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On Thursday, U.S. and European stock markets surged on the ECB pivot boost (dovish hike) as the ECB may have done with tightening and may also start cutting after Q1CY24 (as per some market perceptions). But Wall Street Futures were also briefly undercut by hotter than expected PPI, retail sales, and softer than expected jobless claims, which may keep the Fed on a hawkish hold stance on 20th September. Subsequently, Gold stumbled to almost 1900 from 1910, but later also recovered to around 1913; with USD hovering around a recent high.
On early Friday Asian session, Wall Street and European stock Futures were further boosted by upbeat economic data from China (retail sales, industrial production, and labor/employment) along with RRR (Reserve Requirement Ratio) cut of -25 bps by PBOC to support sufficient banking liquidity, credit for productive sector of the economy and overall economic recovery.
On early European session Friday, Wall Street Futures were also boosted by a hugely successful IPO debut of Arm Holdings Thursday, which soared nearly 25%, signaled a potential end to a prolonged tech IPO drought, igniting so-called ‘animal spirits’ in the market; Dow Future surged to 35356, while Nasdaq Future scaled 15719. But Wall Street Futures soon stumbled on the triple witching day (quarterly FNO expiry day; 3rd Friday of September-Q3 end; simultaneous expiration of stock options, stock index futures, and stock index options on the same trading day; causing heavy volume and wild volatility).
On Friday, overall Wall Street risk trade sentiment was also affected by automobile stocks amid growing labor unrest by UAW over the pay package and politics over it. On Friday, Wall Street Futures slipped more U.S. President Biden expressed his support for the United Auto Workers (UAW) union and its requests in their labor contract talks with GM, Ford and Stellantis.
Remarks by President Biden on Contract Negotiations between the United Auto Workers and the Big 3 Auto Companies: On Friday Biden said:
“I’ll be very brief. I wanted to talk very briefly about the auto strike. I’d like to say a few words about the contract negotiations between the United Auto Workers and the Big 3 auto companies.
You know, I’ve been in touch with both parties over — since this began over the last few weeks. And over the last — the past decade, auto companies have seen record profits, including the last few years, because of the extraordinary skill and sacrifices of the UAW workers. But those record profits have not been shared fairly, in my view, with those workers. Just as the Treasury Department has released a report, pointing out that — the most comprehensive report ever, dealing with how unions are good for both union workers and non-union workers t- — and the overall economy.
Unions raise workers’ wages, they said — incomes — increase homeownership; increase retirement savings; increase access to critical benefits, like sick leave and childcare; and reduce inequality — all of which strengthen our economy for all workers. That’s because unions — unions raise standards across their workplaces and entire industries, pushing up wages and strengthening benefits for everyone. And that’s why strong unions are critical to growing the economy and growing it from the middle out, the bottom up, not the top down. That’s especially true as we transition to a clean energy future, which we’re in the process of doing. I believe that transition should be fair and a win-win — for auto workers and auto companies.
But I also believe the contract agreement must lead to a vibrant, made-in-America future that promotes good, strong middle-class jobs that workers can raise a family on — where the UAW remains at the heart of our economy and where the Big 3 companies continue to lead in innovation, excellence, quality, and leadership.
Last night, after negotiations broke down, the UAW announced a targeted strike at a few Big 3 auto plants. Let’s be clear: No one wants a strike. Say it again: No one wants a strike. But I respect workers’ right to use their options under the collective bargaining system. And I understand the workers’ frustration.
Over generations, auto workers sacrificed so much to keep the industry alive and strong, especially through the economic crisis and the pandemic. Workers deserve a fair share of the benefits they helped create for an enterprise. I do appreciate that the parties have been working around the clock. I’ve — and when I first called them on the very first day of the negotiation, I said, “Please stay at the table as long as you can to try to work this out.” And then — they’ve been around the clock, and the companies have made some significant offers.
But I believe they should go further to ensure record corporate profits mean record contracts for the UAW. I’m going to say that again: Record corporate profits — which they have — should be shared by record contracts for the UAW.
And just as we’re building an economy of the future, we need labor agreements for the future. It’s my hope that the parties can return to the negotiation table to forge a win-win agreement. To continue our active engagement, I’m dispatching two members of my team to Detroit; Acting Labor Secretary Julie Shu [Su] and White House Senior Advisor Gene Sperling — both of them have been involved up until now — to offer their full support for the parties in reaching a contract.
The bottom line is that auto workers helped create America’s middle class. They deserve a contract that sustains them and the middle class.”
The market is now concerned about the lingering auto strike effect on inflation and also the future competitiveness of U.S. automobiles with China, the EU, South Korea and Japan amid elevated labor costs. China is now dominating the global EV market with affordable cost of quality models, thanks to China’s huge scale of production, lower cost of raw materials and lower labor/production cost. Also, ‘the socialistic tone of Bidenomics is hurting Wall Street’s ‘capitalist’ sentiment.
On Friday, the University of Michigan (UM) flash data showed U.S. 1Y inflation expectations fell to +3.1% in September from +3.5% sequentially and +4.7% yearly, lower than the market expectations of +3.5% and lowest since March ’21.
On Friday, the UM flash data also showed U.S. consumer sentiment fell to 67.7 in September from 69.5 sequentially, retreating further from the near-two-year high of 71.6 in July and below market estimates of 69.1 amid lingering macro-headwinds (higher borrowing & living costs). The gauge for current economic conditions fell sharply to 69.8 from 75.7 sequentially as soaring prices for food and fuel hurt consumers' purchasing power and eroded living standards. However, consumers’ future expectations advanced to 66.3 from 65.5, supported by consumers' expectations that elevated inflationary pressures are set to subside.
On Friday, Wall Street Futures were briefly buoyed by softer-than-expected U.S. / UM 1Y inflation expectations and consumer sentiment data, which may keep the Fed on a less hawkish hold stance on 20th September. But Wall Street soon stumbled on triple witching and UAW/Auto strike/Biden’s comments. Blue Chip Dow Jones Future (US/DJ-30) stumbled almost -450 points from the European session high and closed around 34932 (-0.83%); Tech heavy Nasdaq (NQ-100) Future plunged -1.76%, while broader SPX-500 slumped -1.22%.
On Friday, Wall Street was dragged by all the major 11 sectors led by techs, consumer discretionary, energy, communication services, materials, consumer staples, healthcare, financials, industrials, real estate and utilities. Dow was boosted by only three stocks (United Health, American Express and Walt Disney), while dragged by Microsoft, Apple, and Nvidia amid fading AI optimism; also Apple was under stress on reports of high radiation of its iPhone models.
On Friday, Gold surged from around 1915 to 1930 levels on softer-than-expected US/UM 1Y inflation expectations data but soon stumbled to close around 1922 as such data may not affect the Fed's likely hawkish hold stance next week (Wednesday).
The Fed is now preparing the market for another hike in November and then a possible end of the tightening cycle by Dec’23. Overall, the U.S. labor market and core inflation trajectory are still hot enough for another Fed hike. Fed never surprised the market with its rate action and by mid-October (after core inflation and labor/wage data for September), it will be clear whether the Fed will go for another +25 bps hike in Nov’23 before going for a pause in Dec’23.
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%
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 go for a pause on 20th September but may hike another +25 bps on 1st November. Fed may project at least another hike in 2023 in its September dot-plots (SEP). As there is no significant easing of core inflation, especially core service inflation, the Fed may go for another +25 bps hike in Nov’23 and possibly the end of a tightening cycle. But, if core CPI inflation indeed eased further to around +4.0% by Oct’23, then the Fed may refrain from any further rate hike in 2023 and may also indicate some rate cuts in Q2CY24 in the Dec’23 SEP (ahead of the US Presidential Election in Nov’24) to keep real repo rate around +1.00% levels (restrictive zone).
Also, oil prices may stay elevated in the coming months between $75-90 instead of the earlier $65-75 despite US efforts to bring more supply from Iran, and Venezuela (by lessening sanctions) as OPEC/Saudi Arabia will not ‘cooperate’ with the U.S. for ‘breach of trust’ in refilling SPR (as agreed ‘verbally’). Elevated oil prices around $80-85 will continue to boost energy/transportation costs and core inflation. Saudi Arabia/most OPEC producers and even Russia are now seeking $80 oil prices on a sustainable basis to fund budget deficits, EV transition, and also the cost of the Ukraine war. China may also deploy more targeted stimulus to bring out the economy from the deflationary spiral in the coming days, which may also support elevated oil prices.
The U.S., as a producer, is also benefitting from elevated oil prices. The U.S. is also a beneficiary of the Russia-Ukraine war and other geo-political tensions involving North Korea, China, and Iran. The U.S. defense/military industry is now booming. Also, the lingering Cold War mentality with China is resulting in supply chain disruptions and elevated inflations. The global economy continues to face the daunting challenges of macro-headwinds- elevated inflation, high levels of debt, tight and volatile financial conditions, continuing geopolitical tensions, fragmentations, and extreme weather conditions.
In any way, if average U.S. core CPI inflation indeed falls below +4.0% by June’24 (H1CY24) on a sustainable basis, the Fed may go for a +25 bps cut each in July’24 (just ahead of the Nov’24 US Presidential Election) and thereafter every alternate meeting to keep the real repo rate around +1.0% (from 3M/6M average core inflation).
Looking ahead, from March ’24, 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. Overall, it seems that the White House would be quite happy if the Fed could bring back core inflation towards 2% on a durable basis, while keeping the unemployment rate below 4% ahead of Nov’24, the U.S. Presidential election.
Technical trading levels: DJ-30 and NQ-100 Future
Whatever the narrative, technically Dow Future (34932) now has to sustain above 35450 levels for a further rally to 35700/35850; otherwise sustaining below 34890, may again fall to 34500/34300 and 34100/34050-34000/33950 and 33790/33350 in the coming days.
Similarly, NQ-100 Future (15393) now has to sustain over 15500-15800 levels for a further rally to 16050-100 in the coming days; otherwise, sustaining below 15350 may fall to 15200/15100-15000/14900-14700/14600* and may further fall to 14450/14275/13950 and 13575/13490-12450 levels in the coming days.
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