Wall Street surged on hopes and hypes of Fed pivot

Wall Street Futures were boosted Tuesday on hopes & hypes of big Chinese stimulus (fiscal + monetary), a permanent Gaza War ceasefire, and mixed Fed talks. Fed is now preparing the market for an eventual rate cut cycle of 75-100 bps in H2CY24. Although the market was expecting an earlier & deeper Fed rate cut of 150 bps from March/May’24, various Fed policymakers including Chair Powell are now carefully jawboning the market in a well-planned (co-ordinated) manner to control inflation expectations and also bond yields for the intended soft & safe landing of the Wall/Real street (economy) ahead of Nov’24 U.S. Presidential election. Overall, Wall Street is now in full control of the Fed, but if Trump wins again in the Nov’24 election, we may see Trump again take control of the market (like during 2016-20) as he will continue his fight with the Fed, China and also EU.

On early Asian Session Wednesday, Fed’s Harker said:

·         Real Progress has been made in achieving 2% inflation target

·         The economy is on course for a smooth landing

·         Inflation is dropping and labor are markets improving

·         Resilient consumer spending

·         Holding rates was the right decision

On Wednesday, Fed’s Kashkari said:

·         At this moment 2– 3 cuts seem appropriate

·         The housing market's resilience has been surprising

·         If the labor market continues to be strong, we can dial back the policy rate quite slowly

·         If we can see a few more months of good inflation data, will give us confidence that we're on the way back to 2%

·         We can take time to assess the data before cutting

·         The economy is showing up as remarkably resilient

On Wednesday, Fed’s Collins said:

·         Fed doesn't need to go back to 2% inflation to ease

·         I don't think massive damage is needed to get 2% inflation

·         I am worried that the breadth of inflation will come down

·         Future interest rates might be higher than pre-pandemic levels

·         Economic risks have come into better balance

·         There is a risk that inflation progress stalls

·         It will be appropriate to begin easing before the end of the year

·         Likely to cut rates later this year if economy meets expectations

·         Strong January jobs data shows why caution is warranted

·         Recent data shows economic resilience, demand to take time to moderate

·         The economy needs to moderate to get to 2% inflation.

·         Needs to see wage gains moderate to aid move to 2% inflation   

·         Supported FOMC's decision to keep rates steady last week.

·         We need more data before supporting the rate cut

On Wednesday, Fed’s Barkin said:

·         Still a reasonable amount of uncertainty in what we are seeing in inflation

·         Services/rent inflation have stayed elevated

·         I am very supportive of being patient to get to where we need to get on inflation

·         We have to see if still more inflationary pressure to come

·         Services and rent inflation have remained elevated

·         Inflation is down while demand is still healthy

·         Recent data like GDP has been remarkable

·         There's a lot of people still looking for workers

·         I don't think massive damage is needed to get 2% inflation

On Wednesday, Fed Governor Kugler said:

·         Measures of new rents point to slowing housing inflation

·         There may be some upward pressure coming on goods prices, given global shipping & other risks

·         The banking sector is generally sound

·         I'm also keeping a close eye on regional bank exposure to CRE (Commercial Real Estate)

·         I am watching commercial real estate (CRE) as a source of potential financial stress

·         Disinflation was rapid in the second half of 2023

·         Progress on inflation has been aided by both Fed policy impact on demand and healing of the supply side

·         Housing inflation has been persistent but is expected to come down

·         Wage growth is moderating and is filtering through to prices

·         Layoffs in the US are spotty, and not showing up in aggregate data

·         The job on inflation is not done yet. Policy stance is restrictive

·         If the disinflation progress stalls, may be appropriate to hold the policy rate steady for longer.

·         I see reasons for optimism on services inflation, where there has been less progress

·         Core-services ex-housing is still elevated, but expect improvements

·         Continued moderation of wage growth, normalization of price-setting, and anchored inflation expectations likely to contribute to continued disinflation

·         I am pleased that the cooling of labor demand has not led to a rise in layoffs

·         How spending momentum will evolve this year is an open question affecting the disinflationary process

·         I expect consumer spending to grow more slowly this year, which should help with disinflation

·         Some measures of financial conditions have eased, but remain relatively tight and are consistent with continued progress on inflation

·         Risks to our dual mandate are roughly balanced

·         Our policy stance is restrictive

·         At some point, cooling inflation and labor markets may make a rate cut appropriate

·         I am pleased with the great progress on inflation, I am optimistic it will continue

·         The Fed’s job on inflation is not done yet

·         I will remain focused on the Fed’s inflation goal until confident inflation is returning durably to the 2% target

On Wednesday, apart from hopes & hypes of a Fed pivot, Wall Street was also boosted by the progress of a permanent Gaza war ceasefire:

·         Hamas proposes indirect talks with Israel in the first stage to end military operations and restore total calm - Draft Document

·         Hamas Senior Official: We intend for the release of the largest number possible of Palestinians being held in Israeli prisons

·         Hamas Senior Official: It took us time to respond to the framework agreement because many of its issues were unclear and ambiguous

·         Israel's Channel 13 reports an Israeli official saying that some of the demands made by Hamas in the counterproposal are entirely unacceptable

·         A new round of Gaza talks are to start on Thursday in Cairo – AFP

·         Axios: Seems Israel will reject Hamas's plan for a ceasefire

·         AXIOS Reporter Tweets: An Israeli official told me he expects Israel to reject Hamas' response to the hostage deal proposal. The official said the ball will then move to the mediators Qatar and Egypt who will try to press Hamas to accept a more reasonable framework

·         Israeli Government Spokesperson on the New Truce Proposal: Officials are looking intently at what was presented by Qatari negotiators

·         Israel official says some Hamas demands are unacceptable

·         Israel’s Channel 13 cited a senior official as saying some of the demands presented by Hamas are not acceptable. No further details were provided

·         Israel previously said it will not pull its troops out of Gaza until Hamas is wiped out. The report quoted the unidentified official as saying Israeli authorities would debate whether to reject Hamas’s proposals outright or ask for alternative conditions

·         The diplomatic push comes during intense combat in Gaza with Israel pushing to capture the main city in the south of the enclave, Khan Younis, and fighting also resurging in northern areas Israel claimed to have subdued. Senior Hamas Official: The Hamas delegation will visit Cairo to pursue ceasefire talks with Egyptian and Qatar officials. Israel said it plans to storm Rafah, raising alarm among international aid organizations who say an assault on the last refuge at Gaza’s edge would cause a humanitarian catastrophe for more than one million displaced people

·         AXIOS Reporter Tweets: Israeli MoD Gallant told Blinken that Hamas’ negative response to the hostage deal proposal will push Israel to expand its ground operation in Gaza soon, a senior Israeli official said.

·         Senior Hamas Official: Netanyahu's remarks on the ceasefire proposal show he intends to pursue the conflict in the region

Israel's Prime Minister Netanyahu said:

·         There should be mediated negotiations, but based on the Hamas' response, they're not the

·         We have instructed the army to operate in Rafah

·         Continued military pressure is necessary for the release of hostages

·         Victory is within reach, it's a matter of months

·         We are on the way to complete victory

·         US Secretary of State Blinken: Hamas' response creates space for an agreement to be reached

Overall, Hamas now wants to control Gaza in a two-state solution with no presence of the Israeli army. But both Israel and the U.S. are not ready to accept that. Israel will continue to deploy IDF/army to ensure its safety and prevent Gaza further paradise of terrorists. Thus for a practical solution, Gaza/Palestine will have to stay as a state (with a local/state government) under Israel with full Israeli authority (including external security) or allow Gaza as a separate country with some guarantee of security.

Conclusions:

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.

Also Wall Street will make fresh record highs by June-July’24 on hopes of an imminent rate cuts cycle, which will boost Biden/Democrats on the prospect of another election win. But this time Trump/Republicans will have an edge due to the growing incumbency wave. And if Trump again wins the White House, then it may be negative for Wall Street (anti-China, anti-EU, trade/cold war policies, fiscal austerity), but pro-Russian policies may help the end of the Ukraine war as well as the Gaza war; we may also see some tax cut stimulus effort by Trump if elected.

But all policies will depend upon whether Trump or Biden can win the trifecta (White House, House, and Senate) for a majority government; otherwise, a minority government at the White House may continue to affect U.S. policies in the absence of bipartisan politics/agreement between Democrats and Republicans. The U.S. needs to deploy substantial infra stimulus and another fiscal stimulus to increase the supply capacity of the economy to match the growing demand for durable price stability and also to stimulate the economy rather than too much emphasis on ‘easy Helicopter money’ (monetary stimulus, direct grants/subsidies etc).

Market wrap:

On Wednesday, Wall Street Futures were boosted by hopes & hypes of Fed pivot, Chinese stimulus, and Gaza war ceasefire. Nasdaq recovered and scaled a new life time high led by Nvidia, Meta and Microsoft. Wall Street Was boosted by techs, consumer discretionary, communication services, materials, banks & financials, industrials, healthcare, energy and utilities, while dragged by consumer staples and real estate (higher bond yields after subdued US 10Y auction). Nasdaq was also dragged by Tesla on lay-off speculation.

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

Whatever may be the narrative, technically Dow Future (38767), now has to sustain over 39000 levels for a further rally to 39200/39500 levels in the coming days; otherwise, sustaining below 38850 levels may again fall to 38400/38200*-38000/37300 levels in the coming days.

Similarly, NQ-100 Future (17838) now has to sustain over 18000 levels for further rally; otherwise, sustaining below 17950-17750 may again fall to 17375-16390 in the coming days.

Also, technically Gold (XAU/USD: 2035) now has to sustain over 2045-2055 for a further rally to 2065-2085-2105/2120 and 2130/2152 levels; otherwise sustaining below 2040, may again fall to 2020-2010-2000-1990-1975-1960/1940 in the coming days.