Wall Street recovered on fading concern of an all-out recession

·         Fed’s comments indicate Fed may not panic by cutting aggressively based on a single-month job report; the Fed may start cutting rates from Sep/Dec’24

·         Overall data indicates US labor/job market is gradually rebalancing/cooling, but it’s far from a hard landing

On Friday/early Monday, Wall Street Futures plunged into the panic of so-called hard-landing (Sham recession rule) after ‘terrible’ NFP/BLS job despite hopes & hypes of an early Fed pivot by Sep’24. Although the July job report looked ‘terrible’, if we consider the increasing number of multiple job holders and some seasonal factors, it’s still strong. And Fed may not cut rates by -150 bps in H2CY24 based on a single month’s job report; it will consider a 6M rolling average of inflation, labor, and GDP data. If the Fed indeed goes for an emergency or hurried rate cuts, it may be seen as a sign of central bank panic and may do more harm.

Wall Street spooked as ‘terrible job’ data raised concerns that the Fed may be far behind the curve by waiting too long to begin cutting rates, leading to a hard landing instead of a soft landing. While policy easing typically benefits corporate America (Wall Street), an all-out recession concern drove Main Street/Real Economy (equities) lower.

The market is also worried about increasing geopolitical tensions between Israel and Iran after the assassination of the Hamas Chief by IDF/Mossad, but Iran may not launch an all-out war against Israel at this moment. And the US/White House may not allow such war before the Nov’24 Presidential Election. Moreover, Hamas named current Gaza leader Sinwar as the next Chief following Haniyeh’s assassination, which may pave the way for the next round of ceasefire negotiations. Thus Gold slips further to almost $2360 from a high of around $2477 a few days ago. Also, the concern of a synchronized global slow down including China is negative for industrial metals like Copper, Silver as well as Gold to some extent.

The market may be also worried about the so-called BOJ tightening, which hiked the effective reverse repo rate by +0.15% to +0.25%  (paid by BOJ on CDF deposits by banks) and normalized the same against the repo rate of +0.30% (effective from Dec’2008). Earlier the effective reverse repo rate was -0.10%, which discouraged Japanese banks from depositing their excess funds with BOJ and earning a risk-free decent income. This made Japan an exporter of capital which was used in carry trade and startup (seed capital) funding all over the world. Now that BOJ is normalizing policy gradually, the Japanese Yen may not be so attractive for such carry trade and startup funding. Moreover, the Japanese Yen is appreciated by active BOJ intervention and policy normalization. This is negative for export-heavy Japanese stocks (Nikkei-225). The meltdown in Japanese stocks is also affecting risk trade sentiment on Wall Street.

Another factor behind the Wall Street meltdown may be improving approval rate of Harris against Trump ahead of the Nov’24 election and fading hopes of Trump stimulus (additional tax cuts and deregulation) as White House may be heading for a minority government, which may lead to prolong political & policy paralysis; usually White House enjoys Trifecta (House, Sena and WH-majority government) in the 1st two years after election till midterm election, which results in loose of Trifecta. Although the US political and legislation system is mature enough for a bipartisan agreement on all important policy issues between Democrats and Republicans, Trump’s unconventional and autocrat-like attitude with totalitarian behavior is negative for such bipartisan politics (as we have seen during Trump 1.0).

On Friday after the NFP/BLS job data, Fed’s Goolsbee said:

·         If inflation and the job market continue to cool, the Fed should cut

·         It’s one month’s number, it’s a negative number

·         We need to balance policy with the economy in short order

·         We had multiple good months of inflation, broad-based

·         The jobs data follows the trend of cooling the labor market

·         The job of a central bank is to move in a steady way

·         Small business defaults and delinquencies are rising and are in the warning sign stage

·         The economy still has crosscurrents

·         When conditions warrant a cut, there tends not to be just one

·         It is not a secret that Fed policymakers expect multiple cuts over the next year

·         The trends show inflation coming down across the board, and the labor market cooling

·         We're going to get a lot of information before the next meeting

·         What will determine the size of the rate cut, or if there is any action, will be the economic conditions

·         I fully understand why markets want to conclude a trend

·         We have been seeing the improvement we've wanted in inflation

·         The through-line of the data doesn't change based on one month's number

·         If unemployment is going to go up higher than 4.1%, that's the kind of thing the Fed has to respond to

·         If we stay restrictive for too long, we have to think about the employment mandate

·         I've been saying for a long time we'd never want to overreact to one month's data

·         If the stock market moves to give the Fed indication over a longer arc that we are looking at deceleration in growth, we should react to that

·         If jobs data is a longer-term sign, we should then respond to what those forces are

·         Jobs numbers are weaker but it's not looking yet like a recession

·         The Fed's job is not to react to one month's numbers on jobs

·         We can't blow through normal jobs. If we do, we'll have to react more robustly

·         The Fed can wait for more data before the September meeting

·         We should respond to conditions on the broad through line; inflation is way down and employment is at a relatively decent spot

·         If we are not overheating, we should not tighten our restrictiveness in real terms

·         You only want to be there for as long as you have to

·         We are restrictive in real terms at the highest in many decades

·         There is some weakness in the jobs market, we have to pay attention to that

·         I have been saying for some time we are in a balanced risk posture

·         The Fed will respond to conditions

·         If the economy deteriorates, the Fed will fix it

·         When asked about an emergency cut: Everything is always on the table including raises and cuts

·         The stock market has a lot more volatility than the Fed

·         It seems like a lot is going on in the world, which makes things a little more complicated

·         On the other side, the GDP number was a bit stronger than expected

·         Economic growth continues at a steady level

·         That said, there are cautionary indicators in other data such as business defaults

·         We expected some weakness in manufacturing due to pandemic effects

·         We must be a little careful when concluding the job report

·         The manufacturing sector is a little complicated

·         The Fed does need to be forward-looking in making decisions

·         The jobs numbers were weaker than expected but are not looking yet like a recession

·         You only want to be that restrictive if there is a fear of overheating. The data does not look like the economy is overheating

·         The Fed has been in a restrictive posture

·         If inflation and the job market continue to cool, the Fed should cut

·         We need to balance policy with the economy in short order

·         If inflation and the job market continue to cool, the Fed should cut

·         We had multiple good months of inflation, broad-based

·         The jobs data follows the trend of cooling the labor market

·         Small business defaults and delinquencies are rising and are in the warning sign stage

·         The economy still has crosscurrents

·         When conditions warrant a cut, there tends not to be just one

·         It is not a secret that Fed policymakers expect multiple cuts over the next year

·         The trends show inflation coming down across the board, and the labor market cooling

·         We're going to get a lot of information before the next meeting

·         What will determine the size of the rate cut, or if there is any action, will be the economic conditions

·         I fully understand why markets want to conclude a trend

·         We have been seeing the improvement we've wanted in inflation

·         The through-line of the data doesn't change based on one month's number

·         If unemployment is going to go up higher than 4.1%, that's the kind of thing the Fed has to respond to

·         The job of the central bank is to move in a steady way

·         I've been saying for a long time we'd never want to overreact to one month's data

·         We’ve got to be monitoring the real side of the economy: There’s nothing in the Fed’s mandate that’s about making sure the stock market is comfortable

·         We’re forward-looking to it. So if the conditions collectively start coming in like that on the through line, there’s deterioration on any of those parts, we’re going to fix it

·         It’s the market’s job to react and it’s the Fed’s job to act. One of those moves with a lot more volatility than the other

·         As you see jobs numbers come in weaker than expected but not looking yet like a recession, I do think you want to be forward-looking about where the economy is headed for making the decisions

·         If we blow through normal, then we’re in a different situation and we would, in my opinion, we would need to react more robustly

·         The Fed’s job is very straightforward, maximize employment, stabilize prices, and maintain financial stability. So if the conditions collectively start coming in that on the through line, there’s deterioration on any of those parts, we’re going to fix it

On Friday, Fed’s Barkin said:

·         Not ready to embrace 50 bps cut debate, says +114K jobs is 'reasonable'

·         Big rate cuts are more typical if the economy is rapidly weakening

On Friday, the US Acting Labour Secretary Su said:

·         The new jobs report shows a sustainable level of growth

·         We have seen some volatility in the economy, but the broader economy is resilient

Conclusions:

Despite the market now suddenly panicking for a hard landing for the ‘terrible’ NFP/BLS job report for July, if we consider the increasing number of multiple job holders, higher number of temporary layoffs, and an unusual addition in labor force due to one-time seasonal factor), the overall nature of US labor market is still strong enough for Fed to continue its wait & watch stance to gain more disinflation pace and required full confidence to launch the series of rate cuts from Dec’24 rather than Sep’24.

But even if the Fed responds to the present market panic and begins cutting rates from Sep’24 instead of Dec’24, it will make no significant difference in reality (Real Street) but may boost the sentiment of Wall Street by ensuring financial stability first. In that scenario, even if the Fed cuts the rate by -25 bps each (no question of -50 bps pace), it will continue the pace of 4 rate cuts each in 2025-26 and one QTR/HLY cut in 2027.

The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct’24; the Fed will be in ‘wait & watch’ mode till at least Dec’24 as the Fed may want to observe inflation and employment data for Q3CY24. Also, the Fed may be on the sideline till the Nov’24 US election amid growing political & policy uncertainty after Biden exited from the Presidential run, paving the way for the Trump-Harris fight, which may not be smooth for Trump 2.0.

Although the market is now almost discounting the start of Fed rate cuts from Sep’24, considering overall pace of disinflation, Fed may continue its wait & watch stance till at least Dec’24 and may continue to indicate on 31st July FOMC/policy meeting that Fed is gaining incrementally higher confidence for overall disinflation process till Q2CY24, but still it’s not enough for launching the rate cut cycle in Sep’24 as Fed may want to be more confident after having actual data for another QTR. If Q3CY24 average US Core inflation (CPI+PCE) indeed goes around +2.9%; i.e. below the +3.0% ‘confidence’ line, then the Fed may officially indicate the start of the 11-QTR rate cut cycle from Dec’24 QTR till Dec’27 (two half yearly rate cuts in 2027).

The Fed will get the Sep’24 core inflation report by mid-late Oct’24 and accordingly may indicate the rate cut from Dec’24, just ahead of the Nov’24 election to keep both Democrats and Republicans happy; the Fed may indicate the start of a rate cut in Oct’24 (just ahead of the Nov’24 election) Fed talks and may start cutting rates from Dec’24 (just after the Nov’24 election), keeping Wall Street near life time high with some healthy corrections.

But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs, which is now hovering around 15% of US core tax revenue, quite elevated against EU and China’s 6% levels.

Market wrap:

On Tuesday, Wall Street Futures snapped three-day losing streaks amid fading concern of an all-out recession after moderately robust S&P Global PMI data and also Fed comments, trashing the idea of a sudden hard landing and panic Fed rate cuts. The S&P 500 and the Nasdaq-100 surged almost +1% each, while the DJ-30 jumped around +300 points on short covering and value-buying (fresh longs from lower support levels). Wall Street was boosted by interest rate-sensitive sectors on hopes & hopes of an early and bigger Fed rate cuts of -150 bps cumulative rate cuts in Sep+Nov+Dec’24 (@-50 bps each!).

On Tuesday, among mega caps, Nvidia, Microsoft, Meta, and Tesla recovered smartly. On the earnings front, Palantir, Uber surged on earnings beat. All the sectors ended in the green, with real estate and banks & financials leading the gains, followed by communication services, industrials, techs, consumer discretionary, utilities, materials, consumer staples, healthcare, and energy. Script-wise, Wall Street was boosted by Caterpillar (upbeat report card), JPM, Walt Disney, Goldman Sachs, American Express, IBM, Nike, Verizon, Amgen, and Amazon, while dragged by J&J, Intel, Boeing, Merck, Chevron, Apple, Honeywell, United Health and Salesforce. Also, lower USD boosted export-heavy US MNCs and techs. Earlier Monday, Nvidia, Apple, and Tesla all tumbled after Berkshire Hathaway said on Saturday that it had cut its stock in Apple by nearly half as part of portfolio rebalancing. Chipmakers like Intel and Advanced Micro Devices also fell.

On Tuesday, the risk-on sentiment was also boosted by hopes of an imminent Gaza war ceasefire and fading concern of an all-out war between Iran and Israel. The US Secretary of State Blinken said:

·         Cease-Fire Negotiations in the "Final Stage"

·         US Working to De-escalate Middle East Tensions

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

Whatever the narrative, technically Dow Future (39300) has to sustain over 39900 for any further rally to 40100/40500-41050/41450 and 41675*/41950-42100*/42700 in the coming days; otherwise sustaining below 39800/39550, DJ-30 may again fall to 39200 and 39000/38800-38600/38300-38000 in the coming days.

Similarly, NQ-100 Future (18300) has to sustain over 18800-19000 for any further recovery to 19300/19600-19750/19950 and 20150*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 18700/18500-18200/18000 it may further fall to 17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5300), now has to sustain over 5450 for any further recovery to 5475/5525-5605/5675 and rally further to 5725/5750*-5850/5800-6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5425/5400-5350/5300 may further fall to 5250/5200-5175/5100* and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2400) has to sustain over 2425-2440 for a further rally to 2455*/2490-2500*/2525 and 2550/2575-2600/2650 in the coming days; otherwise sustaining below 2420-2410, may fall to 2395/2385-2370/2360 and 2350*/2340-2320/2300-2290/2275* and 2235/2210-2160/2110 in the coming days (depending upon Fed stance, Gaza/Ukraine war trajectory and US election outcome).