, healthcare, consumer staples, and communication services. Dow Jones was boosted by Apple (hopes of a blockbuster report card), Walgreens Boots, Nike, Chevron, Caterpillar, American Express and Boeing to some extent. Apple's report card released after the market hour showed subdued guidance and sales in China.

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

Whatever the narrative, technically Dow Future (33450), now has to sustain over 33550 for any further rally to 33750 and 33900/34300-34450/34855 and further to 35375-35875 in the coming days (if there is a Gaza ceasefire/Israel ends its intensifying surgical/military operation).; otherwise, if there is a further escalation in Gaza war tensions, Dow Future may further fall below 33500 for 33100-32200 and 32000/31750-31595/31190 and even 29400-28475 levels (in case of a wider major regional military conflict).

Similarly, NQ-100 Future (14850), now has to sustain over over14950 for any further rally to 1510/150-15325/15500 and further 15625/15750-15975/16075 in the coming days; otherwise sustaining below 14900, NQ-100 may again fall to 14800/14600-14450/14300-14200/14100 and 14000/13800-13650/13500-13395/12990 and 12790/12400-12180/11650 and even 11000-10675 in the coming days.

Technically, Gold (XAU/USD: 1990) now has to sustain over 2012 for a further rally to 2022/2038-2055/2085; otherwise sustaining below 2005-1995/90 may further fall to 1997/1980-1975/1955 and 1945/1934-1924/908 and further 1894-1805 in the coming days.