Santa Rally continues on US soft landing and tech optimism

·         Gold buoyed on fading hopes of an imminent Gaza war ceasefire and Mossad's advice for a direct Iran attack by Israel

·         US stocks were also boosted by soft landing optimism as US GDP may expand around +3.0% in 2025 too amid solid private consumption

·         Fed may pause in Q1CY25, but may also cut 25 bps each in June and Dec’25

Last Thursday (19th December) some focus of the market was also on US GDP data as it’s an indication of whether the US economy is set for hard or soft landing while trying to restore the price stability mandate. The BEA data (3rd estimate) shows U.S. real GDP for Q3CY24 was around $23400.3B against $23223.9B sequentially (+0.8%) and $22780.9B yearly (+2.7%). In other words, the U.S. economy has expanded by around +0.8% sequentially (Q/Q), which is equivalent to a +3.1% annualized rate (~+3.0%), slightly above the 2nd estimate ($23386.7B) of +2.8%. In the previous QTR, the U.S. Real GDP grew at an annualized rate (seasonally adjusted) of +3.0%

The SLIGHT increase in real GDP for Q3CY24 primarily reflected increases in consumer spending, exports, nonresidential fixed investment, and federal government spending. Imports increased, subtracting GDP. Compared to Q2CY24, the acceleration in real GDP in the third quarter primarily reflected accelerations in exports, consumer spending, and Federal government spending. These movements were partly offset by a downturn in private inventory investment and a larger decrease in residential fixed investment.

The US economy expanded an annualized 3.1% in Q3CY24, higher than +2.8% in the 2nd estimate and above 3% in Q2CY24. It is the biggest growth rate so far this year. Personal spending increased at the fastest pace since Q1CY23 (3.7% vs 3.5% in the 2nd estimate). Also, fixed investment rose more than anticipated (2.1% vs 1.7%). Investment in equipment soared (10.8% vs 10.6%) while structures (-5% vs -4.7%) and residential investment (-4.3% vs -5%) declined. Government consumption growth was also revised higher to 5.1% (vs 5%).

In addition, the contribution of net trade was less negative (-0.43 pp vs -0.57 pp in the second estimate), with both exports (9.6% vs 7.5%) and imports (10.7% vs 10.2%) revised higher. On the other hand, private inventories dragged 0.22 pp from the growth, compared to a 0.11 pp drop in the second estimate.

The Fed is now focusing on PDFP (Private Domestic Final Purchase; which is Personal Consumption Expenditure-PCE+ Gross Private Domestic Investment; i.e. core real GDP, constituting almost 87% of overall real GDP. The seasonally real PDFP has grown +3.0% in Q3CY24 on an annualized basis, slumped from +3.9% in Q2CY24. If we consider the overall TTM average, the annualized growth rate of real PDFP was around +3.0% against overall real GDP growth of +2.7%.

The Fed is viewing the average core real GDP growth at 3.0% as a sign of above-trend growth, but at the same time also of the view that the productivity of the US economy at around +4.0%, running higher than the core real GDP growth +3.0% on an average, it’s ensuring goldilocks nature of the US economy rather than causing overheating. The productivity of the US economy is running around +4.0% on average and higher than the real core GDP growth of +3.0%, which ensures the goldilocks nature of the economy, without causing any overheating and inflation.

Overall, as per the present trend, the US economy may grow around 0.8-0.7% sequentially in Q4CY24 to around $23587.5B. In that scenario, the US real GDP for CY24 would be around $23316.3B vs $22671.1B in CY23. This will translate to a yearly (Y/Y) real GDP growth of around +2.8% in CY24 against +2.9% in CY23.

The US nominal GDP (at current prices) increased +5.0% (~4.9%; seasonally adjusted annualized rate) to around $29374.9B in Q3CY24 against $29016.7B in the previous QTR. As per the current trend, the nominal US GDP may come to around $29188.3, which would translate into +5.3% nominal GDP growth in CY24 against +6.6% in CY23.

On seasonally not adjusted (NSA) and quarterly rate (not annualized), the actual US Real GDP was around $5866.8B at Q3CY24 vs $5817.2B sequentially (+0.9%) and $5724.1B annually (+2.5%).

On seasonally not adjusted (NSA) and quarterly rate (not annualized), the actual US nominal GDP was around $7364.7B at Q3CY24 vs $7290.5B sequentially (+5.2%) and $6997.8B annually (+6.8%).

Overall, the U.S. real GDP may grow around +3.0% in CY25 as per the present trend due to the increasing US population/immigrants and robust private consumption. The US economic activities continue to surprise on the upside amid a solid labor market, while core disinflation is almost stalled. Also, the Fed needs to see the actual immigration/deportation and tariff policies of Trump 2.0, which may have a meaningful impact on both inflation (price stability) and the labor market if implanted at face value.

Conclusions

Despite unfavorable data, and Trump policy uncertainty Fed cut on 18th December’24 to catch up with synchronized global easing and also to keep differential with ECB, which cut -100 bps in 2024. Fed may have also made a policy mistake by not cutting rates by 50 bps in H1CY24 and thus now cut 100 bps in H2CY24 to catch up. Fed may like to keep the repo rate at 4.5% against average core CPI inflation for 2024 around 3.5% for a real repo rate +1.0%, moderately restrictive, but lower than 2.0% in H1CY24, when the repo rate was 5.50% against average core CPI inflation +3.5%. Looking ahead, the Fed may like to keep the core real rate around +1.00% and cut gradually every six months till Dec’27 for a repo rate of +3.00% from +4.50% at present.

As US core inflation (CPI+PCE) almost stalled or even edged up in H2CY24 around +3.0% on average, while the unemployment rate remains stable at around 4.0% along with resilient Real GDP and PDPF growth around 3.0% on average, the Fed should have paused in December’24. However, the Fed may have missed the opportunity of two rate cuts in H1CY24 despite favorable core inflation data. Thus to catch up after the unemployment rate ticked up, the Fed cut a cumulative -100 bps cut in H2CY24 (by front-loading to stay ahead of the curve). Fed has to also synchronize with BOC, ECB, BOE, SNB, and various other European and APC central banks, most of which are in rate-cutting sprees like in a crisis to avert a looming stagflation or even an all-out recession.

Although the Fed generally talks about 2.0% PCE inflation as a price stability target, in reality, it maintains 1.5% core/total PCE inflation and 2.3% core/total CPI inflation; i.e. around 1.9% average inflation (PCE+CPI) targets, Congress has entrusted along with maximum employment 96.0-95.5% of the labor force; i.e. 4.0-3.5% headline unemployment rate. Fed will now try to bring down average core inflation from around 3.0% to 2.5% by keeping the unemployment rate at least around 4.0% by 2025 and then 2.0% core inflation and 3.5% unemployment rate by 2026-27 to achieve its mandate of maximum employment and minimum price stability.

Thus the Fed cut on 18th December for a cumulative rate cut of 100 bps in 2024 to a repo rate of 4.50% against the average core CPI of 3.5% for 2024, so that the real repo rate remains around +1.00%. Fed may have made a policy mistake by not cutting from H1CY24 when 3MRA of core CPI was around +3.5% on average. Thus Fed is now cutting 50 bps extra in H2CY24 to stay ahead of the curve.

Bottom line:

Fed is scheduled to cut 25 bps next in June’25 after pausing in January and March for stalled core disinflation, solid labor market, resilient economic activities, and also to assess Trump 2.0 bellicose policies, whether it will be implemented at face value or not.

But despite a 50 bps projected rate cut in 2025-26, the Fed may also cut 75 or even 100 bps each if Trump’s immigration and tariff policies are less hawkish in reality due to moderate Musk & Co., who may ensure good relations between Trump/US with China and Russia (Putin); Musk has not only good business relation with China but also a good ‘personal/diplomatic’ relation with Putin for the last few years.

Fed front-loaded 50 bps rate cuts for 2025 in H2CY24 and thus may cut only 50 bps in 2025. But the Fed may also change its stance in the coming months and go for 100 bps rate cuts in 2025 if the US unemployment rate ticked up towards 4.5%, while core CPI inflation ticked down below +2.5%. We have to keep in mind Fed often changes its goalposts to suit its narrative/stance/rate action even after contradictory jawboning.

The Fed should maintain more credibility as the Fed is the de-facto central bank of the world and controls almost all types of financial asset classes, with USD being the undisputed preferred global trade & reserve currency. Fed is also doing QT along with rate cuts, which are almost opposite to each other, but the Fed is also defending it as a part & parcel of policy normalizations. In H1CY25, the Fed may also share some concrete plans to end the QT, which may be positive for UST and negative for US bond yields, USD. Lower borrowing costs/lower bond yield would be also positive for stocks and higher bond prices may also boost gold to some extent.

Market Impact:

Wall Street Futures were almost flat Thursday but got some boost in the last few days amid tech and holiday season consumer spending optimism. On Thursday, Gold was also buoyed by fading hopes of an imminent Gaza war ceasefire as Israel negotiators returned home to consult PMO, while Mossad Chief reportedly advised PM Netanyahu to attack Iran directly to eliminate Houthis and other proxy enemies. But Israeli PM Netanyahu didn’t agree.

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

Looking ahead, whatever the fundamental narrative, technically Dow Future (CMP: 43650) now has to sustain over 43900-44200 for any further rally to 45000/45500 and further 45800/46000-46200/46400 and 46800/47000-47500/48000 in the coming days; otherwise sustaining below 43800, DJ-30 may again fall to 43300/43000-42600/41500 in the coming days.

Similarly, NQ-100 Future (21950) has to sustain over 22300 for a further rally to 22500/22700-23000/23300 in the coming days; otherwise, sustaining below 22300, NQ-100 may again fall to 21600/21400 and 20950/20850-20500/20300 and 20000/19800-19650/19350 in the coming days.

Technically, SPX-500 (CMP: 6090), now has to sustain over 6200 for any further rally to 6350/6500 in the coming days; otherwise, sustaining below 6150-6050 may again fall to 6000/5950-5900/5850 and 5675/5600-5550/5500 in the coming days.

Also, technically Gold (CMP: 2630) has to sustain over 2655-2680 for a recovery to 2700-2725 and further 2735/2750-2775/2795 and 2815 in the coming days; otherwise sustaining below 2650-2640 may again fall to 2605/2600 and 2590/2565 and further fall to 2550/2500-2470/2450 in the coming days (depending upon Fed rate cuts, Gaza/Ukraine war trajectory); Gold surged almost 75% in the last one year since Gaza war started back in October’23. Now it may retrace to $2100 levels if Trump indeed can mediate both Gaza and Ukraine war ceasefire by early 2025.