Making Sense

 On Friday, US equities closed in the red with Dow Jones leading losses of 1.12% while today morning saw Asian equities trade mixed. US equity futures are seen trading in the green. Crude oil prices pulled back from Friday's high thus consolidating the push lower to $ 87.70 levels on Oct 24 for the 4th day between $ 87.70 - $ 91.  US Treasuries are off to a negative weekly start with yields on US2s rising 7 bps to 5.07% (swing high 5.26%) and US10s rising 7 bps to 4.91% (swing high 5.02%) on chatter around BoJ tweaking YCC in tomorrow's meeting. US2s10s steepened with the spread at a high of -12 bps on Monday of last week and traded a low of -30 to close the week at -17 bps. The implied Fed fund pricing shifted lower, I have written in the earlier blogpost the risk reward favors going long the contract as the market pricing for Dec 24 contract finds resistance at the 4.80% - 4.85% level.  Overnight Fed Funds Rate 5.33% Current Pricing Peak terminal rate is priced at 5.41...

 Asia markets are seeing a rebound on risk sentiment after US equities fell with Dow leading losses of 1.89%. ECB kept the rates unchanged and stayed away from calling a peak in rates and focused on a data dependent approach.  Initial Jobless claims (IJC) rose 10K rom the prior week for the w/e 20 Oct to 210K while Continuing Jobless Claims (CJC) rose 63K to 1790K. CJC are seen rising since start of September and are at levels last seen in April end. Strong beat on U.S Durable goods orders, for the month of Sep, orders rose 4.70% yoy following a revised reading of -0.10% in the previous month. Pending home sales rose 1.10% mom following a 7.1% contraction in the previous month. US GDP beat expectations with Q3 growth seen at 4.9% following a 2.1% expansion in the previous quarter. The street took comfort from the core PCE deflator which came in below street estimates of 2.40% and the narrative that Q3 marks a peak in growth. A Research house reported that the PCE deflator impl...

The earlier article covered the MPC decision  and since I had not covered the Minutes released on Oct 20th, I wanted to sum up the highlights as below: 1. Inflation  Inflation spike seen in July and Aug as transitory Spatio-temporal dispersion in the rainfall could cause volatility in food prices Food inflation may not see sustained easing in Q3 but ample buffer stocks and supply side measures from the Govt likely to buttress the impact of rise in vegetable prices MPC draws comfort from deceleration in Core CPI Outlook uncertain 2. Growth Momentum to Sustain Decrease in Household net Financial Savings and an Increase in Financial liabilities support consumption Q3 to be buoyed by festival demand Private Sector investment is gaining pace Drag comes from the external sector 3. Real Rates are positive 4. Liquidity will be actively managed, incl OMO sales We had seen a sharp sell off in bonds following the mention of OMO sales on Oct 6. The system liquidity continues to be in...

Nasdaq led losses closing 2.47% lower on the day and S&P 500 closed 1.43% lower on the day. Yields on US2s rose 8 bps off lows to days high of 5.13%, the moves on US10s were dramatic , rising as much as 16 bps off lows to trade a high of 4.97%. US2s10s curve steepened with highs seen at -17 bps. On Tuesday, the spread had widened to as much as -30 bps. US Equities and Bonds tanked while Crude Oil, Bitcoin and USD index gained strength. 759,000 New Homes were sold in the US far more than consensus estimates of 680,000. After the strong PMI data release, the new home sales number only supports the Fed's case for higher for longer. Mike Johnson was elected as House speaker and WSJ writes "The quick take on Wall Street seems to be that this makes the possibility of a government shutdown a little less likely". On the implied Fed Fund Pricing, Dec 2024 pricing shifted 5 bps higher to 4.68% while the pricing for peak terminal rates was unchanged at 5.43%. The Geo-political s...

Hi, I couldn't write the post the last 2 days since I was in Kolkata celebrating Durga Puja. I was positively surprised at the traffic management and the good road conditions. I remember when I last visited some 15 years back for Durga Puja,  the roads were heavily congested but this time the vehicular movement was smooth. The pandals are beautiful and illustrate the bedrock of creative talent coming out of Bengal. When you move across the narrow alleys, you know the love for Puchkas, Meat Rolls, Biryani and Tea. Interestingly, this time I observed the love for Vests and Lycra as the streets are full of billboards from Lux Cozi, Rupa and VIP. It was a wonderful trip and worth a visit !! Coming back to markets now, The implied Fed Fund Pricing* for peak terminal rates is 5.43% (+10bps) and Dec 24 pricing is at 4.63% (-80bps). The terminal rate pricing has ranged between 5.49% - 5.37% over the last three months and the Dec 2024 pricing has exhibited sharp volatility with lowest pric...

Fed Chair Comments on the Economic Outlook can be summarized through the table below. The comments are in line with Fed Speak from earlier in the week. Nothing new there. WSJ is running a headline "Fed’s Jerome Powell Signals Extended Pause in Interest Rate Rises".  Market leaned on the dovish side following the comments. Fed Fund implied pricing shifted downwards. Jan 31, 2024 5.43% (prior 5.46%) Jun 12, 2024 5.18% (prior 5.25%, 1 cut by mid next year) Dec 18, 2024 4.74% (prior 4.82%, 64 bps of cut from peak terminal rates) US2s10s bear steepened with the spread now tighter at -17 bps from previous -31 bps with the front end of the curve outperforming the back end of the curve. US2s peaked at 5.26% before closing the day at 5.16% thus giving a one day reversal candle and US10s peaked at 4.996% before closing the day at 4.92%.  Crude oil prices and Gold continued to climb closing the session at $ 93.35 and $ 1974. On the data front, Initial Jobless Claims data w/e Oct 14, dec...

US Yields moved higher overnight and equities plummeted over a full percentage point.  US2s high yield of 5.24% US10s high yield of 4.93% US2s10s bear steepened -30.5 bps Fed Fund Futures Jan 31, 2024 5.46% (peak terminal rates) Jun 12, 2024 5.25% (1 cut by mid next year) Dec 18, 2024 4.82% ( 64 bps of cut from peak terminal rates) Fed Fund Futures pricing implied a Fed Fund Rates as low as 3.97% on 08th August 2023 following the last hike of 25 bps on July 26 (Fed Fund rate 5.25% to 5.50%). News of downgrade of small and mid sized banks by Moody's and the Fed speak advocating patience saw significant cuts priced in 2024.  USD index moved higher yesterday after the small reversal seen the day before which was confusing. The Geo - political backdrop also continues to be fluid with the odds of escalation having risen. Fed's Waller said that he expects one more rate hike will be needed while New York Fed President Williams said that he is not yet ready to declare victory over inf...

US Retail Sales surprised to the upside. Sep 2023 Retail sales came in at 0.70% mom and July 2023 to August 2023 % change was revised from up 0.6% to up 0.8%. Excluding autos, sales were up 0.6% mom, above f/c for just 0.2%. Total Industrial production rose 0.30% mom (f/c 0.00%).  Bond market sold off on the release of Retail Sales number. US2Y yields rose to a high of 5.24% , levels last seen in July 2006 and US10Y yields rose to 4.86%. We saw a reversal of the Safe haven buying in bonds (post the Israel-Hamas conflict) and DXY. DXY weakened to 106.02 levels. US equities closed flat.  Today morning, bunch of economic releases from China surprised to the upside. Retail Sales rose 5.5% yoy, Q3 GDP expanded by 4.90% yoy (f/c 4.40%)  and Industrial production rose 4.5% yoy (f/c 4.30%). Crude Oil price and Gold are on a rise. Resilience of the US economic data coupled with today's strong Economic data from China could lift commodity prices higher and support commodity cu...

 US Equities closed in the green with S&P 500 closing the day 1% higher and Nasdaq closing the day 1.20% higher. The USD index pulled back from 106.63 to 106.18 levels as risk sentiment improved on diplomatic efforts. President Biden will visit Israel on Wednesday, Secretary of State Antony Blinken said in Tel Aviv. Yields on US2s rose to 5.10% and US10s rose to 4.73% and US2s10s bear steepened to -40 bps from last week's close of -45 bps.   NY Empire State Mfg index gauges business conditions for NY manufacturers. The index came in at -4.60 f/c -7.  Fed's Harker comments: the Central Bank should not create new pressures in the economy by increasing the cost of borrowing. "We should not at this point be thinking about any increases" Earnings Results from Bank of America, Goldman Sachs and Bank of New York Mellon are on Tuesday's Calendar. Economic releases scheduled on the day - U.S. retail sales, industrial production and business inventories data.  India W...

Recapping the last week's price action,  Risk sentiment deteriorated in the immediate aftermath of the Israel-Hamas Conflict at the start of the week but improved on Fed Speak. Higher UST yields and as a consequence tighter financial conditions were seen by Fed Members as having done the job for Federal Reserve and the suggestion that the narrative should shift from how high to how long supported the risk sentiment before the strong US CPI data and resumption in crude oil price rally dented the sentiment again. The extremely fluid geo-political situation and how the war escalates and embroils other nations will continue to weigh on the market sentiment.  The week ahead is light on data. India only releases the WPI data today while US releases Retail Sales / Industrial production / Building Permits / Jobless Claims / Home Sales data coupled with Fed Speak. Keep a close watch on the Fed Chair Jerome Powell's Speech on Thursday before the start of the blackout period ahead of the...

India CPI came in below consensus estimates of 5.5%. Headline number came in at 5.02% yoy and Core CPI number (excl F&B + Fuel and Light) came in at 4.53%.  Headline number has decelerated from a peak of 7.44% in July to 5.02% in Sep 2023. The Q2 inflation averaged 6.43% in line with RBI estimates. Under the food category, cereals, pulses and spices continue to be sticky. The core print has been steadily decelerating from the 6.00% peak seen in Feb 2023 to 4.53%.  With the current deceleration, my estimates for Q3 average 5.36% (RBI estimates 5.60%) and for Q4 average 4.80% (RBI estimates 5.20%). Next Financial Year Q1 will be sticky around 5.07% and Q2 will be closer to 4.2% average.  Fed Fund rates will also be an important determinant of domestic rate policy. Fed Fund Futures Market are pricing in a full rate cut by June. Assuming the current interest rate trajectory plays out in the US as per market pricing and domestic inflation averages 4.80% by Q4 of this FY, R...

Markets flipped overnight on the hot US CPI report with DXY taking support at the 105.50 level. I mentioned about the risk reward in favor of USD longs in yesterday's post ahead of the DXY support and to play the divergence between the Fed's guided path and market pricing.  US CPI for the month of Sep rose 0.40% mom and 3.70% yoy. The largest contributor to the monthly increase  was the shelter index. Another major component was the gasoline index. Core CPI rose 0.30% mom and 4.10% yoy. Core services excluding rent rose 0.60% mom. The Initial jobless claims came in at 209K and continuing jobless claims rose 30K to 1702K , highest in 6 weeks. Fed Fund Futures implied market pricing for Dec 24 shifted higher to 4.70% from 4.54% we saw yesterday. Yields on USTs rose sharply higher with US2s marking a high of 5.09% and US10s marking a high of 4.73%. The move in US yields was also driven by a poor $ 20 bn 30Y auction  This morning China CPI came in at 0.20% mom below cons...

 Overnight we had the release of the US FOMC meeting minutes.  Members are divided on future rate rises Run up in treasury yields could substitute for a final increase Focus should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels.  Comments from Fed's Waller echoed earlier comments from Fed officials that the recent tightening in financial conditions will do some work for the Fed.  US PPI came in above consensus expectations but the market focused on the core PPI print which came in line with expectations at 0.20% mom with a downward revision to the prior month.  All eyes will be on today's CPI data where consensus is for a headline reading of 3.60% yoy and Core CPI reading of 4.10%. Keep a watch on the initial jobless claims data too which has been holding surprisingly well.  The market impact of the Israel - Hamas conflict appears to be well contained with crude now trading at USD 85.55 a barrel , down...

System Liquidity turned negative as the LAF numbers released by RBI show a deficit of inr 42K crore from a surplus of 2K crore yesterday. This deficit in liquidity is being attributed to short tenor S/B FX Swaps conducted by RBI.  Yields on the IN10s surged following the announcement of likely OMO sales in the RBI policy on Oct 6. Despite the sharp fall in US yields yesterday on dovish Fed speak and safe haven buying, Yields on the 10Y closed (at 7.35%) near the day's high of 7.37%. Reckon OMO announcement will only come once there is a decisive turn in system liquidity to surplus and a durable decline in weighted average call rate (WACR) in the overnight segment. The WACR yesterday was 6.72%. Today the Gsec yields are trading lower at 7.3150%. Keeping a close watch on evolving liquidity conditions while forecasting the liquidity requirement on a weekly basis will be important to judge the timing of the OMO sales. 

"Daily habits forge your identity" US stocks made broad gains and USD downside momentum held into yesterday's close on Fed speak. Market sentiment was also lifted on reports that China is considering fresh stimulus measures to the tune of CNY 1 trn ( USD 137 bn). Comments from Federal Reserve member Logan "If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate". The same message was echoed from other Fed speakers - Bostic, Kashkari and Waller. Crude oil prices and Gold prices closed the day at the highs on the Israel - Hamas conflict. The markets continued to push the Dec 24 FFR pricing lower to 4.51% from 4.55% the prior day. There is significant divergence between the Fed's guided path (5.10%) and the current implied market pricing.  For the day, we have the US PPI release and FOMC meeting minutes and the more important CPI data tomorrow. On the domestic front, USDINR continued to be ...

"Mental Resilience comes from training the mind day in and day out" Price action: After the initial sell off in risk assets into the Asia open yesterday, markets reversed overnight on Fed Speak. Fed's Jefferson echoed the comments from Fed's Mary Daly last week wherein the recent rise in long term yields has tightened financial conditions and done part of the job for Federal Reserve. The FFR saw repricing - the market is now pricing in a 13% probability of a rate hike as against 27.10% on Oct 6. The Dec 24 pricing shifted 17 bps lower with market pricing shifting from 4.72% on Friday to 4.55% as at close of yesterday. The move lower in UST yields saw USD reverse gains into the close.  With Geopolitical risks lurking in the background after the surprise attacks by Hamas on Israel, the USD reversal came as a surprise. It is too early to call how the events unfold in the next few days and weeks and does the recent conflict escalate into a more broader conflict. So far pr...

Rate Decision      RBI policy mentioned the use of OMO sales which is a more durable liquidity absorbing measure and the catalyst for a policy pivot comes from a durable decline in inflation to near about 4% Policy Rate                               Unchanged Stance of Monetary Policy Withdrawal of Accommodation ( 5 - 1) Growth Projections                     Unchanged (2024 FY 6.50%, Q1 25 6.60%) Inflation Projections           Unchanged (2024 FY 5.40%, Q1 25 5.20%) Liquidity                                    May have to consider OMO sales Key takeaways from the earlier meeting 1. Inflation target is 4% and a Pivot in policy from tightening to accommodative will not happen ...

 The MPC is scheduled to announce the interest rate decision on Oct 6, 2023. Expectations: Interest Decision                No change expected, 6.25% - 6.50% - 6.75% (SDF - Repo - MSF) Policy Stance             Withdrawal of Accommodation ( the monetary policy stance hinges on the direction of policy rates)   Liquidity management  After the liquidity tightness in September,  Liquidity deficit continued to improve with LAF injection as on Oct 3 at 40K from Sep 29 at 100K. As the Government expenditure kicks in and amounts impounded under I-CRR are released, liquidity could slowly turn positive. The period starting Oct - Mar will see liquidity tightness on account of increased demand for currency. Diwali, Dussehra, 5 state elections, seasonal increase in demand on Rabi Harvest, marriage season and Hindu Festivals followed by  general elections could see an estimated rise of 4% in ...

The big event overnight was the release of the US JOLTS Job opening data which rose to 9.6 mn in August, higher than consensus estimates of 8.8 mn and intervention in the JPY which saw USDJPY drop to 147.37 from highs of 150.16.  The UST curve bear steepened with US2s10s trading a high of -33 bps from overnight lows of -44 bps. US10s today morning are trading at a high of 4.85%.  The implied FFR market pricing for a rate hike into year end continues to be stable around the 13 bps while Dec 24 pricing shifted to 4.73%.  US ISM Non-mfg PMI data / Jobless Claims and NFP numbers become more crucial. Today morning, we are again seeing USD catch a bid and for the Asian session , Central Bank intervention remains a key risk. USDINR is expected to open at 83.22 and though we have seen the currency caught in a tight range, one would expect a higher USDINR and higher rates in the current global backdrop

USD continued on the hot streak today following the ISM mfg yesterday and now the JOLTS data. The number of job openings increased to 9.6 mn (exp 8.80 mn) on the last business day of August, the U.S. Bureau of Labor Statistics reported today. The US2s10s bull steepened further into the data and S&P nursed losses of 1.40% as markets reprice recession risks to soft landing.  Like I have mentioned in this blog earlier, there is divergence in the market implied Fed Fund Rate pricing ( Dec 24 4.70%) and the Fed projected path ( 5.10%). Should data surprise on the upside and market pricing converges towards the Fed's guided path, USD Index could further strengthen. The immediate resistance comes in at 107.20 followed by 108.00. Labor market has shown remarkable strength. The low levels on Initial Claims data and now the JOLTS job data will be followed by the NFP numbers where consensus expectation is for a reading of 170K (prior 187K).

Form a main idea and anticipate what may change to reverse the idea The main idea here is for the current trend in USD index to continue. As China is out for national  day Golden week, expect USDCNH to be range bound. Moves in AUDUSD are likely to be the result of the broad USD move or large surprises in Services and Composite PMI data and AUD trade data.  RBA Rate decision - Michelle Bullock's first policy statement was largely unchanged from the Sep meeting. RBA kept the interest rate unchanged at 4.10% as uncertainties regarding the lag effects of monetary policy and uncertain economic outlook continue to weigh on decision making. Inflation continues to be elevated with price pressures on goods inflation easing while prices of some services and oil continuing to rise. RBA expects inflation to decline to within the 2-3% range in late 2025 and U/R to gradually rise to 4.50% late next year.  AUDUSD broke the recent 46 day, 32 trading day 0.6360 - 0.6500 consolidation rang...

Another strong USD day in the markets with USD index trading at levels last seen in Nov 2022 and Asian session today morning pushing the USD higher. Yields on the USTs surged with US10s trading a high of 4.70% fueled by economic resilience as the ISM Manufacturing number printed 49.0 (exp 47.8) with the employment index at 51.20 (exp 48.30) and it averted the Government shutdown through the passage of a stop gap funding bill. Atlanta Fed GDPNow 3Q growth estimate was unchanged at 4.90%.  Comments from Fed members: Michael Barr - likely at or very near a sufficiently restrictive level Loretta Mester - One more rate hike and then hold them at higher levels for sometime  Michelle Bowman - multiple hikes may be needed  The move in USD index looks secular. Play the trend and don't try to call a top unless you see a catalyst for reversal. 

Good Morning !! Resilience of the mind is crucial to Success .... A very quick recap of last week: The US Government averted a shutdown by passing a stop gap funding bill to fund the Govt until Nov 17, 23. UST curve bear steepened with US2s10s steepening 20 bps on the week from -64 to -44. USD index continued the move higher to 106.84 levels last seen in Dec 2022. The implied FFR market pricing gyrated between 11 - 13 bps until the Dec 23 policy. For Dec 2024, the pricing moved between 4.60% - 4.76%. US PCE for Aug rose 3.50% yoy. PCE price index rose 0.40% mom ( prior 0.20% mom) and core PCE prices rose 0.10% mom ( prior 0.20%).  Core PCE prices reflected an increase of 0.2% in spending on services and a decrease of 0.2% in spending on goods. Resilience of the US economy and labor market was seen in the durable goods orders data and the Initial jobless claims. The housing data, however, exhibited weakness as high interest rate weigh on the sector. Last week, JP Morgan announced th...