Wall Street slips on less dovish Powell talks and ME tensions

·         Powell almost made it clear unless there is an unusual surge in the unemployment rate, the Fed may pause in Nov and cut 25 bps in Dec’24

·         An all-out war-like situation in the Middle East (Israel-Lebanon/Hezbollah/Iran) is dragging stocks while boosting Gold and oil

·         As per a US intelligence report, Iran may be preparing for a missile attack on Israel, while Israel also warned Iran against such an attack

Wall Street Futures led by DJ-30 and also SPX-500 scaled a new life time high (LTH) on synchronized global easing on both sides of the Atlantic as well as Pacific (Fed-ECB-PBOC), but tech-heavy NQ-100 underperformed on growing tech war and regulatory restrictions about AI Chip between two superpowers of the world (US-China). On Friday, NQ-100 was dragged by Nvidia as China requested (instructed) local companies to avoid the usage of AI-grade chips Nvidia and use Made In China like that of Huawei.

On Friday, Wall Street Futures and gold also stumbled from session highs as fine details of the latest core PCE inflation data show the overall US core disinflation pace may have stalled in Q3CY24, which may prevent the Fed from any back-to-back rate cut of -25 bps in Nov’24 and even -50 bps cut in Dec’24; Fed may return to normal gradual rate cut strategy of -25 bps every alternate meeting/every QTR end.

Also growing conflict/full war-like situation in the Middle East (ME) between Israel-Hezbollah/Lebanon/Yemen and Putin’s nuclear war warning/narrative is undercutting stocks while boosting Gold, which is scaling fresh life time highs almost every other day. But Gold is also undercutting on hopes & hypes of an imminent Gaza/Lebanon war ceasefire, at least temporary till the US election amid intensifying efforts by the Biden admin.

On Monday (30th Sep’24), the focus of the market was again shifted to Fed’s Chair Powell as the market is now debating about rate cuts trajectory in Nov and Dec’24:

Economic Outlook;

Chair Jerome H. Powell at the National Association for Business Economics (NABE) Annual Meeting

“I have some brief comments on the economy and monetary policy and look forward to our discussion.

Our economy is strong overall and has made significant progress over the past two years toward achieving our dual-mandate goals of maximum employment and stable prices. Labor market conditions are solid, having cooled from their previously overheated state. Inflation has eased, and my Federal Open Market Committee colleagues and I have greater confidence that it is on a sustainable path to 2 percent.

At our meeting earlier this month, we reduced the level of policy restraint by lowering the target range of the federal funds rate by 1/2 percentage points. That decision reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in an environment of moderate economic growth and inflation moving sustainably down to our objective.

Recent Economic Data

The labor market

Many indicators show the labor market is solid. To mention just a few, the unemployment rate is well within the range of estimates of its natural rate. Layoffs are low. The labor force participation rate of individuals aged 25 to 54 (so-called prime age) is near its historic high, and the prime-age women's participation rate has continued to reach new all-time highs. Real wages are increasing at a solid pace, broadly in line with gains in productivity. The ratio of job openings to unemployed workers has moved down steadily but remains just above 1—so there are still more open positions than there are people seeking work. Before 2019, that was rarely the case.

Still, labor market conditions have cooled over the past year. Workers now view jobs as somewhat less available than they were in 2019. The moderation in job growth and the increase in labor supply have led the unemployment rate to increase to 4.2 percent, still low by historical standards. We do not believe that we need to see further cooling in labor market conditions to achieve 2 percent inflation.

Inflation

Over the most recent 12 months, headline and core inflation were 2.2 percent and 2.7 percent, respectively. Disinflation has been broad-based, and recent data indicate further progress toward a sustained return to 2 percent. Core goods prices have fallen 0.5 percent over the past year, close to their pre-pandemic pace, as supply bottlenecks have eased. Outside of housing, core services inflation is also close to its pre-pandemic pace. Housing services inflation continues to decline, but sluggishly. The growth rate in rents charged to new tenants remains low. As long as that remains the case, housing services inflation will continue to decline. Broader economic conditions also set the table for further disinflation. The labor market is now roughly in balance. Longer-run inflation expectations remain well anchored.

Monetary Policy

Over the past year, we have continued to see solid growth and healthy gains in the labor force and productivity. Our goal all along has been to restore price stability without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation. That would be a highly desirable result for the communities, families, and businesses we serve. While the task is not complete, we have made a good deal of progress toward that outcome.

For much of the past three years, inflation ran well above our goal, and the labor market was extremely tight. Appropriately, our focus was on bringing down inflation. By keeping monetary policy restrictive, we helped restore the balance between overall supply and demand in the economy. That patient approach has paid dividends: Inflation is now much closer to our 2 percent objective. Today, we see the risks to achieving our employment and inflation goals as roughly in balance.

Our policy rate had been at a two-decade high since the July 2023 meeting. At the time of that meeting, core inflation was above 4 percent, well above our target, and unemployment was 3.5 percent, near a 50-year low. In the 14 months since, inflation has moved down, and unemployment has moved up, in both cases significantly. It was time for a recalibration of our policy stance to reflect progress toward our goals as well as the changed balance of risks.

As I mentioned, our decision to reduce our policy rate by 50 basis points reflects our growing confidence that, with an appropriate recalibration of our policy stance, strength in the labor market can be maintained in a context of moderate economic growth and inflation moving sustainably down to 2 percent.

Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course. The risks are two-sided, and we will continue to make our decisions meeting by meeting. As we consider additional policy adjustments, we will carefully assess incoming data, the evolving outlook, and the balance of risks. Overall, the economy is in solid shape; we intend to use our tools to keep it there.

We remain resolute in our commitment to our maximum-employment and price-stability mandates. Everything we do is in service to our public mission.

Thank you. I look forward to our conversation.”

Fed Chair Powell’s comments at the NABE Q&A sessions: Highlights

·         Overall, the economy is in solid shape; we intend to use our tools to keep it there; this is not a committee that feels like it’s in a hurry to cut rates quickly.

·         Sometimes people pay too much attention to The Fed's SEP [Dot Plot], which shows two more 25 bps cuts this year

·         Fed officials were focused on bringing rates down to a neutral level that neither spurs nor slows economic activity.

·         If the economy performs as expected, that would mean two more [quarter-point] cuts this year

·         Fed will move over time toward a more neutral stance if economic activity remains healthy.

·         Rates weren’t on a preset path, meaning bigger cuts were possible if the job market showed greater deterioration and vice versa.

·         Looking forward, if the economy evolves broadly as expected, policy will move over time toward a more neutral stance. But we are not on any preset course. The risks are two-sided, and we will continue to make our decisions by meeting.

·         Interest rates can move over time to a more neutral stance under a relatively favorable base-case scenario.

·         When asked: ‘Is there a love-hate relationship with the SEP’?--- That's not unfair---I have no love-hate relationships with SEP, but This is not a committee that feels like it's in a hurry to cut rates quickly

·         The upward revisions of GDI were quite interesting; there is virtually no difference between GDP and GDI.

·         That GDI wasn't as low as once thought; it removes a downside risk to the economy; GDI is a more important real-time indicator than GDP

·         The upward revision to the savings rate does the same thing.; that suggests spending can continue at a healthy level

·         Risks are two-sided, decisions will be meeting-by-meeting

·         The policy will move over time toward a more neutral stance if the economy evolves broadly as expected

·         The US economy is in solid shape; we intend to use our tools to keep it there

·         We have made good progress toward restoring price stability without a painful rise in unemployment

·         A 50 bps rate cut reflects growing confidence that appropriate policy recalibration can maintain labor market strength and inflation moving toward goal

·         Housing services inflation will continue to decline as long as the growth rate in rents for new tenants remains low

·         Disinflation is broad-based, recent data indicate further progress toward a sustained return to 2%

·         My colleagues and I have greater confidence inflation is on a sustainable path to 2%

·         Labor conditions are solid, labor market is roughly in balance

·         The policy will move over time to neutral if the economy meets forecasts

·         Annual GDP revisions were quite interesting

·         The labor market may give a better real-time picture of the state of the economy than GDP

·         Nothing is suggesting a downturn is more likely now

·         The Fed is not in a hurry to cut rates quickly and will be guided by data

·         If the economy is as expected, SEP shows two more 25 bps cuts

·         The labor market is still solid, but it has cooled

·         Believes Keeping Rates Low Was the Right Move

·         Fed scrutinizes private-sector data sources closely

·         Job creation has significantly decreased

·         Committed to Utilizing Tools for Soft Landing

On Monday, Fed’s Bostic said:

·         I am open to another half-percentage-point rate cut if the labor market shows unexpected weakness

·         The baseline case is for an 'orderly' easing with inflation expected to continue slowing and the job market to hold up

·         I do not want to get overconfident about inflation given core personal consumption expenditures price index remains at 2.7%

·         Business contacts continue to say they do not expect layoffs

·         I will be watching upcoming jobs data closely; if employment growth slows much below 100,000 jobs, it would warrant closer questioning of what is happening

·         Is open to another 50 bps cut if the labor market shows continued weakness

On Monday, Fed’s Goolsbee said:

·         The Fed is cutting rates because the economy has normalized

·         There will be a lot of rate cuts

·         Worried about the possible continued port shutdown; The case for rate cuts clear

·         Risks are two-sided, decisions will be meeting-by-meeting

·         The policy will move over time toward a more neutral stance if the economy evolves broadly as expected

Conclusions:

Fed Chair Powell and also other Fed policymakers almost poured cold water on further jumbo rate cuts (-50 bps) and indicated normal 25 bps rate cuts in the coming days unless the unemployment rate unexpectedly surges (say above the 4.5% red line). Moreover, Powell indicated another 25 bps rate cut in Nov’24 may not be assured unless the unemployment rate unexpectedly jumps in September. The Next Fed meeting would be on 7th November and before that Fed may have official access to only one inflation and employment situation report for September only. Thus unless there is an unusual surge in the unemployment rate or an unexpected drop in core CPI, the Fed may pause. The US average (6MRA) core inflation (CPI+PCE) may have already stalled in Q3CY24 at around +3.2%, while the average unemployment rate is around 4.1% as per available data. Thus if it moves a little in September, then the Fed may go for a pause and cut 25 or 50 bps in Dec’24 based on actual Q3CY24 and 6MRA data and outlook thereof.

Bottom line:

The projected Fed rate cut of -50 bps by Dec’24 not be assured as US core disinflation may have stalled in Q3CY24, while unemployment remains around 4.0%; Fed may cut -25 bps in Dec’24 after pausing in Nov’24.

Market Impact:

Wall Street Futures were under stress early Tuesday US session as Fed Chair Powell almost poured cold water on jumbo rate cuts -50 bps as the usual norm and also made it almost clear unless there is an unusual surge in the unemployment rate in September, the Fed may not cut in November. Also, growing geo-political tensions in the Middle East over Israel-Hezbollah/Lebanon are dragging Wall Street Futures and aiding Gold, and Oil.

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

Whatever the narrative, technically Dow Future (42500) has to sustain over 42700 for any further rally to 42900/43050-43250 and 43500/44000-44500/44800 in the coming days; otherwise sustaining below 42600/650, DJ-30 may again fall to 42400/42300-42100/42000 and 41800/41500-41200/41000* and further 40700/40300-40100/40000* and 39700/394350-39000*/38500 in the coming days.

Similarly, NQ-100 Future (20200) has to sustain over 20400 for a further rally to 20600/20700-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 20350/300, NQ-100 may again fall to 20000/19750* and 19600/19350-19100/18900 and further 18750/18550-18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5780), now has to sustain over 5850 for any further rally to 5900 and 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5825/800, may again fall to 5725-5675/5625-5600/5575*-5550/5500-5475/5450 and 5425/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 in the coming days.

Also, technically Gold (XAU/USD: 2625) has to sustain over 2655 for a further rally to 2675*/2700-2725/2750 in the coming days; otherwise sustaining below 2650/2645, may again fall to 2625 and 2595/2590-2585/2575, may again fall to 2560*/2540-2530/2515 and 2495/2480-2470*/2425 and further 2415/2400-2390/2375 in the coming days (depending upon Fed rate cuts and Gaza/Ukraine war trajectory).