FOMC Minutes echo earlier Comments // Liquidity deficit widened to 173K on GST payments

"We may never know where we're going, but we'd better have a good idea where we are"

Existing home sales fell to a 13-year low in October with sales dropping a surprising 4.1% mom.

Minutes from the Fed’s most recent Nov 1 meeting did not offer any new information and echoed the comments from the Policy meeting and Press Conference. Read the prior decision takeaways here.

Minutes Recap

1. Financial Market Conditions tightened - Higher Yields / Lower Equity Prices / Stronger USD

FOMC Meeting US10Y USD INDEX S&P
01-Nov-23        4.93% 106.72 4186
22-Nov-23        4.42% 103.73 4536
Change        -51 bps -2.80% 8.36%

Since the last policy, financial conditions have loosened. Does it mean that in the days ahead, Fed starts to sound more hawkish but looking at the data over the last week, there is less reason to do so?

2. Labor - Better alignment of labor demand and supply as evident in AHE and ECI

Inflation - Total PCE price inflation was expected to be close to 3.0 percent by the end of this year, and core PCE inflation was expected to be around 3.5 percent. Sep 2023 Projections estimated PCE Inflation at 3.30% and Core PCE Inflation at 3.7%.

3. Economic Outlook - The staff expected fourth-quarter GDP growth to slow markedly from its third-quarter rate. All told, however, average GDP growth over the second half of the year was projected to be a little faster than the first half's pace.

Fed continues to be Data Dependent while assessing the Balance of Risks and Economic Outlook.

Fed Economic Projections for FY 2024 progressively moved higher over the last year. As the US economy is past peak GDP growth, do we see economic data deteriorate enough to pivot a move lower on 2024 Rate projections and how much lower?

Fed Fund Rate Path Projections over last policy meetings

September 2023 Projection 5.1%
June 2023 Projection 4.6%
March 2023 Projection 4.3%
December Projection 4.1%
September projection 3.9%

Markets moved to price the Dec 2024 FFR to 4.495% (84.75 bps of Rate cut from peak terminal rate of 5.3425%).

For India the liquidity deficit widened to 173K on GST tax payments with WACR at 6.79%. Oct 2024 Forwards are a tad bit lower at 1.59% (1 bps lower) and 1Y OIS is trading at 6.90% (1 bps) lower.

Broadly, after the sharp move lower in USD index, I am leaning towards buy USD on dips and have a preference for selling EURUSD on upticks with stops above 1.1050 but I'd like to scale into this positions gradually as I gather more evidence of signs of intermittent reversal.

Comments

The Moment of Reckoning is here !! 25 or 50 Bps and the SEP || Benign PCE Expectations || USDJPY 145.75 or 137.50 ??

“Every once in a while, an up-or-down-leg goes on for a long time and/or to a great extreme and people start to say "this time it's different." They cite the changes in geopolitics, institutions, technology or behaviour that have rendered the "old rules" obsolete. They make investment decisions that extrapolate the recent trend. And then it turns out that the old rules still apply and the cycle resumes. In the end, trees don't grow to the sky, and few things go to zero.” ~ Howard Marks Bonds continued to rally this week with yields on US2s printing a high and low range of 3.71% - 3.55% to close the week at 3.584% and US10s printing a high and low range of 3.76% - 3.6050% to close the week at 3.655%. I highlighted in my blogpost on Aug 31, the triangle breakout target at 15.50 bps on US2s10s. We dipped to -0.004% on the CPI release and closed the week at 0.0710%. On Crude Oil prices we dipped to lows of $ 68.71 but closed the week higher at $ 72.09. ECB annou...

Continued Moderation in the Labor Market - Call for Action

“There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.” That’s one of the most important things you can know about investment risk.” ~ Howard Marks With Fed Chair's Front and Center focus on evolving outlook of the US employment situation , this week carried extra significance and the Employment data catalyzed the move in Yields. Yields on US2s fell 35 bps (High - Low Range) and on US10s 28 bps (High - Low Range) over the week . On US2s Yields, we closed right at 3.65% and on US10s at 3.71% which is in close proximity to the braking point we mentioned earlier in the backdrop of the larger H&S Formation. We did not get the upticks towards the 4.10% handle we were hoping for. Another Trade I had thought about and did not write was the break below the 3.90% - 4.10% consolidation range but that's because consolidation break outs many times chop you out so better to trade at the top of the consolidatio...

Benign PCE but a Presidential Debate seems to have rocked the boat - US10s +14.30 bps

"Champions aren't made in the gyms. Champions are made from something deep inside them - a desire, a dream, a vision" ~ Muhammad Ali Fed Fund Pricing for interest cuts was seen at 47 bps for 2024. Q1 GDP came in line with estimates at 1.4%, however, consumer spending was revised lower to a modest 1.50% which means consumer coming in at a lot weaker position in Q2. The Atlanta Fed GDPNow estimates were revised lower to 2.20% IN Q2 from 3.00% at the end of prior week. DXY found resistance at the 106.13 levels and is seen lower in Asia Open today at 105.67. Durable Goods Orders rose 0.10% mom driven by an increase in new orders for transportation equipment. U.S. PCE Prices showed a welcome moderation with headline number flat over the month and the Core PCE numbers 0.10% higher over the month. Deflation in Durable goods at -0.79% mom and -0.15% in non durable goods alongside a less than 0.20% rise in price of Services and -2.12% mom change in price of core services ...

Broad based Deceleration in CPI || FFR pricing - 98% Prob. of a Rate Cut & Bull Steepening || Constructive Technical Set on US2s - Yields at 3.50% ??? || SPX Correction ???

"I fear not the man that has practiced 10,000 Kicks once, but I fear the man that has practiced one kick 10,000 times." ~ Bruce Lee Morning Everyone , This Week gave us a sense of how the prices or inflation has evolved and we had benign readings across CPI and PPI and the updated PCE estimates are now for a reading of 0.01% mom on the headline PCE and -0.01% on Core PCE Prices which translates to an annual reading of 2.4% yoy and 2.4% on Core PCE Prices. The Implied pricing off Fed Fund Futures is now pricing in o ne full 25 bps of rate cut into the September Policy and 61 bps of cumulative rate cuts for 2024. If you go further out the curve, 100 bps is priced in until March 2025 and 138 odd bps until June 2025. In the 23rd June Wrap, I had written On the DXY, 106.25 is a crucial resistance zone for DXY bears and an important point of reversal. So keep a watch on the levels with SL above 106.75. DXY declined over the last 2 weeks fro...

The Pendulum Swings Again - From Soft Landing to Fears of a Recession | Employment | US2s and US10s Technical Levels | Macro Musings

As Howard Marks says The most important thing is "Awareness of the pendulum'. The mood swings of the market resemble the movement of a pendulum. Although the mid point of the arc best describes the location of the pendulum "on average", it actually spends very little of its time there. In fact, it is the movement towards an extreme itself that supplies the energy for the swing back. Investment markets follow a pendulum like swing - b/w euphoria and depression, between celebrating positive developments and obsessing over negative ones and thus between over priced and underpriced. While we may not know what the futures holds but me must have a fair sense of where we are headed. I hope this blog has helped you navigate the course of the markets by identifying these pendulum type swings and through the analysis, has helped you get a sense of how the data is evolving. The Economic calendar was heavy with Top Tier Data. BoJ raised the overnight call rate by 15 bps to 2...

DXY holds 100.50 support| US2s10s Steepening persists| Economic Data at Cross Roads | Is more than 200 bps of Rate Cut space available?

As identified in the last blog post, USD Index made a low of 100.51 on Tuesday and retraced to close the week at 101.732 . I will be closely looking at how the price action evolves around the 102.50 levels to re-initiate shorts. In my post earlier, we identified the first braking zone to the downward momentum on USTs as the 3.64% - 3.81% zone where US2s found resistance. During the week, Yields on US2s dipped to 3.848% before closing the week at 3.92% inside of the 3.90% - 4.10% range seen for better part of the month. The steepening trend persisted this week as the US2s10s closed the week at -0.014%. On US10s, yields moved higher to close the week at 3.907%. I'm looking at 2 spots to re-initiate trades on US2s ~ 4.10% and 4.20% handle. The break in US2s10s outside of the triangle targets 15.50 bps. US economic data shows a softening trend but it does not outright suggests a sharp deceleration to warrant further pricing of rate cuts. The thought is predicated o...

Embedded Narrative - Soft Landing | Benign Inflation | US2s H&S in play | US2s10s bull steepening

One of my favorite poem is by Kahlil Gibran and thought I'd share a couple of lines with you all... Do not live half a life and do not die a half death If you accept, then express it bluntly, Do not mask it If you refuse then be clear about it for an ambiguous refusal is but a weak acceptance Do not accept half a solution, Do not believe half truths, Do not dream half a dream, Do not fantasize about half hopes To reach and not arrive, Work and not work The half is a mere moment of inability, but you are able for you are not half a being You are a whole that exists to live a life not half a life” On that note, quick weekly roundup for the US markets below: The Fed Fund Futures are pricing in 88% probability of a rate cut by September Policy. The Atlanta FED GDPNow Estimates for Q3 growth readings are running at 2.8%. The Cleveland Fed estimates for Core CPI and Core PCE are running at 0.27% and 0.22% respectively mom. In the last blog piece...

Shroedinger's Cat ~ Preparation is the Key to play markets || US Politics || Macro Musings

"Many of life's failures are people who did not realize how close they were to success when they gave up" ~ Thomas Edison Bonds made fresh highs this week as yields on US2s dipped to 4.411% and later bounced off lows to close the week at 4.517%. Likewise for US10s, yields closed at 4.241% after printing lows of 4.144% at the start of the week. US2s10s bull steepened to -22.2 bps before pulling back to close the week at -27.60 bps. S&P saw sharp price correction as markets reversed off 5 642 levels. We identified last week that 5642 levels correspond to the 1.618% of the corrective move from 4820 to 3492 and is a level worth watching to see if prices stall here for a corrective move lower. On DXY we briefly dipped under the 104 handle to touch lows of 103.65 before closing higher on the week at 104.37. The move in USD index could stall at the 104.50 levels or could stretch towards 105 levels. On the US2s we closed right at the H&S Neckline at 4.52%. The narrativ...

Recalibration of Policy Stance | Ride in Risk Assets | Soft Landing | Close out US2s10s Bear Steepeners

“Experience is what you got when you didn’t get what you wanted.” Federal Reserve announced a 50 bps cut to the Fed Fund Rate to 4.75% - 5.00%. Markets are pricing in a 50% probability of a 50 bps rate cut in the November Policy and 98% probability of 75 bps of rate cut by Dec 2024. Market Pricing is clearly more dovish than the Fed's base case as laid out in the SEP. US2s10s bear steepened and closed the week at 14.40 bps highs. We close the US2s10s position here and re-evaluate. The FOMC Committee judges the balance of risk to be roughly in balance and would be prepared to adjust the stance of monetary policy as appropriate if risks emerge that could impede the attainment of goals. The Summary of Economic Projections (SEP) saw a 40 bps upward revision to U/R and 30 bps downward revision to PCE Estimates which clearly shows Fed's increasing concern around Unemployment. In the Press conference, Chair Powell focused on the recalibration of policy as Fed gains greater confiden...

Chair Powell - Unequivocally Dovish at Jackson Hole ! Front and Centre Focus on Employment Numbers | USD Index at lower end of the 100.50 - 106.50 Range

I have two basic rules about winning in trading as well as in life: 1. If you don't bet, you can't win. 2. If you lose all your chips, you can't bet. ~ Larry Hite Over the last 3 weeks, after the Aug 5 lows, yields on US2s have consolidated in the 3.90% - 4.10% price range and US10s have progressively made lower lows to close the week at 3.92% and 3.80% respectively. US2s10s bull steepened to close the week at -11.90 bps. USD index closed the week at 100.68, 5% off highs of 106.13 June highs and within close proximity to the established range of 100.50 - 106.50 since last year. There is a 76% probability of a 25 bps rate cut in the Sep Policy. The market is broadly equally divided between a 25 bps and a 50 bps in the November Policy and holds a 87% probability of FFR in the 4.25% - 4.50% range by end of 2024. By next year September Policy, the market assigns a 90% probability of FFR at 3.25% - 3.50%, i.e. 200 bps of cuts in next 1 year. The Atlanta Fed GDP Now ...

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