Gold and Dow soared on softer CPI, but slipped on hotter PPI

·         Nasdaq was also undercut by techs on the concern of bubble; Fed talks indicate wait & watch till Dec’24 (until further disinflation and confidence)

On Wednesday, Wall Street Futures and also Gold got some boost after less hawkish Powell comments on his 2nd day of Congressional Testimony, but Gold eventually slipped as the overall Fed stance remains the same for the time being; i.e. wait & watch. Although Powell said he (Fed) has now some confidence about the disinflation process, he (Fed) is not confident enough about going for rate cuts and thus he/Fed will be in wait-and-watch mode for the next few months. But Dow was also boosted by banks & financials as Powell downplayed or again delayed Dodd-Frank and BASEL-III regulatory norms.

On Thursday, all focus of the market was on U.S. inflation data for June as it may influence the Fed decision for any rate action/policy stance change in July/September policy/dot-plots. Although the market is already discounting a pause for the July FOMC meeting, the Fed may still evaluate core CPI data for June’24 along with the 2023/H1CY24 average and 6M rolling average for change of any policy stance required in H2CY24. The market was still broadly discounting -50 bps rate cuts in late H2CY24 in Sep’24 and Dec’24 after less hawkish Powell comments Wednesday and a softer US job report Friday (5th July).

On Thursday, the BLS data (NSA) shows the annual (y/y) US core CPI inflation edged down to +3.3% in June’24 from +3.4% sequentially, below the market consensus of +3.4% and at the lowest over three years (since May 21). In June’24, the annual US core CPI was continuously boosted by the heavy-weight shelter index, which increased by +5.2% but also eased from +5.4% sequentially. Core CPI was also softened by a lower increase in motor vehicle insurance, while boosted by personal care.

 

On Thursday, the BLS data (SA) showed the sequential (m/m) US core CPI increased +0.1% in June’24 from +0.2% in the previous month, below market expectations of +0.2% and the slowest increase in sequential core CPI inflation since Feb’21. In June, the sequential core CPI was boosted by shelter, motor vehicle insurance, household furnishings and operations, medical care, and personal care, while dragged by airline fares, used cars & trucks, and communication services.

Overall, the average of US core CPI eased to around +3.6% in 2024 (YTM) against +4.8% in 2023, and +6.2% in 2022, while the 6M rolling average is now around +3.6% (y/y), eased from the prior +3.7%. Still substantially above the Fed’s +2.0% targets and +3.0% levels, below which the Fed may feel confident enough to go for eleven rate cuts cycle.

The U.S. Core service inflation (w/o energy service) also eased to +5.1% in June’24 from +5.4% sequentially and Jan’23 reading of +7.2%, but it’s still substantially above pre-COVID average levels of 2.8%. The Fed is now closely focusing on core service inflation, which is still quite elevated and sticky led by Shelter/Housing inflation amid higher demand for housing an increasing number of immigrant workers (increasing population) and the legacy issue of lack of adequate supply of affordable housing in the US. Unlike China, the US is unable to create affordable smart cities and high-speed railways for the increasing population due to a lack of political bipartisan consensus between Democrats and Republicans.

 

The US is suffering long from political & policy paralysis to increase the supply capacity of the economy to serve increasing demand and balance inflation. Moreover, now homeowners are not ready to accept lower rent due to higher demand and higher borrowing costs (home/mortgage loans). In any way, in June’24, the US Shelter inflation also eased to +5.2% from +5.4% sequentially.

On Thursday, the BLS data (NSA) shows the annual (y/y) US CPI inflation edged down to +3.0% in June’24 from +3.3% sequentially, below the median forecasts of +3.1%, and the lowest since June’23. In June’24, the US annual CPI was eased by energy, shelter, transportation, new vehicles, used trucks & cars, while buoyed by apparel, and food.

On Wednesday, the BLS data (SA) showed the sequential (m/m) US CPI contracted at -0.1% in June’24, eased from unchanged +0.0% in May’24, below market expectations of +0.1% advance and lowest since Apr’20 COVID times disruptions. In June’24, the sequential core CPI eased by energy/gasoline, and shelter, while buoyed by shelter, and food.

Overall, the 6M rolling average of US CPI is now around +3.2% against +4.1% in 2023 and still substantially above the Fed’s target of +2.0%; officially US Congress has given Fed price stability mandate as 2% CPI on a sustainable basis; not core CPI or core PCE and even total PCE inflation. However, the Fed usually takes the average of core PCE and core CPI inflation for any policy stance as core inflation generally gives a fair picture of underlying inflation; also there is a difference of around 100 bps between core CPI and core PCE inflation. But ordinary Americans are now concerned with higher cost of living expenses, which is total CPI, and thus ahead of the US election, both Democrats and Republicans are now grilling Powell for still elevated inflation, almost +20% high from pre-COVID levels.

On Thursday, the BLS data (NSA) showed the annual (y/y) US core CPI (super core) inflation (w/o food, energy, shelter and used cars & trucks) was unchanged at +2.5% in June’24 from +2.5% sequentially.

Fed may be looking around +1.5% US super core inflation, so that US core inflation (core CPI) MAY MOVE BELOW +2.0% targets on a sustainable basis. Looking at the trend/pattern of overall US core inflation (core CPI) data, the Fed may provide a rate cut signal in its next quarterly (Q3) September meeting (ahead of the Nov’24 election) as by then the 6M rolling average (6M RA) of core CPI may fall to around +3.3% from present (June’24) 6M RA +3.6%.

At present trend, the 6M RA of core CPI may further fall to around +3.0% by Dec’24, when Fed may feel enough confidence to start the 11 rate cuts cycle from Dec’24, just after the Nov’24 election, so that both Democrats and Republicans will be happy and Powell may be on the safe side from high probable Trump tantrum in future; if Trump indeed wins the Nov’24 election, he may try to undermine the role of Fed as an independent monetary authority (Central Bank).

On Thursday, Fed’s Musalem said:

·         The job market is strong but has cooled in recent months

·         I want more evidence inflation is moving to 2%

·         CPI data points to encouraging further progress

·         Monetary policy is restrictive right now

·         I supported the Fed's rate decision at the June meeting

On Thursday, Fed’s Daly said:

·         Likely some policy adjustments will be warranted

·         It's a fairly big signal from the Fed that so many of us are talking about the labor market

·         Shelter prices are coming down, but the lack of supply means the process is slower than it has been in history

·         There's still more room for monetary policy to push down on shelter inflation

·         The decline in super-core ex-housing inflation is welcome

·         We are at the point where additional labor market slowing is more likely to result in a rise in unemployment

·         The labor market has softened but is still solid

·         Recent inflation prints are a relief, but progress is bumpy

·         I expect that inflation will come down gradually; the labor market is gradually slowing

·         The economy looks to be on a path where 1 or 2 rate cuts this year would be more or less the appropriate path

·         We need more information before we can fully take the next step

·         It is likely some policy adjustments will be warranted

On Thursday, Fed’s Cook said:

·         Fed would be responsive if the unemployment rate situation changes quickly

·         Policy well positioned to reach 2% inflation target

·         Risk of "nonlinearities" as the job market slows down

·         Sees US data consistent with a soft landing

·         Predicts increased disinflation without a significant rise in unemployment

On Thursday, Fed’s Goolsbee said:

·         This is what a path to 2% inflation looks like

·         It doesn't feel like the beginning of a recession

·         Financial conditions are pretty restrictive

·         The reason to tighten policy would be if the economy is overheating

·         We are not overheating

·         As inflation falls, leaving the Fed policy rate steady means the Fed is tightening policy.

·         The June CPI report was excellent; improvement in shelter inflation was profoundly encouraging.

Bottom line: Summary

·         Fed may not cut rates before Nov’24 US election despite some pressure from Democrats.

·         Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may cut rates in Dec’24

·         In the Sep’24 Fed meeting, the Fed may say it gets ‘confidence’ for going for rate cuts from Dec’24 to keep both Democrats and Republicans as well as Wall Street and also Main Street; bond yield should slip.

·         One month of weak/strong job data may not change the Fed’s narrative about higher for longer stance as the 6M rolling average of headline unemployment at 3.9% average is still below 4.5%, while core CPI inflation is still around +3.6%, above +3.0% Fed’s confidence levels.

·         At present trend, the 6M RA of core CPI may further fall to around +3.0% by Dec’24, when the Fed may feel enough confidence to start the 11 rate cuts cycle from Dec’24, just after the Nov’24 election, so that both Democrats and Republicans will be happy.

·         The Fed may start the long-awaited eleven rate cut cycle from Dec’24 and may also indicate the same by Sep-Oct ’24.

·         The Fed will be in ‘wait & watch’ mode till at least Dec’24. But at the same time Fed will continue its jawboning (forward guidance) to prepare the market to ensure the official dual mandate (maximum employment, price stability) along with an unofficial mandate to ensure financial stability (Wall Street and bond market); Fed may not allow core real bond yield (10Y) above +1.0% under any circumstances to manage government borrowing costs.

Market impact:

On Thursday, Wall Street Futures and Gold surged on hopes of an early Fed rate cut from Sep’24 rather than Dec’24 after than expected inflation report. But SPX-500 and NQ-100 soon stumbled from record highs after less dovish Fed talks, indicating the much-awaited start of rate cuts from Dec’24 rather than Sep’24. Additionally, Gold was undercut by hopes & hopes of an imminent Gaza war ceasefire. Techs dragged NQ-100 on sky-high valuation concerns, while banks & financials helped DJ-30 amid delay-dallying tactics by the Fed to implement Dodd-Frank and BASEL-III regulatory norms despite increasing pressure from US Congress. On early Friday, Wall Street Futures and also Gold were under stress on hotter than expected US PPI report.

Weekly-Technical trading levels: DJ-30, NQ-100, SPX-500 and Gold

Whatever the narrative, technically Dow Future (39400) has to sustain over 39500-39850 for any further rally to 40050*/40200-40350*/40500 and may further rally to 40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 39800/39600-39400/39200 may again fall to 39000/38800-38600/38400 and further 38200/38100-37900*/37600-37400 in the coming days.

Similarly, NQ-100 Future (20250) has to sustain over 20350-20500* for a further rally to 20700-21050 in the coming days; otherwise, sustaining below 20450-20300 may again fall to 20000/19850-19750/19650* and 19450/19100-18800/18500 and 18400/18100-18000/17700 and 17600/17500-17300/17150 in the coming days.

Technically, SPX-500 (5560), now has to sustain over 5650 for any further rally in the coming days; otherwise, sustaining below 5625/5600-5575/5550 may again fall to 5500/5450-6375/5350 and 5250/5200-5175/5100 and further 5000/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2325) has to sustain over 2350-2365 for a further rally to 2375/2385-2395*/2400 and further to 2410/2425-2435/2455* and 2475-2500; otherwise sustaining below 2345-2320, may further fall to 2290/2275* and may further fall to 2245/2230-2220/2180 and 2155/2115-2085/2045 in the coming days.