Wall Street slumped on mixed PMI and Apple woes

Wall Street Futures were already under stress Monday on less dovish Fed talks and Apple woes, while Gold jumped on hopes & hypes of an early QT tapering and close of QT. Also, the market may be assuming deeper Fed rate cuts in 2025 under likely U.S. President Trump.

Why the Fed won't cut rates in 2024: US economy not slowing, Fed tailwind since December

In an early Asian session Tuesday, China Congress announced its economic plan for 2024:

·         China aims to achieve GDP growth of approximately 5% by 2024

·         China Expects 4.06 Trillion Yuan National Budget Deficit for 2024

·         China to Issue 1.0 Trillion Yuan in Ultra-Long-Term Special Treasury Bonds in 2024

·         China sets 2024 local government special bond quota at 3.9 trillion yuan, up from 3.8 trillion yuan in 2023

·         China: Income from Local Government Special Bonds to Reach 3.9 Trillion Yuan by 2024

·         China Expects 3% GDP Budget Deficit for 2024

·         China aims to keep CPI around 3% by 2024

·         China warns against ignoring possible worst-case scenarios for the economy

·         China's 5% growth rate considers employment and risk reduction

·         China emphasizes stability as the foundation for all actions

·         China calls for continued implementation of proactive fiscal policy and prudent monetary policy

·         China Must Push Ahead with Transforming Growth Model and Making Structural Adjustments

·         China to Enhance Long-Term Measures to Ease Production Overcapacity

·         China to strictly prohibit 'vanity projects' and 'wasteful' local government spending

·         China to Accelerate Development of Self-Reliance and Scientific Strength

·         China Firm on Advancing Cause of Reunification with Taiwan

·         China Plans 7.2% Increase in Defense Spending, Largest in Five Years

·         China says will keep the yuan exchange rate stable

·         China to Promote Nationwide Implementation of Private Pension System

·         China to Assist Localities in Ensuring Adequate Funding for Basic Elderly Care Services

·         China to Increase Minimum Basic Old Age Benefits and Retiree Pensions

·         China State Planner to Ensure Market Plays Decisive Role in Allocating Resources

·         China State Planner: All Foreign Investment Restrictions in Manufacturing Sector to be Lifted

·         China's economic recovery foundation not yet solid, says Premier Li

·         China State Planner to Ease Market Access Restrictions in Telecoms and Medical Services

·         China's Premier Li says weak domestic demand and low social expectations

·         China state planner to expand labor export to create job opportunities

·         China State Planner Prioritizes Accelerating Permanent Residency for Rural-Urban Migrants

·         China State Planner to Coordinate Efforts for Reforming Household Registration System, Ensuring Equitable Access to Basic Public Services in Cities

·         China's Economic Recovery Not Yet Built on Solid Foundation

·         China State Planner to Establish Carbon Management System at Provincial and Municipal Levels Over Time

·         Targets for 5.5% urban unemployment

·         China Will Attempt to Cut the Energy Intensity of Its Economy in 2024

·         China's President Xi: China plans major measures to deepen reforms in all-round way

On early Asian session Tuesday, there were also some news headlines from Japan:

·         Japan economy minister Shindo has no specific ideas about BOJ's exit from negative rate and government declaration of an end to deflation

·         Japan's finance minister Suzuki denies media report on govt considering announcing end of deflation

·         Japan's finance minister denies market speculation of government considering a synchronous exit from deflation with BOJ's negative rates policy decision

·         Japan Economy Minister Shindo not thinking of declaring anything (end of deflation)

·         Japan's Top Currency Diplomat Kanda: The international global order faces mounting challenges including that posed by the global South

·         Japan's Top Currency Diplomat Kanda: We must brace for an environment of higher interest rates given that assumed interest rates raised to 1.9% from 1.1%

·         Japan's top currency diplomat, Kanda, stressed the necessity for responsible fiscal management

·         Japan's currency diplomat Kanda pushes for fiscal responsibility

·         Japan's Deputy Chief Cabinet Secretary Murai: Japan is gradually seeing a positive cycle of rising growth and wages fall into place

·         Japan's Murai: It is important to embed new business practices in Japan so that costs are appropriately passed on throughout the supply chain

·         Japan's Murai, when asked whether conditions are being met to end negative rates: Specific monetary policy decisions are up to the BoJ

·         Japan's Murai: I hope that the BoJ continues to work closely with the government in guiding monetary policy to sustainably meet the price target

·         Japan's Murai: The BoJ has said that the decision on whether or not to sustain easy monetary policy will depend on economic and price developments at the time

·         Japan's Deputy Chief Cabinet Secretary Murai notes rising growth, wages stabilizing

On Tuesday, S&P Global final data shows U.S. service PMI was revised to 52.3 in February from a preliminary of 51.3 and 52.5 sequentially. The latest service PMI reading pointed to a further solid performance of the private service sector, as output rose for a thirteenth successive month, and new business inflows continued to increase albeit at the slowest pace in three months, as new business from abroad dipped back into contraction territory. Meanwhile, pressure on capacity dissipated as backlogs of work fell, aided by a further rise in employment.

On the price front, the rate of input cost inflation eased again to the slowest since October 2020. Companies sought to pass higher costs on to customers; causing selling prices to rise at a sharper pace, albeit still one of the lowest since early-2020. Finally, business confidence dropped to the lowest since last November amid reports of reduced purchasing power among customers and efforts to cut costs.

On 1st March, the final S&P Global data shows U.S. Manufacturing PMI was revised higher to 52.2 in February, from a preliminary estimate of 51.5 and 50.7 sequentially. This latest reading indicated the sharpest expansion in the country's manufacturing sector since July 2022, with output rising the most since May 2022 and total new orders growing at the strongest pace in 21 months. Additionally, new export orders expanded for the first time in three months, achieving the fastest rate since May 2022. The pace of job creation accelerated to a five-month high, and input buying saw an increase for the first time since July 2022. Regarding prices, input cost inflation cooled to its lowest point since last November, while selling prices rose at the fastest pace in ten months. Lastly, business confidence retreated from January's 21-month high.

Finally, the S&P Global U.S. Composite PMI was revised higher to 52.5 in February, from the preliminary estimate of 51.4 and 52.0 sequentially. It was the highest reading since June 2023, as manufacturing production saw a boost while service sector activity also rose. New order growth slightly slowed, though the overall expansion rate was the second highest since mid-2023.

The upturn was supported by a rise in new export orders for goods. February showed a general decrease in cost pressures, with input prices increasing at the slowest rate since October 2020. Despite this, firms aimed to pass on higher costs to customers, resulting in an uptick in selling price inflation from January. Total employment growth remained modest at the start of the first quarter, with manufacturers increasing hiring while service providers showed restrained job creation due to cost-cutting measures and labor shortages.

The S&P Global comments about U.S. Manufacturing PMI:

“Manufacturing is showing encouraging signs of pulling out of the malaise that has dogged the goods-producing sector over much of the past two years. After a long spell of reducing inventories to cut costs, factories are now increasingly rebuilding warehouse stock levels, driving up demand for inputs and pushing production higher at a pace not seen since early 2022. There are also signs of stronger demand for consumer goods, linked in part to signs of the cost of living crisis easing.

Firms are consequently investing in more staff and more equipment, laying the foundations for further production gains in the coming months to hopefully drive a stronger and more sustainable recovery of the manufacturing economy. Problems with shipping disruptions and supply chains earlier in the year have eased, taking some pressure off input prices, though factory gate prices are recovering amid stronger customer demand, which will be an area to watch closely in the coming months as policymakers assess the appropriateness and timing of any interest rate cuts.”

The S&P Global comments about U.S. Service PMI:

"A further robust expansion of service sector activity in February follows news of faster manufacturing output growth. The goods and services-producing sectors are collectively reporting the sharpest growth since last June, hinting at a further quarter of solid GDP growth. The acceleration occurred despite a cooling of growth in financial services, linked to the recent pull-back in rate cut expectations. Demand for consumer goods and services has, however, picked up further in February amid the easing of the cost of living crisis and healthy labor market conditions, meaning consumers are once again at the forefront of the economic expansion.

A concern is that alongside this faster growth, the survey has seen price pressures revive. Although average prices are still rising at one of the slowest rates seen over the past four years, the rate of inflation picked up for goods and services alike in February to hint at some broad-based firming of price pressures that could worry policymakers about cutting interest rates too early."

On Tuesday, data showed the ISM Services PMI fell to 52.6 in February from a four-month high of 53.4 in January and below forecasts of 53. The reading pointed to slightly slower growth in the services sector amid faster supplier deliveries (48.9 vs 52.4) and the employment contraction (48 vs 50.5). Also, inventories shrank more (47.1 vs 49.1) and a backlog of orders slowed (50.3 vs 51.4). On the other hand, business activity/production (57.2 vs 55.8) and new orders (56.1 vs 55) rose at a faster pace and price pressures eased (58.6 vs 64). Meanwhile, the majority of service providers are mostly positive about business conditions but remain concerned about inflation, employment and ongoing geopolitical conflicts.

Overall, both S&P Global and ISM service/manufacturing/composite PMI indicate that the U.S. manufacturing recession may be over, while consumer spending for durable goods is again gaining momentum amid ease of inflation/cost of living. But at the same time, both manufacturing/producers and service providers are increasing prices amid adequate pricing power. This may keep the Fed for higher for longer stance in the coming days.

Conclusions:

Fed may announce a plan for QT tapering in the March meeting and close the same by June before going for rate cuts from July’24. Fed, the world’s most important central bank, may not continue QT and rate cuts at the same time, which are contradictory.

Ahead of the Nov’23 U.S. Presidential election, White House/Biden/Fed/Powell is more concerned about elevated inflation rather than the labor market; prices of essential goods & services are still significantly higher than pre-COVID levels, which is creating some incumbency wave (dissatisfaction) among general voters against Biden admin (Democrats).

Thus Fed is now giving more priority to price stability than employment (which is quite robust) and not ready to cut rates early as it may again cause higher inflation just ahead of the election. Fed may hike only from July’24, which will ensure no inflation spike just ahead of the Nov’24 election (as any rate action usually takes 6-12 months to transmit in the real economy), while boosting up both Wall and Real/Main Street.

Overall, the Fed’s mandate is to ensure price stability (2% core inflation), and maximum employment (below 4% unemployment rate) along with financial/Wall Street stability as well as lower borrowing costs for the government. As the US is now paying almost 15% of its tax revenue as interest on debt, the Fed will now not allow the 10Y US bond yield above 4.50-5.00%. Thus some Fed policymakers like Goolsbee are trying to balance hawkish talks by sounding less hawkish /dovish in conjunction with overall less dovish/hawkish Fed talks to control the overall market (Wall Street), inflation expectations, and the most vital bond yield. It’s a well-planned jawboning strategy by the Fed in synchronization with ECB, BOE, and BOC to control the overall financial market and bring down inflation towards targets without causing an outright recession; i.e. soft & safe landing.

Fed may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps; every major central bank including ECB, BOE, and BOC has to follow ‘King Fed/USD’, whatever may be the narrative (synchronized global rate cuts amid a synchronized easing in core inflation). In any way, as the Fed is not in a hurry to cut rates in H1CY24, expect generally hotter than expected US labor market data and gradual easing of core inflation data to suit the Fed narrative. The White House/Biden admin will also be happy going for the election supported by a strong economy, robust labor market, and cooling inflation almost at the 2% target.

Market wrap:

On Tuesday, Wall Street Futures were undercut by ‘lack of blockbuster’ budget plan/policy reform by China, an imminent end of Japan’s ‘powerful monetary policy’ and hotter than expected PMI reports, indicating possible higher inflation in the coming days. The market will now focus on Fed Chair Powell’s Congressional testimony on Wednesday and Thursday.

On Wednesday, Wall Street was dragged by techs, consumer discretionary, real estate, industrials, healthcare, communication services, materials, and utilities, while boosted by energy, consumer staples, and banks & financials. Wall Street was dragged by Apple (reports of subdued Chinese sales), Meta (FB and Instagram outage earlier), Tesla, Intel, Microsoft, Amazon, Salesforce, United Health, Caterpillar, Nike, Amgen, IBM and Cisco, while boosted by Boeing, 3M, Walmart, JPM, Chevron, and Verizon. Blue-chip DJ-30 tumbled over -400 points, tech-savvy NQ-100 lost -1.6%, while broader SPX-500 lost around -1%.

Gold jumped to almost 2142, near a lifetime high on lingering geopolitical tensions (Israel/Gaza war and Russian threat of Nuke war if NATO soldier steps in Ukraine) and hopes & hopes of an early QT tapering by the Fed. BTCUSD also scaled a fresh life time high around 69100 on US ETF optimism.

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

Whatever may be the narrative, technically Dow Future (38600), now has to sustain over 38300 levels for a further rally to 38600/39000 and 39700/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39300 may again fall to 39250/200-39150/39000-38950/38600 and  38400/38200*-38000*/37300 levels in the coming days.

Similarly, NQ-100 Future (17960) now has to sustain over 18400 levels for a further rally towards 18500/18675-18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, sustaining below 18350/300-18250/200 may fall to and 17300-16830-16750-16550 in the coming days.

Also, technically Gold (XAU/USD: 2127) now has to sustain over 2155 for any further rally to 2175-2200; otherwise sustaining below 2150-2145, may again fall to 2100/2080-2060/2039 and 2020/2010-2000-1995/1985-1975 and even 1950 may be on the card.