Wall Street recovered on softer US PPI data; but Gold slips

·         Ease of Iran-Israel tensions also helped Wall Street, while dragged Gold; despite soft US core PPI data in July, 6MRA ticked up after the latest revisions

On Monday, Wall Street Futures closed mixed as blue-chip DJ-30 stumbled around -140 points, while broader S&P-500 and tech-heavy NQ-100 were almost flat amid fading hopes of dual stimulus in early 2025. Although the Fed may launch a rate cuts cycle from Dec’24 or even Sep’24, there may not be a Trump 2.0 Trifecta this time. Even if Trump wins the White House for the 2nd time, the lack of a simple majority in the House and Senate may not permit Trump to extend/deepen his tax cut and deregulation policy as well as a big-bang infra stimulus. Wall Street Futures were also under stress due to escalating geo-political tensions between Iran and Israel, while Gold and Oil surged.

On early Tuesday, Wall Street Futures slid further on lingering geo-political tensions between Iran and Israel. But Wall Street Futures also recovered on ease of Iran tensions as it seems Iran may have been persuaded by US & Co not to launch any ‘staged attack’ on Israel until at least Thursday, the scheduled date of Gaza war ceasefire talks; Qatar has assured the U.S. that Hamas will be represented at hostage talk summit. US President Biden said he expects Iran to hold off on Israel's retaliation if a hostage deal is reached.

The US, Egypt, and Qatar are convening a summit aimed at finalizing a hostage deal on Thursday. Hamas has thus far indicated that it will not attend. Israel has agreed to send a delegation, but PM Netanyahu has come under increasing fire for adding new demands critics say are aimed at thwarting a deal. The premier insists his latest proposal merely contained clarifications, rather than any new demands.

Apart from Iran-Israel/ME geo-political tensions, Wall Street Futures were also dragged by stronger Yen and the renewed concern about the so-called Yen carry trade. Dow Future made a panic low around 39344 from 39640 but soon recovered on ease of Iran tensions followed by softer US core PPI data, which may translate similar core CPI data tomorrow (Wednesday-14th August). Thus Fed may start cutting rates from Sep’24 rather than Dec’24.

On Tuesday, the focus of the market was on US core PPI data, a day before US core CPI data as the Fed will eventually start cutting rates only when it feels enough confidence that core inflation is sustainably easing towards +2.0%. Fed primarily follows core PCE inflation, data of which is published generally around the last week after core CPI and PPI data around mid-month of every month. The market usually has an idea about the possible rate of core PCE inflation at month's end after getting core CPI and core PPI data mid-month.

On Tuesday, the BLS flash data (NSA) showed annual (y/y) U.S. core PPI (w/o food & energy) eased to +2.4% in July’24, from +3.0% sequentially, lower than the market consensus of +2.6% and the highest since Apr’23.

On a sequential (m/m) basis (SA), the U.S. core PPI was unchanged (0.0%) in July’24 from +0.3% in the previous month and below the market expectations of +0.2% increase.

Overall, after the latest 4M revision, the 2024 (YTD) average of core PPI is now around +2.5% in July’24 (vs prior +2.4%) against +2.9% in 2023, +7.8% in 2022, and pre-COVID levels around +1.5%; the 6M rolling average of US core PPI is now around +2.5% (vs earlier +2.4%). The 6M rolling average of sequential (M/M) core PPI is now around +0.3% in July’24 against +0.3% prior, while the 2024 (YTM) sequential core PPI rate is now around +0.3%; the Fed needs +0.1% core sequential core PPI rate on a sustainable basis for its target/pre-COVID levels of +1.50%, so that core CPI would come around +2.0% targets.

On Tuesday, the BLS data (NSA) also shows U.S. annual (y/y) total PPI increased by +2.2% in July’24 from +2.7% reading sequentially, below market expectations of +2.3%.

On a sequential (m/m) basis, the U.S. PPI increased +0.1% in July’24, from a +0.2% increase in the previous month, and below market forecasts of a 0.2% increase.

Overall, after the latest 4M revision, the 6M and YTM rolling average of US PPI is now around +2.2% and +2.1% (prior +2.0% and +2.0%) against the 2023 average of +2.0%.

In July’24, producer prices (PPI) for services increased +2.6% (vs +3.5% sequentially), while that of goods increased +1.7% (vs +1.5% sequentially).

July US Core PPI-Goods

July US Core PPI-Service

Overall, despite softer core PPI data in July, after the latest 4M revision, the 2024 (YTD) average of core PPI is now around +2.5% in July’24 (vs prior +2.4%) and the 6M rolling average of US core PPI is now around +2.5% (vs earlier +2.4%); i.e. overall US core PPI remains almost at the same levels.

On Tuesday, Fed’s Bostic said:

·         Our rate posture is restrictive

·         I am hopeful in the next several months a normalized economy

·         The balance of risks in the economy is getting back to level

·         I am concerned that the unemployment has gone up, but more supply is good

·         The supply of workers in the economy is growing; it's a good problem to have

·         Balance of risks and economy is getting back to level

·         We are at an inflection point where inflation is getting close to the target

·         Looking at the breadth of inflation, it has improved

·         The labor market can slow but without considerable concern

·         A recession is not in my outlook

·         Contacts don't tell me there are many layoffs, if that continues we'll be in a good place

·         We need to make sure we don't go from a hot labor market to a freezing cold one

·         A recession is not in my outlook

·         We still have a strong, solid labor market

·         The unemployment rate in the grand scheme of things is still historically low

·         Housing inflation has come down importantly in the last couple of months

·         I am willing to wait for the first-rate cut but it is coming

·         It would be really bad if we cut rates and then had to raise them again

·         If the economy evolves as I expect, there will be a rate cut by the end of the year

·         We need to make sure the inflation trend is real

·         Recent inflation data gives me more confidence we can get back to 2%; I want to see a little more data

Conclusions:

Fed is not in a hurry to start the rate cut cycles of 11 QTR cuts without evaluating data for a few more months in totality. Thus Fed may not only evaluate inflation and employment data for July and August but also for September and October/ November before launching the much-awaited rate cut cycles from Dec’24 QTR end.

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 recovered from an early loss and closed in deep green on the ease of Iran-Israel geo-political tensions and softer than expected US PPI data-boosting the implied probability of a Sep’24 rate cut by almost 95% from the prior 90%. Now all focus would be on July core CPI data to be released Wednesday. As per the core PPI data trend, if sequential core CPI increased by +0.2% in July, then the annual rate would be +3.3%, unchanged from June; i.e. US core CPI disinflation may have been stalled in July. As a result, the Fed may need more data in the coming months with a wait-and-watch policy till at least Nov’24 election outcome and fiscal stance thereof. Also, election spending may be acting as some form of fiscal stimulus and may also prevent the required disinflation process, pushing Fed rate cuts after the election; i.e. from Dec’24 rather than Sep’24.

On Tuesday, Wall Street was boosted by techs, consumer discretionary, communication services, healthcare, industrials, materials, banks & financials, real estate, utilities, and consumer staples, while dragged by energy. Scrip-wise, Wall Street was boosted by chip makers such as Intel, Nvidia, AMD, Qualcomm (on hopes of China concession), Nike, Boeing, Amazon, Microsoft, Apple, 3M, United Health, Goldman Sachs, Salesforce, Starbucks, Tesla, Salesforce, Amgen, Home Depot, Dow, JPM, AND Caterpillar, while dragged by J&J, Walmart, Chevron and Honeywell. Blue-chip DJ-30 surged +1.04%,,tech heavy NQ-100 jumped +2.43%, while broader SPX-500 gained +1.68%.

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).