Wall Street surged on tech boost led by Alphabet/AI optimism

On Wednesday, Wall Street Futures and gold stumbled despite softer-than-expected ADP private payroll job data as USD surged on dovish talks by ECB policymakers, indicating a -150 bps rate cut in 2024 (against the Fed’s -100 bps rate cut) from Q1CY24. Wall Street was also affected by energy-related scrips as oil tumbled to almost $69, at a multi-month low amid the concern of lower demand from the U.S. and China and higher supplies by the U.S. Although OPEC+ reportedly produced/supplied lower sequentially in November and lowest since July’23, it was offset by higher supplies/exports from Iran.

In an early Tuesday European session, USDJPY slid on hopes & hypes of BOJ normalization after BOJ Governor Ueda visited the Japanese PMO/PM Kishida reportedly to discuss monetary issues and economic conditions and BOJ exit from its ‘powerful’ QQE and end the decades of NIRP (negative interest rate policy).

The BOJ Governor Ueda said Thursday:

·         Had regular exchange of views with Japan PM Kishida

·         There was no specific discussion on forex with PM Kishida

·         Accommodative financial conditions and stimulus are supporting Japan's economy

·         But the challenging situation remains and it'll become even more challenging towards the end of this year and into early 2024

·         BOJ has not decided on which interest rate to target once we end negative interest rate policy

·         Options include raising the rate applied to financial institutions' reserves at BOJ or reverting to a policy targeting overnight call rate

·         Don't have any specific idea in mind on how much we will raise rates once we end negative rate policy

·         Whether to keep the interest rate at zero or move it up to 0.1%, and at what pace short-term rates will be hiked after ending the negative rate policy, will depend on economic and financial developments at the time

·         Japan's economy to continue recovering moderately, supported mainly by accommodative financial conditions and effects of economic stimulus measures

·         Uncertainty over Japan’s economy is extremely high

·         Closely watching the impact of financial, and forex markets on the Japanese economy, prices

·         Will patiently continue monetary easing under YCC to support economic activity, the cycle of wage growth

·         We have not yet reached a situation in which we can achieve the price target sustainably and stably and with sufficient certainty

·         Achieving 2% trend inflation can be defined as a state where the economy, void of new shocks, can see inflation sustained around 2% and wage growth somewhat above that level

·         We still do not have prospects for achieving that with a sufficient degree of certainty

·         Would be difficult to choose which monetary policy tools to mobilize when exit from stimulus draws near

·         BOJ to work closely with govt while monitoring currency, financial market

·         It is important to closely watch if a virtuous cycle of rising wages and prices becomes stronger

On Wednesday, BOJ Deputy Governor Himino said that exiting the negative rate policy would have relatively little impact on Japan's economy. This remark by the deputy BOJ governor and the meeting between the PM and BOJ governor fueled speculation of a policy shift after years of ‘exit’ jawboning. Subsequently, USDJPY stumbled from around 147.50 to 141.65 on Thursday.

Now all focus is on the BOJ policy meeting on 19th December to see whether BOJ (Bank of Jokers/Japan) wants to normalize its policy rate, which is a reverse repo rate at -0.10% on complementary large deposits above a certain amount, kept at BOJ current account to encourage banks to lend to the real economy rather than parking their excess funds with BOJ.

On early Thursday, U.S. Treasury Secretary Yellen urged bond traders to read data thoughtfully for informed market moves:

·         The Fed wants to create financial conditions consistent with bringing down inflation, state of markets feeds into that

·         It's unclear what role increased treasury supply had in the recent rise in longer-term rates

·         Bond markets anticipating Fed moves can be a helpful complement to monetary policy if participants are thoughtful when reading data

·         It's difficult to disentangle expectations about fiscal and monetary path from other factors affecting treasury term premium

Overall, it’s quite clear that the U.S. can’t afford a 10YUST bond yield above 5.00-5.25% for long as it’s already paying around 10% of revenue as interest on public debt against China/EU levels 5.50%, and Japan’s current 11%, decreased from around 15% a few years ago. The high US bond yield may be a combination of various factors including higher Fed repo rate now at +5.50%, ongoing QT by the Fed (higher supplies of US bonds than demand resulting in lower bond prices and higher yield), and higher inflation.

Thus Fed has to cut rates in H2CY24 for lower bond yield. Like many banks & financials, the Fed is itself in deep red (around $30B) HTM loss for its bond portfolio because of lower bond prices as a result of steep Fed rate hikes to bring core inflation towards +2.0% targets.

On Thursday, some focus was also on U.S. jobless claims (seasonally adjusted), which serves as a proxy for the unemployment trend/overall labor market conditions. The U.S DOL flash data shows the number of unemployed Americans filing initial claims for unemployment benefits (UI-under insurance) increased to 220K in the week ending 2nd December from 219K in the previous week, below market expectations of 222K and the 2nd highest reading since September.

The 4-week moving average of initial jobless claims, a better indicator to measure underlying data, as it removes week-to-week volatility, increased to 220.75K on the week ended 2nd December from 220.25K in the previous week. The 4-week moving average of initial jobless claims was around 225K on average for Jan’17-Jan’20 pre-COVID period.

 

The continuing jobless claims in the U.S., which measure unemployed people who have been receiving unemployment benefits for a while/ more than a week or filed for unemployment benefits at least two weeks ago (under UI), decreased to 1861K in the week ending 2nd December, from 1925K in the previous week (two years high), below the market expectations 1910K.

The continuing jobless claims of all types are also a proxy for the total number of people receiving payments from state unemployment programs, i.e., the overall trend of unemployed persons (insured).

Overall, as per seasonally unadjusted insured continuing jobless claims under all categories (UI) of around 1630K (2-week rolling average) and assuming average uninsured employees/self-employed (not getting any UI benefit) of around 5000K (?), estimated unemployed persons would be around 6630K in Nov’23 against 6506K sequentially. Further, if we assume the labor force is around 168000K, the unemployment rate would be around 3.9% in Nov’23 from 3.9% sequentially. The estimated number of employed persons would be around 161370K in Nov’23, an addition of around +148K sequentially against -348K contraction in Oct’23 (as per Household survey).

Conclusions:

If US core CPI indeed dips below +3.0% by May-June’24 and it seems that the 2024 average core inflation will be around +3.00%, then the Fed may start cutting rates from July’24 and may cut cumulatively -1.00% at -0.25% pace till Dec’24 for a repo rate at +4.50%, so that real rate continues to stand around +1.50%, in line with present restrictive stance.

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut (dovish jawboning) from Mar’24 (Q1CY24) to ensure a soft landing while bringing down inflation. Also, whatever the narrative, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%.

As a result of higher bond yields around 4.50%-5.00% (for 10Y UST); i.e. lower bond prices, the Fed is now in deep MTM loss for its huge bond holding. Fed is also providing higher interest to banks & financials for reverse repo operation than it getting under repo operation; i.e. Fed’s NIM/NII is now negative and theoretically Fed is insolvent to the tune of -$30B. The same is also true for various banks & financials, most of which are now in deep MTM loss for higher bond yields; i.e. lower prices for their HTM bond portfolio holdings due to Fed hikes. The US10Y TSY market price falls from around $140 to $105 from Jan’20 (pre-COVID) to mid-Oct’23; i.e. a fall of almost -33% in around 4 years.

This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price & financial stability and soft-landing. Fed has to bring down inflation to +2.0% targets by ensuring US 10Y bond yield below 5.00-5.25%, and an unemployment rate below 4.0% without triggering an all-out or even a brief recession in the US Presidential election year (Nov’24). The Fed will ensure that the US10Y bond yield is below 5.00-5.25% at any cost for lower borrowing costs for Uncle Sam (U.S.), everything being equal. Thus, overall Fed is methodically jawboning on both sides (hawkish/dovish) from time to time to achieve all its goals at the same time.

Market wrap:

On Thursday, the USD slumped on hopes & hopes of BOJ normalization and a less dovish rate cut path for BOE in 2024. Lower USD buoyed Gold and Wall Street Futures. Also, techs helped Wall Street after Google/Alphabet claimed its latest Gemini update for its generative AI (Bard Chabot) goes a level up against ChatGPT. Blue chip DJ-30 future edged up around +63 points, while tech-heavy NQ-100 surged +1.4% and broader SPX-500 gained +0.8%. Nasdaq was also helped by AMD after the AI chip maker estimated the potential market for its data center AI chips could reach $45B this year (despite China export uncertainty) after Meta, OpenAI, and Microsoft said they will use AMD’s newest AI chip.

On Thursday, Wall Street was boosted by techs, communication services/social media, consumer discretionary, materials, banks & financials, consumer staples, real estate, and industrials, while dragged by energy (lower oil), utilities, and healthcare (FDA may impose price limit even for research/patented drugs if found excessive costly).

On Thursday, Oil slumped again to subdued Chinese import data, the 1st annual decline since Apr’23 and less hawkish comments by the Kremlin after the Putin/Russia-MBS/Saudi Arabia meeting.

Kremlin said:

·         Putin and MBS confirmed the specific agreements reached at OPEC+

·         The sides highly appreciated the cooperation as part of OPEC+

·         All OPEC+ countries must join the agreement so that it would be in the interests of both oil producers and consumers and support global economic growth

·         Russia and Saudi Arabia have agreed that it's important to boost cooperation in oil and gas, including equipment supplies

Meanwhile, Iraq's Oil Minister said:

·         Iraq's decision comes within the framework of joint efforts to achieve balance and stability in oil markets

·         We renew our support for the OPEC+ agreement and commitment to voluntary cut

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

Whatever may be the narrative, technically Dow Future (36144), now has to sustain over 36400 levels for a further rally to 36850/37050-37350/37500 levels in the coming days; otherwise, sustaining below 36350-36200, DJ-30 Future may fall to 36050/36000-35800/35500 and may further fall to 35350/35250-35000/34800 and 34650/34120-34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (16015) now has to sustain over 16250 for a further rally to 16750-16800 zones; otherwise sustaining below 16200, may fall to 16100/16050-15700/15400, and further 15100-14140 in the coming days.

Also, technically Gold (XAU/USD: 2028) now has to sustain over 2052 for any further rally to 2065/2075-2130/2150 areas.; otherwise sustaining below 2047-2040, may fall to 2025/2020-2008*/1995, and further to 1985/1975-1960/1950 and 1928/1908-1895/1885 and 1850/1810 in the coming days (if there was a permanent Gaza war ceasefire and Fed sounds more hawkish than being expected on 14th December).

Technically Oil (69.64) now has to sustain over 67.00 for a rally to 73.00/76.30-77.75/79.50 and further to 82.50/84.50-90.50/95.50; otherwise may fall to 66.50-64.95 in the coming days.