Wall Street tumbled on hawkish Fed talks and AI Chips woes

·         Although softer revision of the US GDP and core PCE GDP price index (deflator) boosted risk assets briefly to some extent, eventually all stumbled

On Tuesday/Wednesday Dow Future and gold slid after hawkish Fed talks, hotter than expected US/CB consumer confidence data and fading hopes of Fed rate cuts even by Dec’24. But tech-heavy NQ-100 edged up +0.3%, supported by Nvidia (AI chip) boost after a report that Musk's AI startup, xAI may utilize Nvidia’s H100 graphics processing units (GPU). Hawkish talks by Fed’s Kashkari and Bowman also affected Wall Street Futures and bonds; the US10Y bond yield scaled a multi-month high around +4.62% and now eyeing the red zone for Fed 4.75-5.00% ahead of US core PCE inflation data on 31st May and May NFP/Job data 7th June.

On Tuesday, the US10Y bond yield got some boost, while Wall Street Futures and gold tumbled after a subdued/soft auction (demand) of US 5Y bond; the U.S. Treasury auctioned off $70B of five-year notes at a high yield of 4.553%. Treasuries extended losses after the US sold $70B in five-year notes at 4.553%, higher than the pre-auction level of 4.540%. An earlier offering of $69 billion in two-year notes was also considered soft amid a deluge of US debt/bond supply. On Wednesday, the US treasury auctioned $44B of 7-year notes at a high yield of 4.650%; against a level of 4.637% before auction; i.e. another soft auction amid soft demand. The JPM CEO also issued another periodic warning: “The chance of stagflation is more than most people think”.

On Wednesday, Fed’s latest Beige book said:

·         Retail sales indicate lower discretionary spending

·         Employment rose at a slight pace overall.

·         Eight Districts reported negligible to modest job gains, and the remaining four Districts reported no changes in employment

·         Prices increased at a modest pace over the reporting period

·         Overall outlooks grew somewhat more pessimistic amid reports of rising uncertainty and greater downside risks

On Thursday, Fed’s Bostic said:

·         Price gain breadth is significant, less breadth would add to confidence for cut

·         The outlook is inflation will come down very slowly

·         I don't see a rate cut in July, but I am open if the data justifies

·         The Fed needs to stay in a restrictive stance

·         I don't think a rate hike will be required to reach the 2% goal

·         The economy continues to grow, but it's growing at a slower pace

·         I expect to reach the inflation goal without an unemployment jump

On Thursday, Fed’s Williams said:

·         Fed policy positioned well to get inflation back to 2%

·         I feel good about where monetary policy is now

·         Monetary policy is working how the Fed wants it to work

·         At some point, interest rates will need to come down

·         I don't feel urgency to act on monetary policy

·         We don't need to be exactly at 2% to cut rates

·         I forecast inflation to reach 2% in early 2026

·         Rate hikes are not baseline forecast

·         Monetary policy is working how the Fed wants it to work

·         There are lots of indications that the job market is cooling to decent levels

·         Amid uncertainty about when rate cuts start, it is unclear how much easing will be needed

·         Friday's PCE is important but it is just one piece of data

·         Markets understand Fed's outlook shifts with incoming data

·         We have time and space to take in data before shifting to policy

·         I expect inflation at 2.5% this year, closer to 2% next year

·         I expect unemployment at 4% by the year-end

·         Inflation is still too high but should moderate over the second half of 2024

·         Recently there’s been a dearth of progress in lowering inflation

·         The Fed will watch all of the data to make decisions on monetary policy

·         Monetary policy remains restrictive on economic activity

On Thursday, Fed’s Goolsbee said:

·         The issue now is whether the US will face a traditional trade-off between inflation and unemployment

·         There is still some supply-chain benefit coming ahead

·         The strongest part of the economy right now is the job market

·         Productivity is a noisy series, we've got to keep an eye on it

·         Housing inflation is still well elevated compared to pre-COVID levels; will be hard to get to 2% unless that changes

On Thursday some focus of the market was also on US GDP data. The BEA 2nd estimate data shows U.S. real GDP for Q1CY24 was slightly revised down to around $22749.80B against $22679.30B sequentially (+0.3%) and $22112.30B yearly (+2.9%); all in 2017 constant prices and at seasonally adjusted annual rates. In other words, the U.S. economy has expanded by around +0.3% sequentially (Q/Q), which is equivalent to a +1.3% annualized rate (~1.2%), in line with the market consensus and lowest since the H1CY22 contractions. In the previous QTR, the U.S. Real GDP grew at an annualized rate of +3.4% to around $22669.90B. The 2nd revision of Q1CY24 real GDP was around $22749.80 vs the flash estimate of $22768.90.

The BEA said:

The sequential increase in real GDP for Q1CY24 primarily reflected increases in consumer spending, residential fixed investment, non-residential fixed investment, and state and local government spending that were partly offset by a decrease in private inventory investment. Imports, which are a subtraction in the calculation of GDP, increased. In Q1CY24, Consumer spending slowed more than initially anticipated due to consumption of both goods and services. Also, private inventories subtracted more from the growth. On the other hand, non-residential investment was revised higher due to structures and intellectual property products. Investment in equipment rose less but residential investment jumped more. Also, government spending was revised slightly up, and both exports and imports rose more.

The US nominal GDP (at current prices) was also revised negatively to around $28255.90B vs $27957.00 sequentially (+1.1%) and $26813.60 yearly (+5.4%); i.e. the annualized growth rate for US nominal GDP was around +4.3% (~4.4%) in Q1CY24.

The core price index for personal consumption expenditures (Core PCE) in the GDP data rose by an annualized +3.6% in Q1CY24, accelerating from the +2.0% increase in the previous QTR and below the flash estimate of +3.7%. The US GDP price index (GDP deflator) was also revised lower at +3.0% against +3.1% in the flash estimate.

Overall, the U.S. real GDP is now poised to grow around 2.4% in 2024, largely in line with the Fed’s estimate and trend rate.

On seasonally not adjusted (NSA) and quarterly rate (not annualized), the actual US Real GDP was around $5669.10B in Q1CY24 vs $5761.50B sequentially (-1.6%) and $5415.40 annually (+4.7%). Although, actual US real GDP (NSA/Not annualized), fell around -1.6% sequentially in Q1CY24, it grew around +4.7% annually (y/y). The U.S. real GDP got a boost of around $2T in 2023 after changing the base year from 2012 to 2017 constant prices.

Overall on Thursday, Wall Street Futures, Gold briefly got some boost on softer than expected US core PCE index for consumption expenditure component in the GDP data, which may be indicating underlying soft consumer spending and soft inflation. But Wall Street also stumbled later as the Q1CY24 GDP report may not change the Fed’s plan for the rate action in the coming months as the overall trend is now showing goldilocks nature (not too hot or too cold) from prior too hot.

Conclusions: Summary

·         Fed is much more concerned about the slow pace of disinflation amid still elevated rent, housing inflation, and strong consumer spending (robust labor market); also goods inflation is again ticking up as the supply chain boost effect may be over now

·         Fed is now changing its narratives and nullifying the probability of a Sep’24 rate cut; accordingly, the implied probability of a Sep’24 rate cut has fallen from 80% a few weeks ago to 40% now

·         But to keep US bond yield under control and also Wall Street, the Fed is also toying with the idea of a Dec’24 rate cut, although it may more look like a signal/formality; the Fed is ensuring US10Y bond yield below 5.00-4.7%% red zone at any cost to lower US borrowing cost

·         Overall, the Fed is now changing its tone and gradually preparing the market for no rate cuts in 2024, especially from Sep’24 to avoid any political controversy just ahead of Nov’24 US election as Powell has to again face another highly probable Trump tantrum from Jan’25

·         Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may/may not cut rates in Dec’24; Fed may revise dot-plots in June meeting.

·         At present, Fed’s Mar’24 dot-plots show: 75 bps rate cuts each in 2024, 2025, 2026, and -50 bps in 2027 for a neutral repo rate of +2.75%

·         But the Fed may now show the June’24 dot-plots as -100 bps rate cuts each in 2025, 2026, and -50 bps in 2027 for terminal neutral repo rate +3.00%

·         Another scenario: Fed may also cut -50 bps in Dec’24 or even in Jan’25 after the Nov’24 US election to avoid any political controversy and also to assess overall inflation and employment data for the whole of 2024

·         Fed is now quite confused about the rate cut narrative from H2CY24 as the disinflation pace was almost stalled in Q1CY24, ahead of the Nov’24 election, while the unemployment rate and bond yields are ticking up;

·         Average US inflation is now higher by over 20% from pre-COVID (Jan’20) levels, while under normal conditions, it should be around +8%; higher cost of living is creating some anti-incumbent wave against Biden admin before Nov’24 election; thus both White House and Fed are now prioritizing to keep inflation under control and not ready to risk of surging inflation by cutting rates just ahead of the election

·         Like in India, the US Presidential election in Nov’24 may be also acting as a big/moderate fiscal stimulus amid huge election spending, which may likely boost inflation again or prevent the disinflation process, making the Fed’s job harder to cut rates even in Dec’24

·         This year, the U.K. is also going for an early election in July, and thus BOE may also not hike rates in 2024

·         BOC may not cut rates in 2024 as Canada is also going for an election in the coming months

·         Thus almost all major G20 Central Banks including ECB, BOE, BOC, RBI, and even PBOC may not cut rates in 2024 if Fed remains on hold; no central bank will go against the Fed irrespective of any narrative/rhetorics and make LCU weaker against USD, causing higher imported/total/core inflation in the process; all central banks led by Fed will continue the 24/7 jawboning to keep bond yields under control (indirect YCC like BOJ) and a vibrant financial/money/FX market, ensuring robust employment globally

Market impact:

On Thursday, Wall Street Futures stumbled from post GDP high on hawkish Fed talks. Also, the US has slowed the issuance of licenses to AI chipmakers such as Nvidia and AMD for large-scale AI accelerator shipments to the Middle East including Saudi Arabia. Additionally, Gold slipped after Hamas said: “We are ready to reach a complete agreement including comprehensive hostages/prisoners exchange deal if Israel stops war on Gaza”.

On Thursday, Wall Street was dragged by techs and communication services, while boosted by real estate, utilities, materials, industrials, banks & financials, consumer staples, energy, consumer discretionary and healthcare. Script-wise, Wall Street was dragged by Salesforce (guidance warning), Kohl’s (earnings/guidance miss), NVIDIA, AMD, Oracle, Adobe, Microsoft, Amazon, Merck & Co, Goldman Sachs, IBM, United Health and Walmart, while boosted by Verizon, Honeywell, Amgen, Chevron, Boeing, Best Buy (earnings beat) 3M, Apple, Caterpillar and Intel (NVIDIA/AMD rival not affected by US partial ban).

On Wednesday, American Airlines tumbled amid a disappointing outlook (guidance). UnitedHealth led industry losses after saying it sees a “disturbance” coming as states pare enrollees in their Medicaid programs. Global bond yields are also surging. Treasury 10-year yields climbed seven basis points to 4.62%. European bond issuance this year has topped the €1 trillion ($1.1 trillion) mark more than a week before the previous record. German bond yields hit a six-month high as inflation accelerated.

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

Whatever may be the narrative, technically Dow Future (39100) has to sustain over 39000 for any recovery to 39200//39300-39400*/39700 and 39800/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 38900 may further fall to 38750/38550-38450/38250 and 38100*/37900-37600/37400 in the coming days.

Similarly, NQ-100 Future (18975) has to sustain over 19100 for a further rally to 19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 19050/19000 may fall to 18850-18750, may again fall to 18350/18100-18000/17900 and 17800/17700-17600-17500 and further 17400/17300-17100/17000* in the coming days.

Also, technically Gold (XAU/USD: 2340) has to sustain over 2330 for any recovery to 2355/2365*-2375/2385 and further rally to 2400/2425-2435/2455* and 2475-2500; otherwise sustaining below 2325, may further fall to 2315/2300-2290/2275* and further to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.