Making Sense

"Details create the big picture"  US Durable goods orders fell 4.50% to $ 272.3 bn from a downwardly revised $ 285.2 bn. 13.30% fall was reported in new orders for transportation equipment driven by sharp fall in New orders for nondefense aircraft and parts which declined a whopping 54.60%. The core durable goods order which excludes transportation increased 0.7 %. Non defense capital goods order excl aircraft orders , a proxy for business investment, rose 0.80% mom.  Pending home sales data, a  monthly measure of homes under contract but not yet closed, rose 8.10% following a revision to Dec number to 1.10%. The data did not change the Fed fund pricing. Bond yields came off highs which appears more on positioning and month end flows rather than any catalysts.  In the week ahead, there are no meaningful catalysts to drive USD price action higher barring the US PMI numbers this week. Hence this week, could see consolidation or a minor pull back across USD index and Ra...

Success is a moving target. You have to be constantly aiming for the bull's eye and adjusting your aim as you go!! Bureau of Economic Analysis released the PCE data on Friday. PCE is the preferred inflation gauge of the Federal Reserve. Fed’s 2023 median projection for PCE inflation is at 3.10% ( range 2.9% - 3.5%) while Core PCE inflation is projected at 3.5% ( range 3.20% - 3.70%). PCE price index for January increased 0.6 %. Prices for goods and services both increased 0.6 % as well. Food prices increased 0.4 % and energy prices increased 2.0 %. Excluding food and energy, the PCE price index also increased 0.6 %. The PCE price index for January increased 5.4 % yoy, with increase in goods prices of 4.7 % and services price of 5.7 %. Food prices increased 11.1 % and energy prices increased 9.6 %. Excluding food and energy, the PCE price index increased 4.7 % yoy. PCE data showed no signs of disinflation and the market toed the Fed’s line of higher for longer and accordingly pu...

"The best way to finish an unpleasant task is to get started." If forecasts of El Nino conditions develop then inflation and growth could turn for the worse.The finance ministry on Thursday raised concerns over the possible impact of El Niño conditions on India this year, saying if recent forecasts came true, the country could see lower agricultural output and higher inflation. Yesterday, we had the external MPC member Shashikant Bhide interview published in Business Standard . In his interview, he emphasises the need to see inflation within the tolerance band in 2023-24. Despite the decline in global commodity prices, pass through of decline is not clear. The areas of concern are core inflation and to some extent the fuel and light inflation, which is in double digits. Real GDP increased 2.7% in Q4 (adv est 2.9%) of 2022 following a third quarter real GDP rise of 3.2%. The updated estimates primarily reflected a downward revision to consumer spending that was partly offset b...

"The details are not the details. They make the design" RBI MPC Meeting minutes: Dr. Ashima Goyal and Prof. Jayanth R. Varma voted for no change in policy rates and favored a change of monetary policy stance to neutral while the other 4 members voted to increase the policy rate by 25 bps and maintained stance to withdrawal of accommodation. Dr. Bhide / Dr. Ranjan / Dr. Patra and the Governor expressed concerns on the sticky core inflation and maintained durable disinflation in prices is a necessary condition to necessitate a pause in hikes.  Fed Meeting minutes: The Federal Reserves also released the minutes of the monetary policy meet on Feb 1, 2023. The committee acknowledged that while significant progress had been made towards a sufficiently restrictive policy stance and inflation pressures have moderated, inflation continues to be elevated and labor markets continue to be tight contributing to wage price pressures. The consensus was for a 25 bps rate hike as a slower p...

Thoroughness is a guarantee that the conscience is not in default" Geopolitical temperature got a notch warmer ahead of the anniversary of Russia's attempted invasion of Ukraine.   In state of the Union address, President Putin suspended participation from the New Start Treaty though he did not withdraw. Nuclear START Treaty is a nuclear arms reduction treaty between Russia and USA that limits the number of deployed strategic nuclear warheads to 1550 and ICBM, SLBM and heavy bombers to 800 and allows for inspection. Secretary of State Antony Blinken called Russia’s decision “unfortunate and very irresponsible.” He added: “We’ll be watching carefully to see what Russia actually does.” Meanwhile on a surprise visit, President Biden said "Ukraine will never be a victory for Russia. Never." and committed $460 million in additional military aid to Ukraine. Acc. to WSJ the administration intends to impose sanctions this week on as many as 200 Russian individuals and entiti...

 The concluding remarks of the Monthly Bulletin are beautiful. It says, "In mythologies across civilisations, the sun is depicted as riding a chariot typically drawn by four horses. In Indian mythology, the sun's chariot is drawn by seven horses. The seventh horse represents dreams, aspirations and the future. It is said that even if the other six horses are injured or exhausted, the seventh horse can take the sun's chariot to it's destination" So dare to dream big and reach your destination whatever that may be. US markets were closed yesterday. Today the activity is muted with strength seen in USD index, higher US Treasury yields and domestic rates higher.  Yesterday, LAF injection stood at inr 41k crore with SDF at 105K crore and O/S Repo operations at 146K crore. WACR traded at 6.56% as liquidity tightens on GST outflows. OIS rates are about 1 - 2 bps higher / India 10Y Gsec is trading at 7.38% / Modified Mifor is 3 odd basis higher while forwards are trading ...

 "Employ every economy consistent with thoroughness, accuracy and reliability" Month of Feb has been a cleansing month for the financial markets characterised by sharp reversal in the USD index and massive paying across Rates. On Friday, we touched a high of 104.70 on the USD index as yields spiked higher to 4.72% on 2Y and 3.93% on 10Y. As markets pared back the position ahead of the long holiday, markets pulled back to close the session at lows of 103.86 / 4.62% and 3.83% respectively. Today is a US holiday in observance of President's day.  On the domestic side, USDINR continues to trade in the 82.40 - 83.00 zone. MTD (upto 17 Feb) FPI flows stand at USD 500 mn. On friday, yields spiked higher after the 7.26% GS 2033 paper was devolved on PDs to the extent of 8255 crs. After the sharp spike on Friday, OIS Rates are down 2 - 3 bps beyond 3 months and 10Y Gsec trades at 7.37%. Forwards is seeing paying pressure as we draw closer to the end of financial year and liquidity...

 "Much of the stress that people feel doesn't come from having too much to do. It comes from not finishing what they've started." Goodmorning!! We had a stronger than expected US producer price inflation report on the heels of a strong US CPI data (6.40% yoy) , strong labor market data - under 200K weekly initial jobless claims data and lower housing starts and building permits data reflecting the weakness in the housing sector on higher interest rates. The data comes on the back of a strong NFP print / Retail Sales / CPI data. Labor market strength and economic resilience has market reprice the terminal rate and second half pivot in Fed policy . The market now prices in a peak terminal rate of 5.30% and Dec 23 rate at 5.10%. Remember as early as start of January, market was pricing a peak terminal rate of 4.855%. Dec 2023 rate at 4.40%. The peak terminal rate is now priced higher than Fed guided policy path of 5.10%. The Fed SEP central tendency shows the range for F...

Prospective Flows for the USDINR Trade Air India closed a 470 aircraft deal with Airbus and Boeing for an estimated value of $ 75 bn. Aircraft deals have earlier been concluded by Indigo in 2015 / 2017 / 2019. “Make in India” is at the heart of Airbus’ strategy in India, Airbus' CEO said. While the Air India planes will finally be assembled in France and Germany, many of their components will come from Indian companies.  So at this point , we don't know the exact deal value and net USD outflow but let's keep a close eye on the flow as it. MSCI will postpone implementation of updates to weightings for two Adani Group companies, Adani Total Gas and Adani Transmission, to the May benchmark review. https://www.business-standard.com/article/companies/three-adani-stocks-could-face-msci-axe-in-may-as-sell-off-tops-400-mn-123021501494_1.html

 US Retail Sales rebounded 3% mom following a 1.1% contraction in December. Retail Sales excluding autos and gas climbed 2.60% mom vs a 0.40% contraction.

 India released the Merchandise + Services Trade data on 15th Feb 2023.  The trade data showed a welcome moderation. The merchandise trade deficit came in at $ 17.75 bn, lowest since Jan 2022 and the services surplus posted a record surplus of $ 16.48 bn. Overall trade balance recorded a net outflow of $ 1.27 bn.  It appears the worst is behind and the services sector outperformance has helped bridge the merchandise trade gap. On a FYTD basis, we are running a Merchandise + Services Trade deficit of $ 112 bn. Broad USD strength on the back of strong NFP print / CPI print and Retail Sales data (released today showed headline Retail Sales rose 3% mom following a 1.10% mom contraction in dec) is likely to weigh on the INR.  Positive surprise on trade data and stable FPI flows so far in Feb along side INR at the top of the support zone of 83.00 have me biased to short USDINR with stops above 83.20. But I'd wait for the USD to turn before establishing any meaningful short...

"STARTING STRONG IS GOOD. FINISHING STRONG IS EPIC." This is the first article I am writing this week post the higher-than-expected CPI inflation print from India and the US.  Data Release: US CPI rose 0.5% in January on a seasonally adjusted basis following an upward revision in Dec data to 0.1 % from -0.10%. Headline CPI rose 6.4 % before seasonal adjustment against market consensus of a 6.20% reading. Core CPI rose 0.40% mom, services (excluding energy services) rose 0.50% mom, shelter rose 0.70% and transportation services rose 0.90% mom. The food index increased 0.5 % mom. Interesting point to note - Egg price index rose  8.5% mom on account of Avian Flu, high cost of feed and transportation etc. In the US , a dozen eggs cost INR 400 / INR 33.33 per egg. Compare that to India where 1 egg costs Rs. 7. The energy index increased 2.0 % mom. The rent index and the owners' equivalent rent index each rose 0.7% mom while the index for lodging away from home increa...

 Let's quickly summarize the price moves in the domestic market: Asian markets echoed the risk sentiment seen overnight. Domestic equities continue to trade lower with price range in a narrow band of 17820 - 17885. RBI LAF window saw injection of 11K crore yesterday. USDINR traded heavy at the 82.60 region and by 1:30 pm IST fell to 82.29 lows while the forward curve consolidated the recent fall in premiums. The action was muted across OIS curves and G-sec curve. 1Y OIS flat at 6.8150% and 5Y paid 3 bps higher at 6.39%. Other news of interest: China's Alibaba Group sells its entire remaining 3.4% stake in Paytm MSCI said it plans to cut the weightings for 4 Adani Group companies - Adani Enterprises, Adani Total Gas, Adani Transmission and recently acquired ACC Cements. The four companies had a combined 0.4% weighting in the MSCI emerging markets index as of Jan. 30. The changes come into effect on March 1. Acc to Periscope Analytics, around $570 million is estimated to be sold ...

"Thorough preparation makes its own Luck" - As a trader, I couldn't believe in this more. We are all involved in a game where the outcome is probabilistic and that is the universal truth. But attributing the unknown to chance rather than lack of preparation is a fundamental error and sets us up for failure. Guard against failure through thorough preparation.  Know as much as you can to improve the edge and be thorough as hell. After all the satisfaction of doing it right supersedes the chance success.  Interesting moves overnight with a sharp rally in US Treasury yields on the back of a weak 30Y auction, initial jobless claims data at 196000 still suggesting a strong labor market data and sell off in equities.  US 2Y @ 4.50% ( T-1 low 4.41%) - On the 2Y we see a double bottom with a price objective of 4.48% which has been met. The next areas of support for the bond are at 4.57%, 4.61% and 4.73%. US 10Y @ 3.68% (T-1 low 3.575%) - US 10Y took support at swing low of 3.32% t...

"Accuracy of Observation is the equivalent of accuracy of Thinking" I wrote about the expectations from the MPC yesterday and as expected RBI hiked repo rate by 25 bps to 6.50%. Consequently, SDF rate now stands at 6.25% and MSF rate at 6.75%. MPC voted 4 - 2 for change in policy rate.  On the change in monetary policy stance, MPC voted 4 - 2 to maintain monetary policy stance " withdrawal of accommodation" Key Highlights from the MPC Rate decision 1. Global growth prospects have improved 2. Domestic growth is likely to be supported by higher Rabi acreage, sustained urban demand, improving rural demand, robust credit expansion, gains in consumer and business optimism and the government’s enhanced thrust on capital expenditure and infrastructure in the Union Budget 2023-24 3. While RBI acknowledged the continuing downward momentum in inflation in FY 24, it estimated inflation to rule above 4% (RBI has an inflation target of 4% +/- 2%) and domestic economic growth to...

RBI will announce the monetary policy decision today where the consensus is for a last 25 bps rate hike in the current cycle to a terminal rate of 6.50%.  While there is a loss of growth momentum but the economic activity is in a position of strength. The major headwind is from a global slowdown as a result of sharp interest rate hikes. Headline inflation is to decelerate in the quarters ahead but the stickiness of core inflation is a concern and RBI rhetoric during the last policy focussed on putting the inflation beast down.  I am leaning with the consensus expectations of a 25 bps rate hike. Regarding the monetary policy stance, I think it would continue with "withdrawal of accommodation" Let's begin by reviewing some of the important data points: 1. Manufacturing PMI reading came in at 55.40 clearly showing a loss of growth momentum though still in expansion mode. A key area of weakness in the report was "Exports" which increased marginally at best and moder...

"Optimism isn't a belief that things will get automatically get better, it is a conviction that we can make things better" Hi everyone, so this has been an extremely action packed week both on the domestic data front and global data front. For this article, we will be purely focussing on the EURUSD Trade  recommended earlier to sell at 1.0950 with a SL at 1.1000. Unfortunately, we got stopped out of the trade. What I have realised during the course of trading is to give ourselves some leeway in terms of time for the view to play out. It is also helpful to understand whether a trade is driven by technical considerations or there is a catalyst to drive a pivot in price. If a trade is driven by technical considerations then you wait for the price to consolidate to give you a clear entry and exit point. However, if the trade is driven by a catalyst, then you study the catalyst and dive in.  In this trade, we were driven by technical levels and hypothesis around fundamental fa...

GoI announced the Union Budget on Feb 1, 2023. The Budget has been applauded by participants for sticking to the fiscal glide path, increasing the allocation for capital expenditure to Inr 10 trn, no populist measures ahead of the Elections, continuity of tax regime and credible forward projections. Key Highlights: Fiscal Deficit target of 6.40% for FY 2023 and 5.90% for FY 2024 FY Gross Market borrowings of Inr 15.43 trn and net market borrowings of Inr 11.80 trn in dated securities and Inr 50000 cr in T-bills. The number was lower than market expectations of Inr 16 trn in gross borrowings. Total expenditure of GoI increased inr 242,000 crore which was financed by increase in revenue receipts of Inr 144,000 cr and higher borrowings of Inr 98000 cr. The rise in expenditure, to the extent of inr 200,000 crs was primarily on account of food and fertiliser subsidy.  For FY 24, the budget assumes nominal GDP Growth of 10.50%. The tax revenue is estimated to grow at 12%. While growth in...