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On Monday, Wall Street Futures recovered from Friday’s triple witching panic low and closed almost flat, thanks to some short covering/value buying and surging oil above $90; energy stocks helped. Tesla slid on analyst downgrade, while Apple surged after reports of robust demand for iPhone 15 pro; other tech and financials helped. The CME Market watch was indicating a Fed pause not only on 20th September almost fully (already discounted by the market), but also on 1st November by almost 70%. The market is also expecting at least a -50 bps rate cut in H2CY24 and dialing down its 2023 core inflation forecast this week by the Fed’s SEP.
Now if the Fed indicates another hike in November or December and no cuts at least till June ’24 (H1CY24), but at least another hike in the rest of 2023, most probably on 1st November, and no cuts in H1CY24, only one cut in H2CY24, then it would be seen as a hawkish hold Wednesday (20h September), causing USD/US bond yield to surge, Wall Street Futures and Gold will plunge and vice-versa.
On Tuesday, Wall Street Futures were also affected by growing political and policy paralysis for the Biden admin, which is now running a minority government effectively after losing the House to Republicans in the Nov’22 mid-term election. Republicans are now planning another government shutdown and even an impeachment motion against President Biden next week.
On late Monday, the U.S. Treasury Secretary Yellen said:
· There's no reason for a government shutdown
· Student-loan payment restart could make a spending difference
· Biden wants to make sure gasoline remains affordable
· I think we're achieving lower inflation
· I would expect to see some impact of Fed tightening, it is already seen in the housing market
· I see no signs economy is in a downturn
· I expect to see some impacts from Fed rate increases
· Consumer spending remains robust
· Job openings are still high, showing a healthy labor market
· The labor market is cooling but doesn't involve significant layoffs
· We have a good and strong labor market, worker demand is high
· We are focused on food shortages, especially in the Black Sea
· I do not see concerns in the bond market about issuance
· A shutdown may have an economic impact, but there's no reason for it to occur
· The US is watching oil prices very closely
· Sees a healthy cooling in the US labor market without mass layoffs
Oil also got a boost after OPEC/others jawboning:
· Aramco CEO: Oil demand to rise to a record 103 mln to 104 mln bpd in the 2H
· Saudi Aramco CEO: I see 110 mln bpd of global oil demand in 2030
· Saudi Energy Minister Abdulaziz: We want to be proactive, pre-emptive and precautious
· Saudi Energy Minister Abdulaziz: Not targeting prices, targeting less volatility
· Saudi Energy Minister Abdulaziz: International energy markets need light-handed regulation
· Saudi Energy Minister Abdulaziz: OPEC conduct is benign, no different from central bank actions
· Saudi Energy Minister: The world could go from one type of energy crisis to another if supply chains for critical minerals aren't well-planned
· Saudi Energy Minister: The Jury still out on Chinese demand, European growth, and what Central Bankers will do
· Saudi Energy Minister Abdulaziz: The whole world should focus on energy security, at the World Petroleum Congress in Canada
· Saudi Energy Minister: We will wait until we see real numbers in market tightness
· Chevron CEO Wirth: I see oil demand steadily increasing
· Chevron CEO: Europe is set up much better than last year for gas
· Chevron CEO Wirth: I see oil going to $100 a barrel
· EIA Forecasts Continued Decline In U.S. Shale Oil Output
On Tuesday, the OECD raised the global growth outlook for the year 2023:
· Monetary policy should stay restrictive until there is a clear indication underlying inflationary pressures are durably lowered
· OECD cuts German GDP forecast to contraction of 0.2% in 2023 (flat growth previously) and 0.9% growth in 2024 (1.3% previously)
· OECD raises Japanese growth forecast to 1.8% in 2023 (1.3% previously), trims 2024 to 1.0% (1.1% previously)
· OECD cuts Eurozone growth forecast to 0.6% in 2023 (0.9% previously) and to 1.1% in 2024 (1.5% previously)
· OECD cuts Chinese growth forecast to 5.1% in 2023 (5.4% previously) and 4.6% in 2024 (5.1% previously)
· OECD raises US growth forecast to 2.2% in 2023 (1.6% previously) and 1.3% in 2024 (1.0% previously)
· OECD raises global growth forecast to 3.0% in 2023 (2.7% previously), cuts 2024 to 2.7% (2.9% previously)
· OECD's Lombardelli: It's hard to judge how far monetary policy must go
· OECD's Lombardelli: Without policy change, growth won't pick up
Market wrap:
On Monday, Wall Street Futures stumbled after hotter-than-expected core inflation data from Northern Neighbour Canada, hotter oil which may keep the Fed on a hawkish inflation outlook. USD/US bond yield surged, while Gold was around a flat line, helped by growing geopolitical tension involving Azerbaijan, which has also boosted oil.
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%
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 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.
Bottom line:
Technical trading levels: DJ-30, NQ-100 Future and Gold
Whatever the narrative, technically Dow Future (34825) now has to sustain above 35100-35450 levels for a further rally to 35700/35850; otherwise sustaining below 35050-34950, may again fall to 345600/500/34300 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.
Gold (1930) now has to sustain above 1940 for a further rally to 1950/1955-1965/1986; otherwise sustaining below 1935, may fall to 1920/1900-1890/1880 levels in the coming days, depending upon whether the Fed goes for a dovish or hawkish hold later in the day today.
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