Wall Street stumbled on mixed earnings and a growing tech war

·         Gold scaled a new life time high on escalating Gaza war tensions after Hezbollah drone strikes Israel's PM’s vacation house

·         Overall, US retail sales data indicates resilient US economic activities

·         Fed may pause in November and cut 25 bps in Dec’24 as core disinflation almost stalled in Q3

On Thursday (17th Oct’24), some focus of the market was also on US retail sales as consumer spending is the backbone of the US economy and the Fed also watches this data closely for an assessment of overall economic activities along with GDP data. On Tuesday, the CB flash data (SA) showed U.S. retail sales (Goods only) for Sep’24 were around $714.4B against 711.3B sequentially (+0.4%) and 702.2B yearly (+1.7%); i.e. the U.S. retail sales increased around +0.04% in Sep’24 sequentially (m/m), against an upwardly revised +1.7% in the prior month and higher than the market consensus +0.1% increase, while surged by +1.7%. annually (y/y).

Overall, after the latest revisions the average/month retail sales are now around $705.1B in 2024 (YTM) against an earlier average of $703.8 in the prior report and the 2023 average of $692.6B (still revising even after one year!).

The current 2024 (YTM) US retail sales nominal growth is now around +2.2% against the 2023 rate of +3.7%. The US retail sales growth although cooled, remained strong despite higher borrowing costs and higher cost of living as the broader labor market is still robust. Adjusted inflation (CPI), the underlying real retail sales have contracted around -0.5% in 2023 against +1.2% in 2022, while remaining around -0.8% in 2024 (YTM).

In 2024 (6MRA), the real retail sales contracted by around -0.5%; i.e. real US retail; sales are still negative while continuing to hover around 29% of nominal GDP as overall, the goldilocks nature of the U.S. economy remains intact despite some volatility in underlying economic data due to various transient/seasonal factors. The 3M rolling average of US retail sales is now around $712.167B and $696.549B yearly; i.e. grew by around  +2.2%, while US 3MRA core retail sales (w/o food and fuel) grew +3.0% annually.

In Sep’24, the US Retail Sales were boosted by sales at miscellaneous store retailers followed by clothing, health, and personal care stores and food & beverages stores, food services & drinking places; general merchandise stores; non-store retailers; sporting goods, hobby, musical instrument, and book stores; and building material and garden equipment supplies dealers. In contrast, Sep’24 retail sales were dragged by at electronics and appliance stores sank and other decreases were reported at gasoline stations; and furniture stores. Sales at auto dealers flattened.

Meanwhile, US retail sales excluding food services, auto dealers, building materials stores, and gasoline stations, which are used to calculate PCE of GDP, the so-called US super core retail sales (used in real GDP calculation-consumer spending) were up +0.7% in Sep’24 sequentially, the most in three months, indicating US real GDP growth may be resilient. The US Retail sales data is not adjusted for inflation and includes mostly goods, not services, while the US economy is primarily service-oriented.

On Monday (21st Oct 24), Fed’s Logan said:

·         I am not surprised there’s some money market volatility

·         Liquidity is still abundant in money markets

·         Balance sheet drawdown (QT) is part of policy normalization

·         Balance sheet cuts (QT) and rate cuts are working in the same direction

·         The economy is strong and stable

·         The Fed will need to be nimble with monetary policy choices

·         I see downside risks to the job market and ongoing risks to the inflation goal

·         I expect gradual rate cuts if the economy meets forecasts

·         Over time I want negligible balances in the reverse repo facility

·         I expect money markets are close to or just above interest on reserves rate (reverse repo)

·         The Fed should tolerate some money market volatility

·         The Fed could change the reverse repo rate if cash doesn’t leave the facility

·         Selling Fed-owned mortgage bonds is not a current issue

·         Expect gradual cuts if the economy meets forecasts

·         My business contacts are optimistic looking forward and are aware of the risks

·         I pay a lot of attention to financial condition indexes

Conclusions:

Overall, US retail sales are still hot enough for the Fed to keep a restrictive rate (real positive) for longer to produce some more slack in the economy so that demand comes down to some extent and try to balance with the present constrained supply capacity of the economy, pulling inflation down to around +2.0% on a sustainable basis. The US retail sales average remains around 30% of nominal GDP, indicating no recession or even a moderate slowdown in consumer spending despite higher borrowing costs as the US labor market remains robust. Thus Fed may not go for any kind of jumbo (50) or even back-to-back -25 bps rate cuts. The Fed may prefer -25 bps normal rate cuts every QTR end without showing any panic to balance its dual mandate.

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 average unemployment remains around 4.0%, while overall economic activities remain robust. Fed may cut -25 bps in Dec’24 after a pause in Nov’24.

 

Market Impact:

Wall Street surged Friday but closed mixed for the week amid mixed report card and hotter than expected US retail sales, core CPI, and PPI data coupled with less dovish Fed talks and fading hopes of a rate cut in Sep’24. On Friday, Wall Street was boosted by an upbeat report card from Netflix. Broader S&P 500 rose 0.3% and the blue-chip DJ-40 edged up, both marking a fresh record, while tech-heavy NQ-100 gained +0.7%. Wall Street was boosted by communication services, real estate, utilities, techs, healthcare, materials, consumer discretionary, industrials, consumer staples, banks & financials, while dragged by energy.

Netflix jumped after delivering better-than-expected Q3 earnings, revenue, and subscriber growth. Also, Apple surged after an industry report showing a surge in China iPhone sales. Nvidia, Amazon, and Alphabet also closed in the green. However, P&G edged down after missing sales expectations, and American Express slid due to lower-than-expected revenue. Wall Street was also dragged by American Express, Merck & Co, Nike, Caterpillar, 3M, Chevron, IBM, Boeing, and Home Depot.

For the week ended 19th Oct’24, the S&P 500 gained 0.2%, the Dow Jones (DJ-30) advanced 1.2% to book their sixth consecutive weekly gain and the longest streak in 2024, while the Nasdaq 100 lost over 0.7% due to growing tech/cold war with China and regulatory hurdles; the market may be also worried about Trump trade/cold war tantrum 2.0 (if Trump indeed reelected again). Germany/EU is also facing an all-out recession/stagflation amid China trade war and Trump trade war tantrum 2.0.

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

Whatever the narrative, technically Dow Future (43500) has to sustain over 43700 for any further rally to 43900/44050-44250/44500* and 44800/45000-45500/45800 in the coming days; otherwise sustaining below 43650, DJ-30 may again fall to 43400/43200-42900/42700 and 42300/42000-41650/41350-41150/40900 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 (5900), now has to sustain over 5950 for any further rally to 6000/6050-6100/6150 in the coming days; otherwise, sustaining below 5925/900-5850/800, may again fall to 5750/5725-5675/5625-5600/5575*-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: 2735) has to sustain over 2755 for a further rally to 2775/2800-2825/2850 in the coming days; otherwise sustaining below 2750-2735, Gold may again fall to 2700/2675-2650/2625 and 2600/2575-2550/2525 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).