Wall Street mixed on hawkish Fed talks and mixed report card

On Monday, Wall Street Futures stumbled, while Gold surged again amid an escalating war of words (scripted) between Iran and Israel in line with their respective domestic political compulsions. Also hotter than expected US retail sales dragged Wall Street as the market is now implying fewer rate or even no rate hikes in 2024. Fed may not go for rate cuts and the continuation of QT (even at a slower pace) at the same time as these tools are contradictory, at least theoretically (like QE and rate hikes).

Thus considering the tepid pace of disinflation, hotter economy, and Nov’24 US Presidential election, the Fed may not go for any rate cut cycle in H2CY24 or from July-Sep’24 for the sake of politically independent image and the credibility of maintaining price, employment, and financial credibility. Also, Recent Fed talks indicate due to the muted rate of disinflation, the Fed may go for rate cuts from Mar’25 after ending the contra tool QT and bring down the B/S size to around $6.60T (around 22% of estimated nominal GDP $30T by CY24) from present size around $7.44T to ensure ample liquidity (just above the minimum 20% of nominal GDP) for the US money/funding/repo market to avoid the late 2019 QT tantrum, which forced Fed to launch a mini QE en before Mar’20 COVID shock. The QT is a relatively new experiment for the Fed, which failed to some extent last time.

On Tuesday, apart from lingering geopolitical tension over the Iran-Israel weekend ‘war thriller’, some focus of the market was also on economics, especially on Fed Chair Powell’s comments at an economic conclave along with BOC and BOE chiefs.

On Tuesday, Fed’s Chair Powell said:

·         Recent data shows a lack of progress on inflation this year

·         2023 was the year of the supply-side recovery

·         The current situation is not the standard case of inflation driven by overheated demand

·         It is appropriate to let policy take further time to work

·         If higher inflation persists the Fed can maintain the current rate as long as needed

·         Twelve-month Core PCE inflation was little changed in March according to estimates

·         The labor market moving into better balance even amidst ongoing strength

·         The US economy over the past year has been quite strong

·         Recent data show a lack of further progress on inflation

·         Fed needs more confidence about disinflation progress so that inflation falls back to 2% on a sustainable basis

On Tuesday, Fed's Barkin said:

·         It's smart for the Fed to take its time on the decision to cut rates

·         The economy is not overheating, but if so we can deal with it

·         The CPI data has not “been supportive" of a soft landing

On Tuesday, the US Treasury Secretary Yellen said:

·         US firms are not on a level playing field with China

·         We have been working to diminish Iran's ability to export oil, there may be more that we can do

·         We have seen some spillovers from the Iran situation, but not widespread

·         I will meet with Chinese officials this week to discuss anti-money laundering and balanced growth

·         US inflation is significantly down from its peak, but we need more disinflation

·         US inflation is down significantly from its peak, but there's more work to do

·         Global economic performance has been powered in part by a strong U.S. economy & the labor market is also remarkably healthy

On Tuesday, Fed’s VC Jefferson said:

·         If inflation is more persistent, holding rates in place for longer

·         Compared to Q4 2023, I expect Q1 economic growth to slow down but remain solid as indicated by February and March retail sales data

·         I am fully committed to getting inflation back to 2%

·         Despite considerable progress in lowering inflation, the job is not yet done

·         My baseline outlook remains inflation will decline further with the policy rate at the current level

·         In March, headline PCE was 2.7% over the past 12 months based on Fed staff estimates; core PCE at 2.8%

·         Recent readings on both job gains and inflation have come in higher than expected

·         Easing will likely be appropriate later this year

·         If incoming data suggest inflation is more persistent than I currently expect, it will be appropriate to hold in place the current restrictive stance of policy for longer

Relevant text of Economic Uncertainty and the Evolution of Monetary Policymaking by Fed Vice Chair Philip N. Jefferson at the International Research Forum on Monetary Policy, Washington, D.C

Current Situation

“Reflecting on the situation we are facing today, over the past year, inflation has come down significantly but is still running above the FOMC's 2 percent goal. In March, headline personal consumption expenditures (PCE) inflation was 2.7 percent over the past 12 months based on the Federal Reserve's staff estimates. A year earlier, it was 4.4 percent. Core PCE inflation, which excludes the volatile food and energy components, stood at 2.8 percent; a year ago, it was 4.8 percent. While we have seen considerable progress in lowering inflation, the job of sustainably restoring 2 percent inflation is not yet done.

Real GDP growth in the fourth quarter of 2023 was 3.4 percent, and I expect first-quarter economic growth to slow down but remain solid as indicated by the solid growth in retail sales in March and February. Recent readings on both job gains and inflation have come in higher than expected. The economy added an average of 276,000 nonfarm jobs per month in the three months through March, a faster pace than we have seen since last March. And the inflation data over the past three months were above the low readings in the second half of last year.

My baseline outlook continues to be that inflation will decline further, with the policy rate held steady at its current level, and that the labor market will remain strong, with labor demand and supply continuing to rebalance. Of course, the outlook is still quite uncertain, and if incoming data suggest that inflation is more persistent than I currently expect it to be, it will be appropriate to hold in place the current restrictive stance of policy for longer. I am fully committed to getting inflation back to 2 percent.”

On Tuesday, Wall Street also reacted mixed amid mixed report card:

Morgan Stanley Q1CY24: Upbeat

·         EPS $2.02, est. $1.66

·         Net rev. $15.18, est. $14.46b

·         FICC sales & trading rev $2.49b, est. $2.33b

·         Net interest income $1.80b, est. $1.96b

·         Wealth management net rev. $6.88b, est. $6.69b

·         Non-interest expenses $10.75b, est. $10.75b

·         Compensation expenses $6.70b, est. $6.45b

·         Equities sales & trading rev $2.84b, est. $2.65b

·         Total deposits $352.49b, est. $342.63b

Bank of America Q1CY24 Earnings: Disappointing

·         Adj. EPS $0.83 vs est. $0.77

·         Rev. net of interest expense $25.82b, est. $25.43b

·         Loans $1.05t, est. $1.06t

·         FICC trading rev. ex-DVA $3.31b, est. $3.3b

·         Provision for credit losses $1.32b, est. $1.4b

·         Wealth & investment management rev $5.59b, est. $5.34b

 Johnson & Johnson (J&J) Q1CY24 Earnings snapshot: Upbeat

·         Adj. EPS $2.71, est. $2.65

·         Sales $21.38b, est. $21.39b

·         Medtech sales $7.82b, est. $7.94b

·         Sees FY sales $88b to $88.4b

United Health Q1CY24 Earnings: Upbeat

·         Adj. EPS $6.91, est, $6.59

·         Rev. $99.8B, est. $99.21B

·         EPS -$1.53 vs. $5.95 YoY

·         Still sees FY adj. EPS $27.50 to $28

·         Operating cost ratio 14.1%, est. 14.2%

On Tuesday there was no dearth of Israel-Iran duet headlines, boosting gold/bond/ haven assets and dragging stocks/risk assets:

·         Israel reportedly finalizes plans for a counter-strike against Iran.

·         The Israeli military is said to have finalized its strategy for the response to the weekend attack by Iranian forces

·         Israel decided to strike inside Iran "as soon as possible"

·         US Defense Secretary Austin speaks with the Chinese Defense Minister - Pentagon.

·         Putin had a phone call with Iran's president Raisi: Putin expressed hope for restraint

·         Iran President Raisi told Putin that Iran is not interested in further escalation in the Middle East –

·         Israeli Army Spokesman: It is impossible not to respond to the Iranian attack, and we will act at the appropriate place and time

·         Some European governments rebuff calls to designate the Revolutionary Guards a terrorist organization

·         Initial reports of a drone exploded in the Beit Hillel area, Israel. No IDF confirmation

·         The Israeli army conducts training exercises simulating combat scenarios on the Lebanese and Syrian fronts.

·         Iran's Deputy Oil Minister Shahmirzaei: We take into account the interests of our allies

·         Iran's Deputy Oil Minister Shahmirzaei: All countries and players need to adhere to the principles of non-harm to energy producers to ensure stability

On Tuesday, the IMF said:

·         Confidence in an economic soft landing is growing in the financial markets, but persistent inflation could trigger instability

·         The central banks should avoid premature policy easing

·         Concerned about medium-term US fiscal trajectory

·         China's rising export reliance risk is causing trade tensions

·         The Mideast conflict is not yet spurring sustained higher oil prices

·         IMF raises 2024 global GDP growth forecast to 3.2% from 3.1%

IMF’s policy prescription is also now synchronizing with the Fed as it should not go for an early rate cut, while the economy is firing on almost all cylinders. Fed should hold for now and go for rate cuts when disinflation gets more momentum and there are some signs of labor market stress. For the time being, the Fed could continue to do the QT to bring B/S size down to around $6.60T and be ready for the next round of QE/QQE/Rate cuts.

Market impact:

On Tuesday, Wall Street Futures stumbled, while Gold surged again amid an escalating war of words (scripted) between Iran and Israel in line with their respective domestic political compulsions. Wall Street was also undercut by hawkish Fed talks as Powell & Co is now preparing the market for no rate cuts in 2024, although there is also a probability of rate cuts from Sep’24. Fed Chair Powell and also VC Jefferson clearly said that the disinflation progress stalled, while the labor market and overall economy were still running hot. Thus Fed has to keep higher for a longer policy (restrictive) at least till H1CY24 or even till Q1CY25. Wall Street closed almost flat with a negative bias.

On Tuesday, US short-term interest-rate futures dropped after Fed chair Powell said the restrictive policy needs further time to work, while WSJ's influential Fed watcher Timiraos tweeted on Fed's Jefferson: “He doesn't refer to rate cuts as a base case, as he did on February 22nd.”

On Tuesday, Wall Street was dragged by real estate, utilities, energy, materials, banks & financials, consumer discretionary, industrials, and communication services, while boosted by techs, consumer staples, and healthcare to some extent. Wall Street was boost5ed by United Health, Salesforce, Boeing, IBM, Travelers, Microsoft, Walt Disney, P&G, Nike and Amgen, while dragged by Caterpillar, Goldman Sachs, Honeywell, Apple, J&J, Home Depot, JPM and Chevron.

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

Whatever may be the narrative, technically Dow Future (38145), now has to sustain over 33750/38000-38350/38550 for a rebound to 39500-40000/40200-40600/40700 to 42600  levels in the coming days; otherwise, sustaining below 37650-37600, may further fall to 37400/37200-37050/36600 and 36300/36300 and even 35700 levels in the coming days.

Similarly, NQ-100 Future (17935) now has to sustain over 18000 for a rebound to 18500-18750 and 19000/19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 18000, NQ-100 may gain or fall to around 17800/17575*-17150/16850 and 16650/16490-15900/15700 in the coming days.

Also, technically Gold (XAU/USD: 2383) now has to sustain over 2400-2425 for any further rally to 2455-2475/2500; otherwise sustaining below 2395-2390, may again fall to 2375/2350 and 2320/2315-2305/2300 and 2290/2270-22245/2240, and 2220/2210-2200/2195-2190/2180 and 2175/2145*, and further to 2120/2110-2100/2080-2060/2039 and 2020/2010-2000-1995/1985-1975 and even 1940 may be on the card.