Wall Street flat as Gaza war spreads to south; oil jumped

On Thursday, Wall Street Futures were almost flat dragged by the intensifying Gaza war spreading in hospitals, while boosted by hopes of an early Fed cut after higher-than-expected jobless claims, indicating a +4% unemployment rate in Nov’23; Gold also jumped. Dow Future was also affected by a plunge in Wall Mart amid subdued guidance on weak consumer spending in the coming days. The market is now expecting a -50 bps Fed rate cut by July’24, while is quite optimistic about the progress of the Gaza war's temporary pause/ceasefire. But on Thursday Wall Street Futures slipped on intensifying the Gaza war, especially the reported/alleged violent attack’ on Gaza’s al-Ahil hospital by the IDF/Israel army.

On Friday, Wall Street Futures stumbled, while Gold got some boost after a report that IDF is now also preparing to launch a military operation in the southern part of the Gaza strip (after telling civilians to move from north to south to avoid bombs/missiles). Previously, IDF dropped leaflets in southern Gaza telling residents to immediately move into “known shelters”. IDF said it will hit Hamas anywhere in Gaza, including in the south: “We are determined to advance our operation. It will happen wherever Hamas exists, including in the south of the strip. It will happen at the time, place and conditions that are best for the military.”

Meanwhile, there’s been a volley of rockets reportedly fired from Gaza towards central Israel and cities like Tel Aviv, Jaffa, and Holon. Although Israel’s Iron Dome missile defense system was able to intercept several of those rockets, some hit around Tel Aviv, while Hezbollah is also increasing its attack on the IDF from the Lebanon border to distract and keep busy IDF. On Friday, the Israeli defense minister compared Hamas’s top leader in Gaza (Sinwar) to Laden: “Yahya Sinwar is the new bin Laden – we will haunt him down, and we will achieve victory”.

On Friday, the EU foreign policy chief Borrell called for an immediate ceasefire in Gaza:

·         Israel must respect international law

·         The war against Hamas in Gaza is the result of a general political failure of the international community

·         The EU calls for an immediate humanitarian truce and more opportunities for aid to reach civilians in Gaza

·         There are thousands of civilian casualties in Gaza, and Israel must respect international humanitarian law

·         This war shows the European Union that it cannot leave the Palestinian issue without a solution

·         There is increasing settler violence, and the EU stressed to Israel that it must control the violence in the West Bank

·         On Friday, Alashqar, an assistant professor of international peace studies at Trinity College in Dublin noted that there is no real pressure on Israel to end the Gaza war quickly as the global condemnation of Israel’s ruthless military actions in Gaza has yet to translate into real action: “So far, international powers including U.S. and EU countries have spoken about the humanitarian crisis in Gaza, including a lack of food and medical supplies. But we haven’t seen real actions through policy or international pressure. The US, if we look at it, is facilitating the Israeli war in Gaza. If we look at the EU, as well, it’s facilitating the Israeli war.”

On Friday, an influential U.S. Democrat/Independent Senator Sanders said Congress can’t pass an Israel spending bill until the bombing stops. But Sanders has emerged as one of only a handful of US legislators who have said conditions should be applied to a Biden admin request for more military funding for Israel. Sanders tweeted: “There is a horrific humanitarian disaster in Gaza. Israel must stop the bombing now and allow for massive amounts of humanitarian aid, including fuel, to reach those who need it. Congress cannot pass a supplemental spending bill that allows these actions to continue.”

On Thursday, Sanders also released details of conditions he said should be put on the bill approving more aid for Israel, which also included “the right of displaced Gazans to return to their homes; no long-term Israeli occupation of Gaza; an end to settler violence in the West Bank and a freeze on settlement expansion; and a commitment to broad peace talks for a two-state solution in the wake of the war.” But Sanders, like Biden and most other influential U.S. Lawmakers, also refrained from demanding a full ceasefire from Israel.

On Friday, Fed’s Goolsbee said:

·         We will do whatever it takes to beat inflation

·         Housing inflation is the thing we should keep an eye on

·         If we hit the targets we expect to hit, we will be on the path to 2% inflation

·         The main thing for the Fed to pay attention to is prices

·         Jobs and growth rate should not be the main focus now

·         Inflation is improving, but it's still too high

·         There's a big gap between the data and how consumers and businesses feel about the economy

·         We have seen a strong rebound in labor supply

On Friday, Fed’s Collins said:

·         I wouldn't take additional hiking off the table

·         Long-term yields have come down since the last Fed meeting

·         There are positive signs the labor markets coming into balance

·         I see evidence financial conditions are still working in the Fed's favor

·         We need to watch rent inflation in particular

·         It is important to be patient, far from declaring victory

·         I am seeing some good news on shelter inflation

·         It's too soon to declare victory over high inflation

·         There's been promising inflation news, the economy is re-balancing

·         The Fed is positioned to be patient

·         The data is very noisy right now

·         Improvements in labor supply in a tight market may let employment grow without price pressures

On Friday, Fed’s Daly said:

·         Business contacts are still worried about elevated inflation

·         It is too early to know whether the neutral rate has risen

·         Fed needs 'the boldness to wait' given the uncertainty

·         The Fed is not certain if inflation is on track to 2%

·         We must resist pressure to act quickly when patience needed

·         The Fed is unsure about the length of policy lags

·         The Fed is grappling with uncertainty over outlook and policy lags

·         The fed needs the boldness to wait given uncertain times

·         I'm not certain whether inflation is on the path to 2%

On Friday, Fed’s Barr said:

·         We are likely at or near the peak of where we need to be on interest rates

Overall, despite significant progress of inflation towards the target and the rising unemployment rate, the Fed is still maintaining a hawkish hold stance to ensure tighter financial conditions and moderate inflation expectations. Subsequently, Wall Street Futures, and Gold slips on Fed’s hawkish jawboning.

Conclusion:

The average sequential rate for U.S. core CPI (seasonally unadjusted) was around +0.11% in 2020, +0.45% in 2021-22, and estimated +0.35% in 2023. At a current average sequential rate of +0.25% in the last few months, the annual core CPI should be around +4.3% in Dec’23 against +5.7% in Dec’22.

Looking ahead, if the rate of average sequential core CPI further declines to around +0.25% in 2024 and +0.15% in 2025, then the annual core CPI would be around +3.0% by Dec’24 and +2.0% by Dec’25-in line with Fed’s present projections. Thus there is a need for a higher restrictive rate for longer policy at least till Sep’24. By Sep’24, U.S. core CPI should be around +3.0% and then the Fed may go for rate cuts of at least -50 bps a quarter to +5.00% and keep the real rate around +2.0% (compared to core CPI), still in the restrictive zone. In 2025, the Fed may further cut -2.0% for a repo rate of +3.00% against likely core CPI of around +2.00%. The market is now assuming the first Fed rate cut in June vs prior July after a softer-than-expected October NFP/BLS job report. Also, Fed swaps showed more than -100 bps of easing prices for 2024!

Thus Fed is preparing the market for a hawkish hold stance in H1CY24 with an end to the current tightening cycle. Fed may go for a hawkish hold policy action/stance amid excuses of Israel-Hamas war/simmering ME geopolitical tensions and rising 10Y US bond yield. But the Fed may continue to project at least another hike in December and one hike in H1CY24 (March/June) to continue its hawkish hold stance and to ensure tighter financial conditions and also Fed credibility. The Fed is now preparing the market for higher for longer policy.

As per Taylor’s rule, for the US:

Recommended policy repo rate (I) = A+B+(C+D)*(E-B) =0.00+2.00+ (0+0)*(5.50.00-2.00) =0+2+3.50=5.50%

Here:

A=desired real interest rate=0.00; B= inflation target =2.00; C= permissible factor from deviation of inflation target=0; D= permissible factor from deviation of output target from potential=0.00; E= average core inflation (CPI+PCE) =5.50% (for 2022); H1CY23 average core inflation around +5.40% (~5.50%)

Fed may not hike further, keeping the terminal repo rate at +5.50% with a hawkish hold stance at least till H1CY24. Similarly, ECB and BOE will continue to be on hold with a hawkish bias at +4.75% and +5.50% respectively; i.e. we have a synchronized global hawkish hold stance by major G4 central banks (Fed, ECB, BOE, and BOC) to ensure tighter financial conditions, lower demand/economic activities and lower inflation expectations/lower inflation.

Looking ahead, the Fed may try to balance the financial/Wall Street stability and price stability by expressing intentions to cut from June’24 (H2CY24) to ensure a soft landing while bringing down inflation. Also, the Fed has to ensure lower borrowing costs for the U.S. Government (Treasury) endless deficit spending and mammoth public debt of almost $32T. The U.S. is now paying around 9.5% of its revenue as interest on public debt against China/EU’s 5.5%. This is a red flag, and thus Fed has to operate in a balancing way while going for calibrated hiking to bring inflation down to target, avoiding an all-out recession; i.e. to ensure both price stability and soft-landing.

Market wrap:

On Friday, Wall Street Futures were almost flat amid hopes of an early Fed cut and lingering uncertainty about the Gaza war trajectory/pause/ceasefire. Fed’s hawkish jawboning about the possibility of another hike also affected Wall Street Futures and Gold. But oil recovered from Thursday’s plunge after a report that OPEC+ may consider a -1 mbpd production cut at the next scheduled meeting on 26th November.

On Friday, Wall Street was boosted by energy (higher oil), consumer discretionary, industrials, banks & financials, utilities, and materials, while dragged by communication services, techs, healthcare, real estate, and consumer staples.

On Friday, AMD tumbled despite earnings beat after a report that the chip maker is under criminal investigation by the DOJ for sending its equipment to a Chinese company without the required licenses/prior approval. Charge Point tumbled after the EV charging company lowered its guidance and replaced its CEO and CFO.

On the other side, Gap soared on earnings and guidance beat. For the week, the three major indexes booked moderate gains for the third consecutive week as the DJ-30 added almost +2.00%, the SPX-500 and the NQ-100 surged around +2.60% and +3.00%, respectively.

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

Whatever the narrative, technically Dow Future (34988), now has to sustain over 35200 for a further rally to 35350/35500-35650/35850 in the coming days; on the other side, sustaining below 35150, Dow Future may again fall to 34800/34650-34120/34000 and 33700/33200-33000/32400 in the coming days.

Similarly, NQ-100 Future (15900), now has to sustain over 16100 for a further rally; otherwise sustaining below 16050, may again fall to around 16100-14140 in the coming days.

Also, technically Gold (XAU/USD: 1980) now has to sustain over 1975 for any further rally to 1980/1995-2008/2012 and 2063-2085 for a further rally to 2022/2038-2055/2085; otherwise sustaining below 1970, may further fall to 1955/1932-1923 and 1908/1904-1895/1885 and 1850/1810 in the coming days (if there was a Gaza war ceasefire).