Dow, Gold stumbled on flat revision of core CPI data

Wall Street Futures were boosted for the last few days 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 Friday, Wall Street Futures were boosted by hopes of a negative revision of CPI/core CPI data in the 2023 annual revision (seasonal factors adjustment). Last year it was revised higher, which put the Fed in a perplexed situation and the Fed shifted from its transitory inflation narrative to permanent and began the lift-off (rate hikes) on March 22. Every year, the BLS readjusts its seasonal adjustment factor to reflect price movements from the just-completed calendar year.

Fed Chair Powell also recently pointed out this annual revision in CPI/core CPI data, which may influence Fed rate action in the coming days depending upon the degree of negative (softer) or positive (hotter) revisions: “One piece of data I will be watching closely is the scheduled revisions to CPI inflation due next month. Recall that a year ago, when it looked like inflation was coming down quickly, the annual update to the seasonal factors erased those gains. In mid-February, we will get the January CPI report and revisions for 2023, potentially changing the picture of inflation. I hope that the revisions confirm the progress we have seen, but good policy is based on data and not hope.”

On Friday, the focus of the market was on the CPI/core CPI annual revision data, which may influence the Fed for the next logical action of planned rate cuts in H2CY24. The BLS revised data shows no change in core CPI data for Q4CY23, which was previously reported at a +3.3% annualized increase. The core CPI data was unrevised to show a 0.3% increase in both December and November and a 0.2% gain in October.

Overall, after the annual revision, the average core CPI for 2021 was +3.6%, 2022 at +6.2% 2023 at +4.8% (as per seasonally not adjusted data), and +3.6%, +6.2%, and +4.8% (as per seasonally adjusted data), unchanged before the revision.

US CORE CPI INDEX DATA BEFORE 2023 ANNUAL REVISION

But the revised BLS data shows the headline/total CPI in the US was up 0.2% sequentially (m/m) in Dec’23, below a 0.3% increase initially reported. Also, data for November was revised higher to 0.2% from an initial 0.1%, and the October rate was also revised up to show a 0.1% increase instead of a flat reading (0%) initially reported. The annualized Q4CY23 CPI rate was around +1.8% after revision against +1.6% previously reported.

But overall, even after a slight negative revision, headline CPI was around +4.1% for 2023, virtually unchanged.

On Friday, Wall Street Futures and gold surged soon after revised sequential CPI data on the softer side, although that was negligible. In this way, the Fed goes by core CPI data, which was unchanged. Subsequently, Wall Street Futures and Gold stumbled again from the session high as overall revised CPI/core CPI data will not influence the Fed for any change of its higher for longer policy; the Fed may not start cutting rates before H2CY24 (July 24).

Looking ahead, the market is also worried about any tsunami in the global financial market as bond yield may surge as a result of any sudden/unplanned BOJ exit/normalization and rate hikes. On Friday, the IMF presented a policy prescription for BOJ. IMF First Deputy Managing Director Gopinath believes BOJ can smoothly end negative rates due to the market perception of long-term low borrowing costs:

·         BOJ should exit YCC and asset buying program (QE), then gradually increase short-term rates

·         Inflation Upside Risks Materialize Year on Year

·         Gradual BOJ rate hikes with clear communication should not cause large global spillovers

·         Rate hike decisions should depend on the data

·         IMF criticizes Japan's planned income tax cut as it could worsen the debt dynamic with limited growth impact

·         IMF advises Japan to tighten fiscal policy and wind down unconventional monetary policy in the near term

In brief, BOJ may exit its ‘super-powerful Abenomics/Kurodanomics’ under the new team of PM Kishida and BOJ Governor Ueda in the coming months, both the Japanese government and BOJ almost made it clear that as a first step, they only end the so-called negative reverse repo (deposit) rate of -0.10%, which is applicable only on certain deposits about a specific levels by banks in special BOJ current accounts. BOJ may end this so-called negative rate in Apr’24 meeting, but may not hike the repo rate, reverse the repo rate, or even end QE/YCC policy immediately as Japan can’t afford higher borrowing costs on its huge public debt. Japan is now paying around 13-15% of its revenue as interest on public debt, which is a red line for AE.

Although, BOJ is famous for its negative interest rate policy (NIRP), in reality, the effective reverse repo rate is around 0% or +0.10%, while the repo rate is +0.30% and no banks ever make the ‘complementary deposit’ above a certain limit in a special current account with BOJ, so that it has to pay an interest of +0.10% to BOJ under reverse repo rather than the usual opposite. BOJ’s repo rate is still now +0.30% (unchanged since Dec’2008) against the Fed’s current rate of +5.50% and ECB’s +4.75% despite comparable core CPI; 6M average of around +4.10%, resulting in a deep negative real repo rate around -4.00% against Fed’s +1.20%. The bank lending rate (BLR) of Japan is now around +1.48% against the US +8.50% and China +3.45%.

BOJ is trying to keep the 10YJGB bond yield at minimum levels, now below +1.0% by sheer jawboning and a false perception (bluff) of a negative interest rate; in reality, BOJ’s repo rate is +0.30% against Fed’s +5.50%, while the effective reverse repo rate +0.10% against Fed’s +5.40%. In this way, due to the very low repo rate, reverse repo rate, and bank lending rate, banks & financials have very low NIM compared to their US peers, leading to subdued wage growth and the vicious cycle of deflation.

On Friday Japan’s Chief Cabinet Secretary Hayashi tried to downplay BOJ's Uchida's Thursday comments Thursday about policy normalization. Japan’s Chief Cabinet Secretary Hayashi said:

·         BOJ to decide monetary policy conduct and any policy tweaks

·         Expect BOJ to cooperate closely with the government and conduct appropriate monetary policy toward the price target

·         BOJ Deputy Governor Uchida's Monetary Policy Comments Align with Governor Ueda's at Previous Meeting

·         BOJ to Determine Monetary Policy Details

On Friday, Japan's finance minister Suzuki said:

·         Closely watching FX rate moves

·         Vows to manage debt appropriately

·         Expects BOJ to maintain close contact with the government to guide monetary policy appropriately

·         Leaves monetary policy decisions to BoJ, government refrains from commenting

·         Emphasizes stability in currency movement reflecting fundamentals

On Friday, BOJ Governor Ueda said:

·         To consider the health of the balance sheet when exiting stimulus policy

·         Sees a high likelihood of accommodative conditions remaining despite the abandonment of negative rates

BOJ officially maintains a negative reverse repo rate (tiered), so that banks are discouraged from parking their excess funds at BOJ and encouraged to lend to the real economy (forced lending policy is the World’s financier, especially in US bonds, startups, and infra projects). Thus, if BOJ starts normalization; i.e. tightening, especially at a time when Fed, ECB, BOE, BOC, PBOC, RBI, and all other major G20 central banks may go for rate cuts in H2CY24, it will cause an abnormal surge in JGB bond yields, resulting in another wave of global financial crisis.

Thus as a part & parcel of synchronized policy action by major global central banks in 2024, BOJ may start QE tapering and YCC policy abandoning (officially) along with the end of negative reverse repo rate by H1FY24 (from April’24 to Sep 24). And BOJ may also hike the repo rate from the present +0.30% to +0.50% (@0.10% run rate) in FY25. These actions will be more than sufficient to bring USDJPY at around 135-130 levels and reduce core imported inflation back to around +2.0% on a sustainable basis.

Now on the other side of the Pacific, Fed’s Logan said Friday:

·         The outlook is for inflation to be sustained near the target, the labor market to loosen but still robust

·         Right now US economy is in a good place

·         Shrinking the Fed's balance sheet has been going very smoothly so far

·         We are on an unsustainable trend for US national debt

·         We need to build confidence in inflation

·         I don't see any urgency to adjust rates

·         The labor market is very tight but loosening

·         We have made 'tremendous progress’ on inflation, more work to do

·         Some industries still have supply chain issues, which may take some time to heal

·         Supply chains have pretty much normalized

·         China's slowing growth is also a key issue

·         The outlook is for inflation to be sustained near the target, the labor market loosening but still robust

·         Shrinking the Fed's balance sheet has been going very smoothly so far

·         I don't see any urgency to adjust rates

·         The labor market is very tight but loosening

On Friday, Fed’s Bostic said:

·         Inflation has been too high for too long

·         We need to be resolute and stay the course to get to the target

·         Data suggest real wage gains will continue for several more months

·         Inflation has made good progress but still a ways to go

·         The US is on a pathway to get back to pre-pandemic economic strength; and wants to avoid a new spike in inflation

·         Inflation has been too high for too long, still a ways to go for a return to the target

Conclusions:

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.

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). This along with lingering Ukraine and Gaza war, Trump is ahead of Biden by around a 10% approval rate for the Nov’24 US Presidential election.

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, BOC, PBOC, and RBI has to follow ‘King Fed/USD’, whatever may be 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).

Overall, the stimulus-addicted Wall Street may be trading far ahead of its fundamentals/valuation. SPX-500 gained around +24% in the last year (2023) and +27% in the last three years (2021-23), but currently may be running far ahead of fair valuation on hopes & hypes of an early & deeper Fed rate cuts and AI /tech optimism. The S&P 500 is now around 4900 and at Q3CY23 TTM EPS is $184.25, the present/TTM PE of the 500 is around 27 against fair/average PE of around 20 and average EPS growths +17.50% (~18%) since 2018.

In Q3CY23, the actual S&P 500 (SPX-500) EPS was around $47.65 vs 48.58 sequentially (-1.91%), 44.41 yearly (+7.30%), and market expectations 52.35. Now considering the current run rate, the Q4CY23 EPS may grow sequentially by around +2.50% to $48.84, which may translate the CY23 EPS to around $193.48 against CY22 EPS of $172.75 (+12.00%).

In CY22, the EPS of the S&P 500 was around $172.75 vs 197.87 in CY21 (-12.70%).  Now, assuming a +15% CAGR in EPS for CY24-25 amid lower borrowing costs (Fed rate cuts), synchronized global reflation/growths, and the uptick in consumer spending, SPX-500 may report an EPS of around $222.50-255.88. Further assuming an average fair PE of 20, the fair value of the S&P 500 may be around 4450-5118. As the financial market usually discounts 1Y earnings in advance, the projected fair value of the S&P500 may be around 4450-5120 by Dec’23-Dec’24, while the present fair value may be around 4450-3870.

But SPX-500 is now trading above 5000 and may be eyeing 5120, the FY25 projected fair valuation, if EPS indeed comes around 255 by CY25 from present 185 levels; i.e. SPX-500 is now trading almost projected CY25 EPS valuation levels instead of CY24 and may soon correct itself and fall around 4500 levels in the coming days (whatever may be the correction trigger).

Bottom Line:

Fed, ECB may cut rates from July’24; i.e. in H2CY24 for a cumulative 75-100 bps (synchronized global rate cuts amid a synchronized easing in core inflation); every major central bank including PBOC has to follow ‘King Fed/USD’, whatever may be the narrative. Looking ahead, US CRE (Commercial Real Estate), the potential Trump Presidency, and BOJ normalization/tightening may be some of the risks that the Wall Street/global market may face despite the relief of Fed/ECB/synchronized global rate cuts. The market is already making new life time highs almost every other day, discounting Fed pivot, and is now extremely over-valued.

Market wrap:

On Friday, Wall Street Futures closed mixed on fading hopes of an early and deeper Fed rate cuts, mixed report cards, and Fed talks. Blue Chip DJ-30 stumbled almost over -300 points from the post-CPI revision hypes high of 38978 (fresh life time high) to 38645, but eventually closed around 38746, while tech-heavy NQ-100 surged almost +1.0%, making another new life time high around 18070.30 and broader SPX-500 gained +0.5%.

On Friday, Wall Street was boosted by techs, consumer discretionary, communication services, utilities, banks & financials, real estate, materials, and industrials, while dragged by healthcare, consumer staples, and energy (short-term oil rally may be over). Wall Street was mainly boosted by big tech names like Intel, Microsoft, IBM, Honeywell, Apple, NVIDIA, Meta, Amazon and Alphabet. Wall Street was dragged by Chevron, Walt Disney, Caterpillar, Walgreens Boots, Merck, McDonald’s and P&G.

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

Whatever may be the narrative, technically Dow Future (38714), now has to sustain over 39200 levels for a further rally to 39500/39900-40200/40500 and even 42600  levels in the coming days; otherwise, sustaining below 39150-39000 levels may again fall to 38400/38200*-38000/37300 levels in the coming days.

Similarly, NQ-100 Future (17850) now has to sustain over 18200 levels for a further rally towards 18500/18675-18975/19200 and 19450/19775-2000/20200 in the coming days; otherwise, sustaining below 18150-18100 may again fall to 17950/17750 17375/16390 in the coming days.

Similarly, SPX-500 Future (5043) now has to sustain over 5200 levels for a further rally towards 5320/5400-5455/5515 and 5600-5710 levels; otherwise sustaining below 5175/5150-5100//5050, SPX-500 may again fall to 5000/4930-4860/4820 and 4700/4550-4400/4120 in the coming days.

Also, technically Gold (XAU/USD: 2024) 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.