Dow, Gold slumped on hawkish Fed talks and FOMC minutes

·         But Wall Street Futures also recovered early Thursday led by Nasdaq on Nvidia boost; Fed may not cut in Sep’24

Wall Street was almost flat in the last few days amid hopes & hypes of a blockbuster report card from Nvidia and an early Fed pivot from Sep’24 despite ongoing hawkish Fed talks coupled with the sudden death of Iran’s President Raisi and talks of Chinese fiscal/infra stimulus. Gold jumped to almost $2455 new life time high on Iran tensions and Russia’s annual nuclear drill (strategic weapons); oil also got dome temporary boost amid elevated geopolitical tensions and signs of gradual rebalancing.

Late Wednesday (after the closing of the US spot market), Nvidia released the much-awaited report card:

·         Nvidia's result beats market estimates across the board

·         EPS $6.12 vs $5.57 EST

·         Revenues $26.04B vs $24.57B EST

·         Gross margins (EBITDA %) 78.9% vs 77% EST

·         Boosted dividends by 150%

·         Announced a 10:1 stock split

·         Data center revenues $22.6B vs $21.32B EST

·         Guidance: Q2CY24 revenue will be about $28B vs market EST $25.8B

On Wednesday, all focus of the market was also on FOMC minutes for the May meeting; FOMC mites show Fed needs more time to gain the necessary levels of confidence about the disinflation process and rate cuts:

·         Participants at the meeting assessed it would take longer than previously anticipated to gain greater confidence in inflation moving sustainably to 2%

·         “Participants noted that they continued to expect that inflation would return to 2 percent over the medium term. However, recent data had not increased their confidence in progress toward 2 percent and, accordingly, had suggested that the disinflation process would likely take longer than previously thought”

·         Various participants mentioned willingness to tighten policy further should risks to outlook materialize and make such action appropriate

·         Many participants commented on their uncertainty about the degree of policy restrictiveness

·         A couple of participants said it would be useful to begin discussions of appropriate longer-run maturity composition of the Fed's portfolio

·         Almost all participants supported the decision to begin to slow the pace of decline of the central bank's securities holdings (QT tapering); a few could have supported a continuation of the current pace (no QT tapering)

·         Participants remarked that the future policy path would depend on incoming data, the evolving outlook, and the balance of risks

·         Fed staff's economic projection was similar to the March outlook but noted that deteriorating household financial positions, especially for lower-income households, might prove to be a bigger drag on activity than anticipated

Full text of relevant section of FOMC minutes: Minutes of the Federal Open Market Committee: April 30-May 1, 2024

Staff Economic Outlook

The economic forecast prepared by the staff for the April–May meeting was similar to the March projection. The economy was expected to maintain its high rate of resource utilization over the next few years, with projected output growth roughly similar to the staff's estimate of potential growth. The unemployment rate was expected to edge down slightly over 2024 as labor market functioning improved further, and to remain roughly steady thereafter.

Total and core PCE price inflation were both projected to move lower this year relative to last year, though the expected pace of disinflation was slower than in the March projection, as incoming data pointed to more persistence in inflation in the coming months. Inflation was expected to decline further beyond this year as demand and supply in product and labor markets continued to move into better balance; by 2026, total and core PCE price inflation was expected to be close to 2 percent.

The staff continued to view the uncertainty around the baseline projection as close to the average over the past 20 years. Risks to the inflation forecast were seen as tilted to the upside, reflecting the possibility that supply-side disruptions or unexpectedly persistent inflation dynamics could materialize.

The risks around the forecast for economic activity were seen as skewed to the downside on the grounds that more-persistent inflation could result in tighter financial conditions than in the staff's baseline projection; in addition, deteriorating household financial positions, especially for lower-income households, might prove to be a larger drag on activity than the staff anticipated.

Participants' Views on Current Conditions and the Economic Outlook

Participants observed that while inflation had eased over the past year, in recent months there had been a lack of further progress toward the Committee's 2 percent objective. The recent monthly data had showed significant increases in components of both goods and services price inflation. In particular, inflation for core services excluding housing had moved up in the first quarter compared with the fourth quarter of last year, and prices of core goods posted their first three-month increase in several months.

In addition, housing services inflation had slowed less than had been anticipated based on the smaller increases in measures of market rents over the past year. A few participants remarked that unusually large seasonal patterns could have contributed to January's large increase in PCE inflation, and several participants noted that some components that typically display volatile price changes had boosted recent readings. However, some participants emphasized that the recent increases in inflation had been relatively broad-based and therefore should not be overly discounted.

Participants generally commented that they remained highly attentive to inflation risks. They also remained concerned that elevated inflation continued to harm the purchasing power of households, especially those least able to meet the higher costs of essentials like food, housing, and transportation.

Participants noted that they continued to expect that inflation would return to 2 percent over the medium term. However, recent data had not increased their confidence in progress toward 2 percent and, accordingly, had suggested that the disinflation process would likely take longer than previously thought.

Participants discussed several factors that, in conjunction with appropriately restrictive monetary policy, could support the return of inflation to the Committee's goal over time. One was a further reduction in housing services price inflation as lower readings for rent growth on new leases continued to pass through to this category of inflation.

However, many participants commented that the pass-through would likely take place only gradually or noted that a reacceleration of market rents could reduce the effect. Several participants stated that core non-housing services price inflation could resume its decline as wage growth slows further with labor demand and supply moving into better balance, aided by higher labor force participation and strong immigration flows.

In addition, many participants commented that ongoing increases in productivity growth would support disinflation if sustained, though the outlook for productivity growth was regarded as uncertain.

Several participants said that business contacts in their Districts reported increased difficulty in raising their output prices, while a few participants reported a continued ability of firms in their Districts to pass on higher costs to consumers. Al­though some measures of short-term inflation expectations from surveys of consumers had increased in recent months, medium- and longer-term measures of expected inflation had remained well anchored, which was seen as crucial for meeting the Committee's inflation goal on a sustained basis.

While supply chain improvements had supported disinflation for goods prices over the previous year, participants commented that an expected more gradual pace of such improvements could slow progress on inflation. Several participants commented that growth of aggregate demand would likely have to slow from its strong pace in recent quarters for inflation to move sustainably toward the Committee's goal.

Participants assessed that demand and supply in the labor market, on the net, were continuing to come into better balance, though at a slower rate. Nevertheless, they saw conditions as having generally remained tight amid recent strong payroll growth and a still-low unemployment rate. Participants cited a variety of indicators that suggested some easing in labor market tightness, including declining job vacancies, a lower quits rate, and a reduced ratio of job openings to unemployed workers.

Some participants indicated that business contacts had reported less difficulty in hiring or retaining workers, al­though contacts in several Districts continued to report tight labor conditions, especially in the healthcare and construction sectors.

Many participants commented that the better balance between labor demand and supply had contributed to an easing of nominal wage pressures. Even so, a number of participants noted that some measures of labor cost growth, including the ECI, had not eased in recent months, and a couple of participants remarked that negotiated compensation agreements had added to wage pressures in their Districts. Many participants noted that, during the past year, labor supply had been boosted by increased labor force participation rates as well as by immigration.

Participants further commented that recent estimates of greater immigration in the past few years and an overall increase in labor supply could help explain the strength in employment gains even as the unemployment rate had remained roughly flat and wage pressures had eased.

Participants noted that recent indicators suggested that economic activity had continued to expand at a solid pace. Real GDP growth in the first quarter had moderated relative to the second half of last year, but PDFP growth maintained a strong pace. High interest rates appeared to weigh on consumer durables purchases in the first quarter, and growth of business fixed investment remained modest. Despite the high interest rates, residential investment grew more strongly in the first quarter than its modest pace in the second half of last year.

Al­though recent PDFP data suggested continued strong economic momentum, participants generally did not interpret the data as indicating a further acceleration of activity and expected that GDP growth would slow from last year's strong pace. A number of participants commented that high rates of immigration could support economic activity by boosting labor supply and contributing to aggregate demand.

Participants noted the important influence of productivity growth on the economic outlook. Some participants suggested that the recent increase in productivity growth might not persist because it reflected one-time adjustments to the level of productivity or reflected continued elevated volatility in the data over the past several years. A few participants commented that higher productivity growth might be sustained by the incorporation of technologies such as artificial intelligence into existing business operations or by high rates of new business formation in the technology sector.

In their discussion of the outlook for the household sector, participants observed that consumer spending remained firm in the first quarter, supported by low unemployment and solid income growth. A number of participants judged that consumption growth was likely to moderate this year, as growth in labor income was expected to slow and the financial positions of many households were expected to weaken.

Many participants noted signs that the finances of low- and moderate-income households were increasingly coming under pressure, which these participants saw as a downside risk to the outlook for consumption. They pointed to increased usage of credit cards and buy-now-pay-later services, as well as increased delinquency rates for some types of consumer loans.

In addition, elevated housing costs were adding to financial strains for lower-income households. A couple of participants noted that financial conditions appeared favorable for wealthier households, which account for a large portion of aggregate consumption, with hefty wealth gains resulting from recent equity and house price increases.

Business contacts in many Districts reported a steady or stable pace of economic activity, while contacts in a couple of Districts conveyed increased optimism about the outlook. A few participants noted that government spending was supporting business expansion in their Districts. Consistent with a solid outlook for businesses, a couple of participants noted that their contacts had reported increased investment in technology or in business process improvements that were enhancing productive capacity. Regarding the agricultural sector, a couple of participants noted that lower commodity prices were weighing on farm incomes.

Participants discussed the risks and uncertainties around the economic outlook. They generally noted their uncertainty about the persistence of inflation and agreed that recent data had not increased their confidence that inflation was moving sustainably toward 2 percent. Some participants pointed to geopolitical events or other factors resulting in more severe supply bottlenecks or higher shipping costs, which could put upward pressure on prices and weigh on economic growth.

The possibility that geopolitical events could generate commodity price increases was also seen as an upside risk to inflation. A number of participants noted uncertainty regarding the degree of restrictiveness of current financial conditions and the associated risk that such conditions were insufficiently restrictive on aggregate demand and inflation.

Several participants commented that increased efficiencies and technological innovations could raise productivity growth on a sustained basis, which might allow the economy to grow faster without raising inflation. Participants also noted downside risks to economic activity, including slowing economic growth in China, a deterioration in conditions in domestic CRE markets, or a sharp tightening in financial conditions.

In their discussion of financial stability, participants who commented noted vulnerabilities to the financial system that they assessed warranted monitoring. Participants discussed a range of risks emanating from the banking sector, including unrealized losses on assets resulting from the rise in longer-term yields, high CRE exposure, significant reliance by some banks on uninsured deposits, cyber threats, or increased financial interconnections among banks.

Several participants commented on the rapid growth of private credit markets, noting that such developments should be monitored because the sector was becoming more interconnected with other parts of the financial system and that some associated risks may not yet be apparent. A few participants also commented on the importance of measures aimed at increasing resilience in the Treasury market, such as central clearing, or on potential vulnerabilities posed by leveraged investors in the Treasury market.

A couple of participants commented that the Federal Reserve should continue to improve the operational efficiency of the discount window. Participants generally noted that high interest rates could contribute to vulnerabilities in the financial system. In that context, a number of participants emphasized that monetary policy should be guided by the outlook for employment and inflation and that other tools should be the primary means to address financial stability risks.

In their consideration of monetary policy at this meeting, all participants judged that, in light of current economic conditions and their implications for the outlook for employment and inflation, as well as the balance of risks, it was appropriate to maintain the target range for the federal funds rate at 5-1/4 to 5-1/2 percent. Participants assessed that maintaining the current target range for the federal funds rate at this meeting was supported by intermeeting data indicating continued solid economic growth and a lack of further progress toward the Committee's 2 percent inflation objective in recent months.

Participants also discussed the process of reducing the Federal Reserve's securities holdings. Participants judged that balance sheet reduction had proceeded smoothly. Almost all participants expressed support for the decision to begin to slow the pace of decline of the Federal Reserve's securities holdings in June by reducing the monthly redemption cap on Treasury securities from $60 billion to $25 billion, maintaining the monthly redemption cap on agency debt and agency mortgage‑backed securities (MBS) at $35 billion, and reinvesting any principal payments in excess of the $35 billion cap into Treasury securities.

A few participants indicated that they could have supported a continuation of the current pace of balance sheet runoff at this time or a slightly higher redemption cap on Treasury securities than was decided upon. Various participants emphasized that the decision to slow the pace of runoff does not have implications for the stance of monetary policy. Several participants also emphasized that slowing the pace of balance sheet runoff did not mean that the balance sheet would ultimately shrink by less than it would otherwise.

Some participants commented that slowing the pace of balance sheet runoff would help facilitate a smooth transition from abundant to ample reserve balances by reducing the likelihood that money markets experience undue stress that could require an early end to runoff. Participants generally assessed that it would be important to continue to monitor indicators of reserve conditions as balance sheet runoff continued.

In addition, a few participants commented that the existing redemption cap on agency debt and agency MBS was unlikely to bind at any point over the coming years, but the decision to reinvest any principal payments above that cap into Treasury securities was consistent with the Committee's longer-run intention to hold a portfolio that consists primarily of Treasury securities. A couple of participants commented that it would be useful to begin discussions regarding the appropriate longer-run maturity composition of the SOMA portfolio.

In discussing the policy outlook, participants remarked that the future path of the policy rate would depend on incoming data, the evolving outlook, and the balance of risks. Many participants commented that the public appeared to have a good understanding of the Committee's data-dependent approach in formulating monetary policy and its commitment to achieving its dual-mandate goals of maximum employment and price stability. Various participants also emphasized the importance of continuing to communicate this message. Participants noted disappointing readings on inflation over the first quarter and indicators pointing to strong economic momentum and assessed that it would take longer than previously anticipated for them to gain greater confidence that inflation was moving sustainably toward 2 percent.

In discussing risk-management considerations that could bear on the policy outlook, participants generally assessed that risks to the achievement of the Committee's employment and inflation goals had moved toward better balance over the past year. Participants remained highly attentive to inflation risks and noted the uncertainty associated with the economic outlook.

Al­though monetary policy was seen as restrictive, many participants commented on their uncertainty about the degree of restrictiveness. These participants saw this uncertainty as coming from the possibility that high interest rates may be having smaller effects than in the past, that longer-run equilibrium interest rates may be higher than previously thought, or that the level of potential output may be lower than estimated.

Participants assessed, however, that monetary policy remained well-positioned to respond to evolving economic conditions and risks to the outlook. Participants discussed maintaining the current restrictive policy stance for longer should inflation not show signs of moving sustainably toward 2 percent or reducing policy restraint in the event of an unexpected weakening in labor market conditions. Various participants mentioned a willingness to tighten policy further should risks to inflation materialize in a way that such an action became appropriate.

On Tuesday, Fed’s Governor Waller said:

·         The idea of only one cut doesn't make a lot of sense

·         If the data warrants, we could consider cutting at the end of this year

·         The data does not look like we need to raise rates

·         I am starting to see policy put downward pressure on demand

·         Restrictive policy will have to bite to bring inflation down

·         “Let me now turn to the implications for monetary policy of my outlook for the U.S. economy. With the labor market as strong as it is, my focus remains on bringing inflation down toward the FOMC's 2 percent goal. The latest CPI data was a reassuring signal that inflation is not accelerating and data on spending and the labor market suggest to me that monetary policy is at an appropriate setting to put downward pressure on inflation. While the April inflation data represents progress, the amount of progress was small, reflected in the fact that I needed to report the monthly numbers to two decimal places to show progress”

·         “The economy now seems to be evolving closer to what the Committee expected. Nevertheless, in the absence of a significant weakening in the labor market, I need to see several more months of good inflation data before I would be comfortable supporting an easing in the stance of monetary policy. What do I mean by good data? What grade do I need to give future inflation reports? I will keep that to myself for now but let's say that I look forward to the day when I don't have to go out two or three decimal places in the monthly inflation data to find the good news”

Conclusions: Summary

·         Fed is much more concerned about the slow pace of disinflation amid still elevated rent, housing inflation and strong consumer spending (robust labor market); also goods inflation is again ticking up as the supply chain boost effect may be over now

·         Fed is now changing its narratives and nullifying the probability of a Sep’24 rate cut; accordingly, the implied probability of a Sep’24 rate cut has fallen from 80% a few weeks ago to 40% now

·         But to keep US bond yield under control and also Wall Street, the Fed is also toying with the idea of a Dec’24 rate cut, although it may more look like a signal/formality; the Fed is ensuring US10Y bond yield below 5.00-4.7%% red zone at any cost to lower US borrowing cost

·         Overall, the Fed is now changing its tone and gradually preparing the market for no rate cuts in 2024, especially from Sep’24 to avoid any political controversy just ahead of Nov’24 US election as Powell has to again face another highly probable Trump tantrum from Jan’25

·         Fed may not cut rates at all from Sep’24, just months before Nov’24 US election to avoid any political controversy, and may/may not cut rates in Dec’24; Fed may revise dot-plots in June meeting.

·         At present, Fed’s Mar’24 dot-plots show: 75 bps rate cuts each in 2024, 2025, 2026, and -50 bps in 2027 for a neutral repo rate of +2.75%

·         But the Fed may now show the June’24 dot-plots as -100 bps rate cuts each in 2025, 2026, and -50 bps in 2027 for terminal neutral repo rate +3.00%

·         Another scenario: Fed may also cut -50 bps in Dec’24 or even in Jan’25 after the Nov’24 US election to avoid any political controversy and also to assess overall inflation and employment data for the whole of 2024

·         Fed is now quite confused about the rate cut narrative from H2CY24 as the disinflation pace was almost stalled in Q1CY24, ahead of the Nov’24 election, while the unemployment rate and bond yields are ticking up;

·         Average US inflation is now higher by over 20% from pre-COVID (Jan’20) levels, while under normal conditions, it should be around +8%; higher cost of living is creating some anti-incumbent wave against Biden admin before Nov’24 election; thus both White House and Fed are now prioritizing to keep inflation under control and not ready to risk of surging inflation by cutting rates just ahead of the election

·         Like in India, the US Presidential election in Nov’24 may be also acting as a big/moderate fiscal stimulus amid huge election spending, which may likely boost inflation again or prevent the disinflation process, making the Fed’s job harder to cut rates even in Dec’24

·         This year, the U.K. is also going for an early election in July and thus BOE may also not hike rates in 2024

·         BOC may not cut rates in 2024 as Canada is also going for an election in the coming months

·         Thus almost all major G20 Central Banks including ECB, BOE, BOC, RBI, and even PBOC may not cut rates in 2024 if Fed remains on hold; no central bank will go against the Fed irrespective of any narrative/rhetorics and make LCU weaker against USD, causing higher imported/total/core inflation in the process; all central banks led by Fed will continue the 24/7 jawboning to keep bond yields under control (indirect YCC like BOJ) and a vibrant financial/money/FX market, ensuring robust employment globally

Market impact:

On Wednesday, Wall Street Futures, Gold slumped on hawkish Fed talks and FOMC minutes and fading hopes of Sep’24 rate cut; DJ-30 slumped over -200 points, while tech-heavy NQ-100 lost marginally on hopes & hypes of a blockbuster report card by Nvidia, which came true later. On early Thursday, US/Wall Street Futures recovered to some extent.

On Wednesday, Wall Street was boosted by healthcare, industrials, and techs to some extent, while dragged by energy, utilities, materials, real estate, consumer discretionary, banks & financials, consumer staples and communication services. Script-wise, Wall Street was boosted by J&J, Cisco, Boeing, Verizon, Microsoft, Merck, Coca-Cola, Walmart and IBM, while dragged by Dow Inc. Amgen, Goldman Sachs, Home Depot, 3M, Chevron, American Express, Intel, Caterpillar, Apple and JPM.

Weekly (Monday)-Technical trading levels: DJ-30, NQ-100, SPX-500, Gold and oil

Whatever may be the narrative, technically Dow Future (40132) has to sustain over 40400 for a further rally to 40500/40600-40700/41000 and even 42000-42700 in the coming days; otherwise, sustaining below 40350-40200 DJ-30 may again fall to 39900*-39700/39200-38900/38500 and 39100/37400 in the coming days.

Similarly, NQ-100 Future (18750) has to sustain over 19100 for a further rally to 19200-19450/19775 and 20000/20200 in the coming days; otherwise, sustaining below 19050/19000 may fall to 18850-18750, may again fall to 18350/18100-18000/17900 and 17800/17700-17600-17500 and further 17400/17300-17100/17000* in the coming days.

Technically, SPX-500 (5330), now has to sustain over 5400-5450* for any further rally in the coming days; otherwise, sustaining below 5375 may fall to 5275/5175-5100/4990 and 4950/4900*-4850/4825 and 4745/4670-4595/4400* in the coming days.

Also, technically Gold (XAU/USD: 2415) has to sustain over 2455 for a further rally to 2475/2500; otherwise sustaining below 2450/2440-2435/2430, may again fall to 2398/2372-2350*/2335 and 2310/2300-2290/2370 in the coming days.

Technically Oil (78.30) now has to sustain over 76.50-75.00 for any recovery to 78.50/80.50-82.00/85.00-88.00-90.00/91.00-95.00; otherwise sustaining below 74.50, oil may further fall to 73.00 and 72.00-70.00 in the coming days.