US stocks surged on hopes of a jumbo Fed cut and Harrisnomics

·         Overall Harris' Presidency may be better for the US economy/market for policy certainty & continuity rather than Trump's, which may again ignite a trade war

·         Gold also jumped as the Harris Presidency may prolong Gaza and Ukraine war and even risk mini-WW-III (Putin rhetoric)

·         Latest core PPI, CPI, and jobless claims data indicate US core PCE inflation may have stalled or even ticked up in August, while the unemployment rate may rick down in Sep’24

On Thursday, EURUSD got some boost on a less dovish hike by the ECB, while Gold, and Wall Street Futures also jumped on renewed hopes of a jumbo Fed rate cut after the ECB cut its repo (MLF) rate by -60 bps against reverse repo (DFR) rate by normal -25 bps.

On Thursday, Wall Street Futures were also undercut by than expected US PPI report, which along with the stalled core CPI report indicated US core PCE inflation may have also stalled again or even ticked up in Aug’24 and thus Fed will cut by normal -25 bps each QTR end from Sep’24 rather than some jumbo rate cuts (-50 bps) or even back-to-back -25 bps. But some market participants and financial journalists (led by WSJ) may be still expecting the Fed will start the next rate cut cycle by going for -50 bps jumbo rate cuts not only in Sep’24 but also in Dec’24, totaling -100 bps. This is creating some uncertainty and volatility in the market, but this is always welcome for a vibrant financial market; otherwise, who will short the market at the top and long around the bottom (as a part of short-term swing trading.

Wall Street may be relieved by fading concern of Trump 2.0 trade war tantrum and policy continuity under Harris:

Wall Street was also boosted by fading concern of Trump 2.0 after the disappointing debate performance of the former US President against Present VP (Democrat candidate) Harris. The market is being boosted by policy continuity and predictability under Harris rather than Trump tantrum 2.0. Democrats/Harris is set to win the White House and House but may lose the Senate, which means no Trifecta at least till the next mid-term election in Nov’26 (unlike 1st two years under Biden and Trump).

But even under a minority government, a moderate Harris admin may be able to make political consensus at least with some key Republican Senators. In the Senate, Harris-led Democrats may be able to win 49 seats against Republicans 51 (49 vs 51) against the present majority 51 vs 49. At present the US House is under the control of Republicans, but Democrats are set to regain it, whereas may lose the Senate by a thin margin.

Although Trump is again promising further corporate tax cuts, even if he can win, he may not pass the same bill due to a lack of majority in the House. But at the same time, Trump's 1.0 tax cut stimulus may continue beyond 2025 as Republicans may not allow it to expire. Thus under Harris, all present major tax policies may continue, while there will be also some infra/fiscal stimulus consensus between the two major political parties (Democrats and Republicans) led by moderate Harris rather than dictator like attitude of Trump.

Also, under Trump 2.0, there may be another trade war tantrum involving China and even with allies like Germany, Italy, France, Canada, Japan, and even India! Thus Harris may be better for the US economy/market rather than Trump 2.0. Although the US and China always compete with each other for supremacy in every field, the two largest economies of the world also need each other for prosperity and development.

China is not only very important for supply chains, but also its huge domestic consumption and most of the US MNCs are dependent heavily on Chinese revenue. On the other side, the US is also the biggest client of Chinese exports. Thus after the Trump trade war tantrum, and COVID-related fragmented trade tensions, the world/US can’t afford another wave of trade/cold war under Trump 2.0. China matters to the US almost in every aspect like domestic political compulsion, US election debate, and even Fed/FOMC discussions.

But at the same time, the Ukraine-Russia and even Gaza war may linger under war savvy (?) Democrats/Harris as the military-industrial lobby, who controls US politics & foreign policies seems to be happier with Biden/Democrats rather than Trump.

Thus unlike Trump, Democrats led by Harris may also be good for Gold as Russia-Ukraine and even the Gaza war may be dragged on; i.e. we may continue to see lingering geopolitical tensions. Also, the US may have a higher fiscal deficit under Democrats for not only housing/infra-related fiscal stimulus, but also for Ukraine and Gaza war funding. Gold is a major beneficiary of 3D (deficit, debt, and currency devaluation) and lingering geo-political tensions.

Gold also got a boost on increasing the WW-III narrative by Putin and Trump, alleging US/NATO/West is playing fire with the WW-III/Nuclear war! On Thursday, Gold also jumped after Putin said: “The use of Western high-precision long-range weapons against Russia will mean direct participation of NATO countries in military operations in Ukraine”. Putin/Russia may be even planning to form a NATO-like military block involving Russia, China, and other anti-West/US countries to deal with a legacy monopoly of NATO/US/West! Thus Gold is now hovering around $2600.

Now from geopolitics to economics, on Thursday, the focus of the market was also on US core PPI data, a day before US core CPI data as the Fed will eventually start cutting rates only when it feels enough confidence that core inflation is sustainably easing towards +2.0%. Fed primarily follows core PCE inflation, data of which is published generally around the last week after core CPI and PPI data around mid-month of every month. The market usually has an idea about the possible rate of core PCE inflation data after getting core CPI and core PPI data mid-month. Thus it may also help the Fed’s SEP/dot-plots on 18th September, when the Fed is set to start the next rate cut cycle by cutting the rate 25 bps, while the market may be still assuming -50 bps to some extent.

On Tuesday, the BLS flash data (NSA) showed annual (y/y) U.S. core PPI (w/o food & energy) ticked up to +2.4% in Aug’24, from +2.3% sequentially, and lower than the market consensus of +2.5%.

Overall, from the above chart, it is almost clear that unlike during pre-COVID times, core PPI disinflation is diverging from core CPI may be due to structural reasons including corporate greedflation and adequate pricing power as there is still sufficient demand for the economy amid a growing population and robust labor market, while supply capacity is still constrained.

On a sequential (m/m) basis (SA), the U.S. core PPI surged +0.3% in Aug’24 from a -0.2% fall in the previous month and above the market expectations of +0.2% increase.

 

Overall, after the latest 4M revision, the 2024 (YTD) average of core PPI is now around +2.4% in Aug’24 (vs prior +2.5%) against +2.9% in 2023, +7.8% in 2022, and pre-COVID levels around +1.5%; the 6M rolling average of US core PPI is now around +2.5% (vs earlier +2.5%). The average sequential (m/m) rate of the US core PPI is now at +0.2% against +0.1% in 2023; as per the pre-COVID longer-term trend, the Fed needs +0.1% core sequential core PPI rate on a sustainable basis for its target/pre-COVID levels of +1.50%, so that core CPI would come around +2.0% targets.

On Thursday, the BLS data (NSA) also shows U.S. annual (y/y) total PPI increased by +1.7% in Aug’24 from +2.1% reading sequentially, below market expectations of +1.8% and the lowest in 6-months. Compared to core PPI, total PPI is converging more to total CPI due to volatile food and energy/fuel.

On a sequential (m/m) basis, the U.S. PPI increased +0.2% in Aug’24, from a flat reading of 0.0% (unchanged) in the previous month, and above market forecasts of a 0.1% increase.

Overall, after the latest 4M revision, the 6M and YTM rolling average of US PPI is now around +2.2% in August (prior +2.2%) and +2.0% (prior +2.1%) against the 2023 average of +2.0%. The sequential rate (m/m) of the US PPI was around +0.2% in the August report.

Overall, the sequential (m/m) prices of services increased 0.4% in August, after a 0.3% drop in July, led by a 4.8% rise in guestroom rental. Cost for machinery and vehicle wholesaling, auto fuels and lubricants retailing, residential real estate loans (partial), and professional and commercial equipment wholesaling also moved higher, while dragged by airline passenger services (-0.8%). Meanwhile, the sequential (m/m) goods cost was unchanged, as rises in cost for non-electronic cigarettes (2.3%), chicken eggs, gasoline, diesel fuel, and drugs and pharmaceuticals offset falls in prices for jet fuel (-10.5%).

 

In Aug’24, producer prices (PPI) for services increased +2.6% (vs +2.6% sequentially), while that of goods was flat 0.0% (vs +1.7% sequentially).

August US Core PPI-Goods were mainly dragged by energy/fuel:

August US super Core PPI-Service

August US Core PPI-Service:

Overall as per core CPI and PPI data trend, the sequential core PCE inflation for Aug’24 may come around 0.2-0.3%; in both scenarios, the annual rate of US core PCE inflation should come around +2.8% in Aug’24 against +2.6% sequentially. The core CPI for Aug’24 was at +3.2% and the 6M rolling average US core inflation (CPI+PCE) would be around +3.1% in Aug’24, almost unchanged sequentially; i.e. overall disinflation pace may have stalled in Aug’24, which may also keep Fed for a normal rate cut pace of -25 bps each every quarter end rather than any jumbo cut of -50 bps or even back-to-back cuts of -25 bps. Fed has to evaluate incoming core inflation and employment data and the outlook thereof to gradually reduce restrictive real rates. The average rate of core disinflation would be around -0.06% in 2024 (till August) against -0.15% in 2023.

On Thursday (12th Sep’24), some focus was also on U.S. jobless claims (seasonally adjusted), which serves as a proxy for the unemployment trend/overall labor market conditions. The U.S DOL flash data shows the number of Americans filing initial claims for unemployment benefits (UI-under insurance) rose to +230K in the week ending 7th September from 228K in the previous week and in line with the market expectations of 230K. In the U.S., Initial jobless claims refer to the number of people who have filed for unemployment benefits with their state's unemployment agency for the first time during a specific reporting period, typically every week.

The 4-week moving average (4WMA) of initial jobless claims, a better indicator to measure underlying data, as it removes week-to-week volatility, also increased to 230.75K on the week ended 7th September from 230.25K in the previous week. Overall, the 4WMA of US initial jobless claims remains below the 250K red line and also in line with the longer-term pre-COVID average of around 235K (2017-19).

The continuing jobless claims in the U.S. rose to 1850K in the week ending 31st August, from 1845K in the previous week, and in line with the market expectations of 1850K. The 4-week moving average was 1852.500K, from the previous week's average of 1854.750K and well below the highest since late Nov’21 (around 1928K). The advance seasonally adjusted insured unemployment rate for the related week was unchanged at 1.2%.

Overall, the US continuing jobless claims average is now around 1800K and is in line with the longer-term pre-COVID (2017-19) period. The continuing jobless claims number is a proxy for the advance numbers of seasonally adjusted insured unemployed persons for the week. The continuing jobless claims in the U.S. measure unemployed people who have been receiving unemployment benefits for a while/ more than a week or filed for unemployment benefits at least two weeks ago (under UI),

Overall, as per seasonally unadjusted continuing jobless claims under all categories (UI) of around 1871K (4-week rolling average) and assuming average uninsured employees (not getting any UI benefit) of around 4677K (usually 2.5 times of 4WMA seasonally unadjusted continuing jobless claims), and estimated self-employed persons, who may be now looking for some work/business, estimated unemployed persons was around 7115K in Aug’24 against 7163K sequentially. Assuming the muted addition of the labor force in Aug’24 (after an unusual addition of +420 K in July due to some exceptional factors against average R/R +200K), the headline unemployment rate WAS 4.2% in August against 4.3% in the prior month. Overall, the latest report indicates around 1850K continuing jobless claims against 1871 in the previous 4WMA; i.e. US unemployment may further edge down in Sep’24 to around 4.0%.

Conclusions:

After Aug’24, the 6MRA of US core inflation (CPI+PCE) would be around +3.0%, the unemployment rate of 4.0% against a target of +2.0% (core inflation-price stability) and 3.5% (maximum employment-unemployment rate). As US core CPI data for Aug’24 does not surprise on the upside, the Fed may start the eleven QTRs rate cut cycle from Sep’24 by cutting -25 bps each QTR end for in H2CY24, CY25, CY26, and Q1CY27. The Fed may cut -275 bps cumulatively from Sep’24 to Mar 27/June’27 for a terminal/neutral repo rate of +2.75% against average core inflation +2.0% on a durable basis.

Bottom line:

Fed may start cutting rates by -25 bps from Sep’24 QTR and may also project similar -25 bps rate cuts each QTR end as below for 2025-26 in its September dot-plots unless there are some signs of the next financial crisis or some real exigencies. Fed will not go for jumbo or any type of back-to-back rate cuts to maintain the Goldilocks nature of the US economy.

Market Impact:

On Friday, Wall Street Futures surged on hopes & hypes of a jumbo Fed rate cut -0.50% against normal -0.25% for not only Sep’24 but also Dec’24 after ECB cuts repo (MLF) & MRO date by -60 bps and reverse repo (DRF) by -25 bps in Sep’24 policy meeting (one-time technical adjustment of spreads as already announced in Mar’24). The US stock market was also boosted by increasing odds of Harris winning in the Nov’24 Presidential election against Trump, which is positive for policy certainty & continuity and may be the best available option under the present scenario.

On Friday, blue-chip DJ-30 surged +0.72%, closing around 41427 after a roller coaster move and recovering from an earlier low of 41141. The broader SPX-500 gained +0.54%, while tech-heavy NQ-100 also surged +0.47%. Wall Street was boosted by utilities, communication services, industrials, materials, consumer staples, real estate, consumer discretionary, techs, energy, banks & financials, and healthcare. Scrip-wise, Wall Street was boosted by Caterpillar, Travelers, Intel, American Express, IBM, Home Depot, McDonald’s, Walt Disney, Verizon, Walmart, Goldman Sachs, Chevron, United Health, Coca-Cola, 3M, Microsoft, Nike, Amgen, Visa, Alphabet, Micro Computer, and ARM, while dragged by heavyweight Boeing (labor strike after failed negotiations), JPM, Amazon, Honeywell, and Apple (subdued launch of new models and Irish tax slap).

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

Whatever the narrative, technically Dow Future (40970) has to sustain over 41300-41500 for any further rally to 41650/41750*-41950/42100* and 42700/41900-43050/44250-44500/44800 in the coming days; otherwise sustaining below 41200-41000, DJ-30 may again fall to 41900/40700-40500*/40300 and 40150/40000*-39700/39450 and further 39350/39200-39100/38900 and 38500*/38300-38000/37600 in the coming days.

Similarly, NQ-100 Future (18650) has to sustain over 18900/19000-19200/19500 for further recovery and rally to 19800/20050-20200/20300 for any further rally to 20400*/20600-20800/21050* and further to 21300/21700-21900/22050 and even 23000 levels in the coming days; otherwise, sustaining below 18750-18650, NQ-100 may again fall to 18400/18200-17950/17600 and 17450-17300/17000 in the coming days.

Technically, SPX-500 (5475), now has to sustain over 5550 for any further rally to 5575/5675 and 5725/5750*-5850*/5900 and 6000/6050 and 6100/6150 in the coming days; otherwise, sustaining below 5550-5500 may again fall to 5450/5390-5370/5300* and 5250/5100* and further 5050/4950*-4850/4750 and 4550/4450-4350*/3850 in the coming days.

Also, technically Gold (XAU/USD: 2500) has to sustain over 2510 for a further rally to 2520/2530-2540* and 2560*/2575-2600/2650 in the coming days; otherwise sustaining below 2505, may fall to 2490/2480-2460/2445* and 2435/2420-2410/2400 and further to 2375/2350*-2325/2300 in the coming days.