Gold, Wall Street slip on fading hopes of an early Fed pivot

·         Powell made it almost clear that the Fed needs to see inflation and employment data for at least Q3CY24 (another QTR) to be confident about any rate cuts

Wall Street was trading in a narrow range near the life time high for the last few days amid mixed US economic data, mixed Fed talks, and mixed sectoral movement as techs/AI chip optimism led by Nvidia boosted the risk trade sentiment, while China/export heavy MNCs. As a result, while tech-heavy NQ-100 made a new life time high around 20600 and SPX-500 almost 5600/5650, at new life time highs, blue-chip export heavy MNCs DJ-30 was still hovering around 39500-40000 levels, almost 500 points away from the previous life time high on the concern of Trump trade war tantrum as Trump is expected to win the Nov’24 election (against Biden) and may again impose additional tariffs (import duties) not only on Chinese goods but also on various EU and even Indian goods & services (IT export) this time.

Overall, stimulus-addicted Wall Street is now consolidating/distributing around life lifetime high on hopes & hypes of an early Fed pivot coupled with Trump tax cuts (if Trump again comes to the White House), but at the same time also concerned about Trump trade tantrum and lower fiscal/infra stimulus. The market is also concerned about forthcoming political/electoral & policy uncertainty. Biden may not only withdraw himself from the 2nd Presidential run against Trump after a terrible performance in the debate but may also resign early from the White House (President’s Post) to pave the way for VP Kamala Harris to take charge for six months and also run against Trump as the 1st Female Democratic Presidential candidate in the Nov’24 election.

On Tuesday, all focus of the market was on the semi-annual testimony of Fed Chair Powell; whether he signaled any specific month for starting the rate cut cycle amid increasing unemployment and decreasing core inflation rate in the last few months. But Powell sticks to the known position.

Semiannual Monetary Policy Report to the Congress: Chair Jerome H. Powell-Before the Committee on Banking, Housing, and Urban Affairs, U.S. Senate

“Chairman Brown, Ranking Member Scott, and other members of the Committee, I appreciate the opportunity to present the Federal Reserve's semiannual Monetary Policy Report.

The Federal Reserve remains squarely focused on our dual mandate to promote maximum employment and stable prices for the benefit of the American people. Over the past two years, the economy has made considerable progress toward the Federal Reserve's 2 percent inflation goal, and labor market conditions have cooled while remaining strong. Reflecting these developments, the risks to achieving our employment and inflation goals are coming into better balance.

I will review the current economic situation before turning to monetary policy.

Current Economic Situation and Outlook

Recent indicators suggest that the U.S. economy continues to expand at a solid pace. Gross domestic product growth appears to have moderated in the first half of this year following impressive strength in the second half of last year. Private domestic demand remains robust, however, with slower but still-solid increases in consumer spending. We have also seen moderate growth in capital spending and a pickup in residential investment so far this year. Improving supply conditions have supported resilient demand and the strong performance of the U.S. economy over the past year.

In the labor market, a broad set of indicators suggests that conditions have returned to about where they stood on the eve of the pandemic: strong, but not overheated. The unemployment rate has moved higher but was still at a low level of 4.1 percent in June. Payroll job gains averaged 222,000 jobs per month in the first half of the year.

Strong job creation over the past couple of years has been accompanied by an increase in the supply of workers, reflecting increases in labor force participation among individuals aged 25 to 54 and a strong pace of immigration. As a result, the jobs-to-workers gap is well down from its peak and now stands just a bit above its 2019 level. Nominal wage growth has eased over the past year. The strong labor market has helped narrow long-standing disparities in employment and earnings across demographic groups.

Inflation has eased notably over the past couple of years but remains above the Committee's longer-run goal of 2 percent. Total personal consumption expenditures (PCE) prices rose 2.6 percent over the 12 months ending in May. Core PCE prices, which exclude the volatile food and energy categories, also increased 2.6 percent. After a lack of progress toward our 2 percent inflation objective in the early part of this year, the most recent monthly readings have shown modest further progress. Longer-term inflation expectations appear to remain well anchored, as reflected in a broad range of surveys of households, businesses, and forecasters, as well as measures from financial markets.

Monetary Policy

Our monetary policy actions are guided by our dual mandate to promote maximum employment and stable prices for the American people. In support of these goals, the Committee has maintained the target range for the federal funds rate at 5-1/4 to 5-1/2 percent since last July, after having tightened the stance of monetary policy significantly over the previous year and a half.

We have also continued to reduce our securities holdings. At our May meeting, we decided to slow the pace of balance sheet runoff starting in June, consistent with the plans released previously. Our restrictive monetary policy stance is helping to bring demand and supply conditions into better balance and to put downward pressure on inflation.

The Committee has stated that we do not expect it will be appropriate to reduce the target range for the federal funds rate until we have gained greater confidence that inflation is moving sustainably toward 2 percent. Incoming data for the first quarter of this year did not support such greater confidence. The most recent inflation readings, however, have shown some modest further progress, and more good data would strengthen our confidence that inflation is moving sustainably toward 2 percent.

We continue to make decisions meeting by meeting. We know that reducing policy restraint too soon or too much could stall or even reverse the progress we have seen on inflation. At the same time, in light of the progress made both in lowering inflation and in cooling the labor market over the past two years, elevated inflation is not the only risk we face. Reducing policy restraint too late or too little could unduly weaken economic activity and employment. In considering adjustments to the target range for the federal funds rate, the Committee will continue its practice of carefully assessing incoming data and their implications for the evolving outlook, the balance of risks, and the appropriate path of monetary policy.

Congress has entrusted the Federal Reserve with the operational independence that is needed to take a longer-term perspective in the pursuit of our dual mandate of maximum employment and stable prices. We remain committed to bringing inflation back down to our 2 percent goal and to keeping longer-term inflation expectations well anchored. Restoring price stability is essential to achieving maximum employment and stable prices over the long run. Our success in delivering on these goals matters to all Americans.

Let me conclude by emphasizing that we understand that our actions affect communities, families, and businesses across the country. Everything we do is in service to our public mission.

Thank you. I am happy to take your questions.”

Highlights of comments by Fed Chair Powell in his Senate/Congressional testimony:

·         Restrictive policy is helping put downward pressure on inflation

·         Reducing restraint too soon or too much risks reversing inflation's progress

·         Reducing restraint too late or too little could unduly weaken the economy and the jobs market

·         We have made considerable progress toward the 2% inflation goal, recent monthly readings show modest further progress

·         More good data would strengthen our confidence in inflation

·         Elevated inflation is not the only risk we face

·         A policy rate cut is not appropriate until the Fed gains greater confidence inflation is headed sustainably toward 2%

·         First-quarter data did not support the greater confidence in the inflation path that the Fed needs to cut rates

·         Labor market conditions have cooled while remaining strong, and are not overheated

·         Risks to achieving employment, inflation goals coming into better balance

·         The US economy is expanding at a solid pace

·         I am not sending any signals today about the timing of future Fed policy actions

·         Job creation is narrowing in the economy

·         You can't break inflation down into supply & demand elements exactly (immigration issues)

·         The labor market appears to be fully back in balance

·         Our tighter policy is affecting activity in the housing sector

·         We have significant housing issues in the country. The pandemic has created new distortions in housing

·         It is not likely that the next policy move would be a rate hike

·         The labor market is more or less back to pre-pandemic levels

·         Most recent labor market data sent a pretty clear signal that the labor market has cooled considerably

·         Our tighter policy is affecting activity in the housing sector

·         We have significant housing issues in the country. The pandemic has created new distortions in housing

·         If the labor market weakens unexpectedly, that could also be a case for a rate cut

·         We need more good inflation data to cut rates, which would make confidence rise. The timing of cuts will depend on data and what is happening in the labor market.

·         The labor market is not a source for broad inflationary pressures now

·         The labor market has cooled considerably across so many measures

·         We've had one good and one very good inflation reading, we need more good data

·         Wage increases are still very high, but are coming down to more sustainable levels

·         If the labor market weakens unexpectedly, that could also be a case for a rate cut

·         We need more good inflation data to cut rates, which would make confidence rise. The timing of cuts will depend on data and what is happening in the labor market.

Overall, Powell was grilled by both Democrats and Republicans over still elevated inflation/higher cost of living compared to pre-COVID levels and increasing unemployment rate. But Powell made it quite clear that even 4.1% of the unemployment rate in June’24 is still below the Fed’s red line of 4.5% and the overall 6M rolling average is around 3.9% and NFP job addition average +222K indicating that the US labor market is still robust, while there is a case for more fall in core inflation.

The 6M rolling average of core CPI is now around +3.7% after a mixed pace of disinflation in H1CY24; in Q1CY24, it was stalled, while the disinflation process was again visible in Q2CY24. Thus Fed is still not confident enough to start the rate cut cycle and wants to see overall economic/inflation data for at least Q3CY24, if not H2CY24. If the Fed feels confident that core CPI is on the way to falling to +2.0% targets on a sustainable basis, then the Fed may start cutting rates from Dec’24.

Powell also pointed out Fed is trying to bring a modified version of the Dodd-Frank trading Rule and BASEL-III regulatory norms for risky derivative trading and higher bank capital, keeping the interest of all concerned stakeholders including big ten banks. Powell insisted that the Fed is interested in a regulatory norm in line with the current reality of the financial market despite stiff pressure from US Senators across the party line, especially from Democrat Senator Warren.

On Wednesday, the US Treasury Secretary Yellen said in another Congressional (House) Testimony:

·         Trump's tax cuts are costly and regressive

·         I see less inflationary pressure from the labor market

·         Inflation will continue to come down over time, rents are keeping it higher than we would like

·         I believe the big inflationary impulse seen in 2022 was global and stemmed from supply problems after the pandemic, many of those supply problems have been resolved, and wage pressure is easing.

·         Restrictions on investment into China for artificial intelligence are narrowly targeted at clear national security risks.

·         I am not aware of any discussions among cabinet secretaries invoking the 25th Amendment.

Ahead of the US Nov’24 election, both Democrats and Republicans are trying to score on immigration, housing and its effect on inflation. Although higher immigration has helped to cool the US labor market in the last two years by adding more supply of workers (skilled/unskilled), it’s also creating fresh demands for goods & services including housing and causing more inflation (increasing demand vs constrained supply).

Thus to serve a bigger economy, the US has to increase the supply capacity of the economy, especially both social & traditional/transport infra to meet growing demand and balance/reduce inflation. But most of the time, the Ruling Party in the White House is a minority government and there are various issues for a common bipartisan agreement for such infra spending; Democrats are usually more infra savvy, while Republicans are almost the opposite, relying on more tax cuts. As per some reports, Trump may even end the income tax in the US and instead go for higher VAT/sales tax rates of 35% (?) in the US!

As the flood of immigrants is now a political/election issue, many Senators also pointed out Fed should allow higher wage growths to bring back around 7M of US workers from the sideline. But Powell clearly said immigration, and fiscal stimulus issues are with the government, not the Fed’s.

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 +3.7%, above +3.0% Fed’s confidence levels.

·         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 Tuesday, Wall Street closed mixed on fading hopes of an early Fed pivot coupled with AI/Nvidia optimism and the never-ending Boeing issues. The S&P 500 surpassed 5,570. Nvidia rose after UBS Group raised its target. More than 2,600 Boeing 737 aircraft registered in the US will need to have their oxygen generators inspected. United Airlines reported that another of its Boeing aircraft lost a main landing gear wheel while taking off. Broadcom is borrowing $5 billion from the investment-grade market. Additionally, Gold slid after China/PBOC reported no buy in June after buying none in May. Also, lingering suspense about the Gaza war ceasefire is buoying and undercutting Gold (roller coaster move). Banks & financials surged on the Fed’s delaying tactics for Dodd-Frank and BASEL-III regulatory norms.

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.