Making Sense

"Consistency is what transforms average into excellence" Domestic equities closed in the green yesterday and USDINR moved higher. RBI announced a 7 day variable rate repo auction for a notified amount of Rs 1.75 lakh crore on December 22. The LAF uptake as on Dec 20, was at 227K crore. US2s10s bear steepened 2.40 bps. Implied Fed Fund Pricing was relatively unchanged. The U.S. data rhymed with the soft landing narrative. EURUSD got a boost from a hawkish comments while AUDUSD and USDCAD continued the outperformance.  On the data front: US IJC Actual 205K, Est 215K, Prv. 203K US CJC Actual 1.865M, Est 1.888M, Prv. 1.8666M US Third Est Q3 GDP revised down to 4.90% from prev 5.20% US Personal Consumption Expenditure Prices 2.60% , prev 2.80% US Core Personal Consumption Expenditures 2.00% , prev 2.30% Canada Retail Sales Actual 0.70%, Est 0.80%, Prev 0.50% Canada Retail Sales Ex Auto Actual 0.60%, Est 0.50%, Prev 0.10% ECB's de Guindos said "Once we see inflation is cle...

 UK inflation surprised on the downside with mom print at -0.20% (prior 0%) and yoy print at 3.90% (prior 4.40%).  PBoC Kept the LPR unchanged at 3.45% German PPI -7.9% yoy , prior -11.00% UK Retail Price Index 5.30% yoy , prior 6.10% US Existing Home Sales 3.82mn, Prior 3.79mn USTs rallied as the soft inflation print from the UK catalyzed a rally in bonds. UK Gilts closed sharply lower at 3.526% from prior day high of 3.698%. US 20Y bond auction was weak. High yield of 4.213% tailed the when-issued yield by 1.5 basis points. Dollar demand was soft, evidenced by a 2.55 bid-to-cover ratio that trailed the prior 12-auction average of 2.65.* Philadelphia Fed President Harker (2023 FOMC voter) stated rates should move lower, but not right away, according to Bloomberg. DXY consolidated recent gains with GBP leading losses on the inflation print. A quick look below on the current implied pricing for Central Bank Policy Rate For the day, you have the Initial Jobless Claims data, Fina...

"Failure of Imagination" is the inability to understand in advance the full range of outcomes. Overnight, USD index weakened and USTs were unchanged. The implied Fed Fund pricing shows 20 bps of Fed Fund Rate cut priced into the March Policy and a cumulative 143 bps of Rate cuts priced until the Dec 2024 policy. Post the FOMC Rate decision, Markets had priced in 23 bps of rate cuts by March Policy and 148 bps of rate cuts by Dec Policy. We had comments from 2 Fed Speakers both of whom are FOMC Voters into 2024. Raphael Bostic reiterated his view of 2 rate cuts into 2024 starting sometime in Q3 and  stated that there is no urgency to back away from restrictive policy stance. Thomas Barkin stated that inflation continues to move in the right direction and if inflation trajectory evolves on expected lines, the Fed would act appropriately. U.S released housing data where Housing Starts rose 14.80% mom while Building permits at 1.46 mn were below consensus of 1.465 mn. On the dome...

Snapshot Overnight Long end of the curve rose ~ 3.50 bps on 30Y. Comments from Fed Members following Friday's comments from President Williams tried to push back on the market pricing of Interest Rate Cuts. Chicago Fed President Goolsbee told CNBC he was a bit confused by the market's reaction to the latest FOMC meeting/comments. Fed's Mester said markets are a "little bit ahead" of the Fed on rate cuts, says the next phase is not when to reduce rates, even though that's where markets are at, it is about how long policy should remain restrictive (source FT). San Francisco Fed President Daly (FOMC voter), however, said she thinks it's appropriate for the Fed to begin looking ahead to lowering rates in 2024,because of how inflation has improved this year, mindful not to over tighten (WSJ). The Market is pricing in 140 bps of rate cuts by Dec 2024.  DXY consolidated overnight. On the EU side, IFO Expectations, Current Assessment and Business Climate for Germa...

 "The Oscillation is one of the most dependable features of the investment world, and investor psychology seems to spend much more time at the extremes than it does at a happy medium" Interesting Week for U.S Rates following the US CPI Release and the Federal Reserve Rate Decision as Rates moved one way down. End of the week saw position squaring as markets looked stretched and  NY Fed President Williams (FOMC Voter) comments "We aren’t really talking about rate cuts right now" reminded Markets they may have gotten ahead of themselves. The week ahead will see the release of  19 Dec Housing Starts 20 Dec Consumer Confidence and Existing Home Sales 21 Dec GDP Final Estimates / Initial Jobless Claims / Philly Fed Index 22 Dec PCE Price Index Exp 2.80% yoy (prior 3.00%) and Core PCE Prices Exp 3.40% (prior 3.50%) / Durable Goods Order 2% yoy (prior -5.40%) / New Home Sales / University of Michigan Sentiment This week will also see 5Y TIPS Auction and 20Y Bond Auction. C...

 India recorded a merchandize trade deficit of $ 20.58 bn below consensus est of a reading of $ 23.60 bn and sharply lower than previous month reading of $ 31.46 bn. During this period, exports remained steady at $ 33.90 bn (+ ~1% mom) and Imports sharply decelerated to $ 54.48 bn from previous $ 65 bn (- 16% mom). FYTD this corresponds to $170 bn of merchandize trade deficit. Corresponding period previous year recorded a trade deficit of $ 189 bn. For this FY, Per month average Merchandize Trade Deficit is at ~ $ 21 bn.

In this Central Bank Heavy week, Fed was the first to blink. The other Central Banks rate decision were hawkish despite growth faltering and that supported their currencies against the USD.  U.S Retail Sales rose 0.30% mom ag consensus estimates of -0.10% and the prior month reading was revised lower by 10 bps to -0.20%. Meanwhile, Intitial Jobless Claims (IJC) for the w/e Dec 9 fell to 202K and CJC for the w/e 02 Dec came in lower at 1.876 mn. The market was oblivious to the strong Retail Sales print as Bonds continued their rally. US2s dipped to as low as 4.28% before closing the day at 4.39%. 4.35% is resistance zone and we have a one day reversal candle. We will wait for price action to develop here to see if the level holds. The long end of the UST curve outperformed as US10s closed at an yield of 3.92% (-10 bps) and US30s closed the day at an yield of 4.04% (-14 bps). US2s10s bull flattened 5.40 bps to a closing spread of -46.70 bps.  The Dec 24 FFR imply 148 bps of rate...

 Finally the trade  (click the link to refer to the trade) is performing after the long hold. Nov swap points traded a high of 1.78%.

 ECB kept the key interest rate unchanged in today's policy decision.  Marginal Deposit 4.00% Main Refinancing Operations 4.50% Marginal Lending 4.75% The APP portfolio is declining at a measured and predictable pace, as the Eurosystem no longer reinvests the principal payments from maturing securities. It intends to continue to reinvest, in full, the principal payments from maturing securities purchased under the pandemic emergency purchase programme (PEPP) during the first half of 2024. Over the second half of the year , it intends to reduce the PEPP portfolio by €7.5 billion per month on average . The Governing Council intends to discontinue reinvestments under the PEPP at the end of 2024. Key Takeaways from Monetary Policy Decision Tighter Financial Conditions dampening demand. Eurosystem staff expect economic growth to remain subdued in the near term. Beyond that, the economy is expected to recover because of rising real incomes – as people benefit from falling...

 Earlier Posts  Initiation Update  We now wait for a pull back to ride the seasonality through December.

"Money may not be everyone's goal for it's own sake, but it's everyone's unit of account" The Fed announced the monetary policy decision overnight and the kept the interest rates unchanged at 5.25% - 5.50%. The key takeaways from the decision, SEP and Post Policy Conference are: SEP Projections: All participants saw the peak Fed Fund Rate at the current levels of 5.25% - 5.50%. For 2023, Real GDP was revised 50 bps higher and Inflation projections were lowered by 50 bps. As per Fed median projections, median estimates are for 75 bps of rate cuts in 2024 and 100 bps of rate cuts in 2025. While cumulative rate cuts over the 2 years stay at 175 bps over the two statements (sep and dec), 25 bps of rate cut has been brought forward in 2024.  In 2024, Fed sees positive but below trend growth ( Fed sees 2024 as the year of below trend growth at 1.40%) , U/R holding steady, Inflation closer to the 2% handle.  The message from the post policy conference was  Economic A...

 Post the Fed Policy announcement (to be covered in a later post), USD is getting sold. EURUSD has so far traded a high of 1.0887. We like holding on to the position  for 1.1000 levels.

U.S CPI rose 3.12% yoy and 0.10% mom. Core CPI declined further to 4% yoy and 0.28% mom. There has been a lot of discussion around the Shelter Component of U.S Consumer Price Inflation. The Shelter component is a category under the Services Inflation. The Shelter component contributes 32.50% to the Headline CPI. The trajectory of Shelter Inflation has an important bearing and hence it is important to understand the idiosyncrasies in calculation methodology.  The Shelter component is primary divided into 4 main parts mentioned below and the weightage mentioned on the right side. Rent of Primary Residences                    7.30% Owner's Equivalent Rent  (OER)            23.80% Lodging Away from Home                     1% Tenants and Household Insurance         ...

A Head and Shoulders Pattern was highlighted in the previous post on crude oil "Why Traders faded the spike in Oil prices after the OPEC+ Meeting" is near completion.  There are a Cluster of supports around the $ 72 handle and today, we briefly dipped to $ 72.50 lows. After the sharp correction since the peak marked at end of Sep 2023, it's time to be neutral on crude and reassess the price action in crude over the next few days.

India CPI for the month of November came in below market estimates of a reading of 5.70%. November CPI came in at 5.55% yoy and 0.54% mom.  Cereals (~ 10% wt rose 10% yoy) , Fruits (~ 3% wt rose 11% yoy) , Vegetables (~ 6% wt rose 18% yoy) , Pulses (~2.4% wt rose 20% yoy) and Spices (~2.5% rose 22% yoy) were the known culprits. Oil and fats prices (~3.6% wt) were significantly down, -15% yoy. Core CPI came in lower at 4.11% yoy.  What does this means for Rates going forward? Usually the month of December sees disinflation, averaging - 45 bps mom which translates to a reading of 5.56% yoy. If Dec CPI were to come along 5.50% number, the Q3 FY24 CPI will average 5.3% , 30 bps lower than the RBIs guidance. The Q4 CPI could average 4.80%, much below RBIs 5.20%.  As mentioned in my earlier post and with the current CPI data coming softer than expected, I believe we could see 75 - 100 bps of cuts in FY 2025. IIP rose 11.75% yoy in the month of Oct 2024 with Manufacturing (wt ~...

EURUSD briefly dipped to 1.07238 in the last week. Price quickly recovered and the pair is taking support at the 1.0765 handle. EURUSD December Seasonality is very positively strong for the EUR. 10/13 years since 2010 have seen EUR gain. Two levels to be EUR long are seen at 1.0765 and 1.0680 with stops below the swing low at 1.0660. 

 "What a wise man does in the beginning, a fool does in the end." RBIs beginning remarks state that Major Central Banks have kept rates on hold while refraining from forward guidance in view of prevailing uncertainties and that's what RBI did too. RBI announced the monetary policy decision on Friday. The Repo rate was kept unchanged and the monetary policy corridor with SDF at 6.25% and MSF at 6.75% retained. The withdrawal of accommodation stance was maintained.  The growth projection for FY 2024 was revised higher by 50 bps to 7% and Dr. Patra suggested that the growth outturn could be higher based on high frequency indicators in Oct and Nov 2023.  Inflation projections for FY 2024 were retained at 5.40%. For next FY, Inflation is seen to average 5.20% in Q1 and decelerate to 4% in Q2 before reaccelerating to 4.70% in Q3. The risks to the inflation outcome come from uncertainty in food prices. Rabi sowing of wheat, pulses and spices need to be closely monitored. The tra...

"Progress is absolutely assured when there is unalterable dedication to the purpose." Interest Rate Decision    Unchanged at 6.5% and Monetary Policy Corridor at 6.25% (SDF) and 6.75% (MSF) Monetary Policy Stance Maintained the stance as withdrawal of Accommodation  Liquidity Management Framework On the liquidity front, Liquidity deficit turned neutral as Government spending kicked in. RBI announced a reversal of liquidity facilities during weekends and holidays from Dec 30 and the measure will be reviewed after 6 months or earlier. The objective of this measure was to institute better fund management by banks.  There was no need for OMO Sales as system liquidity deficit remained in deficit before turning neutral at start of Dec while keeping the door open for OMO Sales The Outlook for FY 24 Growth was materially revised higher by 50 bps while Inflation Outlook was retained at 5.40%. 

"Intelligently bear risk for Profit. Be aware, Analyse, Diversify and have a good risk reward ratio" Aussie Q3 GDP grew 2.10% yoy following a 2% growth in Q2.  Germany Oct factory orders contracted 7.30% yoy following a 4.30% contraction in the previous month. EZ Oct Retail sales rose 0.10% mom following an upwardly revised 0.10% mom contraction from -0.30% ADP Employment came in lower at 103K (27K below consensus) along side declining Unit Labor Costs and Rising Productivity. The same has been covered in the earlier post. Canada reported an improved Trade Balance for Oct at C$ 2.97 bn above consensus estimates of C$1.6 bn. BoC left the interest rate unchanged at 5% and continued quantitative tightening. The broad assessment was largely the same as from the U.S : Economic momentum is slowing as lagged effects of monetary policy take effect and that BoC is ready to hike rates if conditions so warrant while closely assessing the outlook for growth and inflation.  Brent Cru...

Data today out of U.S showed Labor Productivity* rose for Q3 beating consensus estimates by 30 bps and increasing sharply from Q2 reading of 4.7%. Q3 Unit Labor costs were down 1.20%, beating consensus estimates of -0.90% and prior month reading of -0.80%. The ADP employment numbers showed private payrolls added 103,000 jobs in November, -27K from consensus est and below prior reading of 113K. Acc to the press release, the post pandemic boost that saw strong job creation in Restaurants and Hotels, is behind us and the return to trend in Leisure and Hospitality suggests the economy as a whole will see more moderate hiring and wage growth in 2024. Today's data comes after the surprisingly lower JOLTS data yesterday and elevated continuing claims data. The data shows better demand and supply balance occurring in the labor market coupled with labor productivity gains bodes well for a soft landing narrative. US2s are trading at 4.585% from session highs of 4.6250% and US10s keep pushing...

PMI data released overnight showed better reading than estimates across Services and Composite PMI from Italy, France, Germany, EZ and UK. For the US, Services PMI rose to 52.70 with the employment component showing strength. The prices paid and new order component maintained the momentum from last month.  Oct U.S JOLTS data showed Job openings came in at 8.733 mn, the lowest since April 2021.  The UST curve rallied with long end of the curve outperforming the short end of the curve.  The Fed Fund implied pricing implied 117 bps of rate cuts by Dec 2024 compared to Friday's close of 122 bps.  For U.K. Retail Sales rose 2.60% yoy in Nov. For Japan , CPI rose at 2.60% yoy (prior 3.2%), excl food and energy rose 3.60% yoy (prior 3.80%), excl fresh food rose 2.30% yoy (prior 2.70%). S. Korea also confirmed the lower inflation trend with mom CPI at -0.60% mom (prev 0.30%) and 3.30% yoy (prior 3.80%). S. Korea GDP grew in line with est at 1.40% yoy. Singapore Retai...

"Everything that was good for the markets yesterday is no good for it today" Yields on US Treasuries moved sharply lower and the US2s10s bull steepened by 14 bps. The moves were driven by soft PCE readings with headline number at 0.00% mom and Core PCE prices rose 0.20% mom, soft spending and income growth, upward revision to Q3 GDP to 5.20% and an Initial Jobless Claims data which showed job market holding relatively well. Dovish Speech from Chair Powell at the end of the week pushed the momentum into the close. The economic release supported a soft landing scenario where in unemployment rate does not go drastically up and growth does not go in negative. The data along side a softening inflation print from EZ 2.40% yoy Nov, Germany 2.30% yoy and lower crude oil prices saw a marked downward shift in Fed Fund pricing. The market is now pricing in 122 bps of cuts in 2024 which is the lowest in the last 3 months. Far out into the last 1 year, events around SVB Collapse, Stress i...

Key takeaway from Chair Powell comments today Labor demand supply is moving into better balance and wage growth is moving towards levels that would be more consistent with 2% inflation  On inflation, core inflation ran at an annual rate of 2.5%. Better supply demand dynamics as the effects of pandemic recede , restrictive policy and significant tightening of financial conditions are putting downward pressure on economic activity and inflation. Uncertainty about the economic outlook persist and growth in spending and output is expected to slow next year. Monetary Policy works with lags and the full effects of tightening are likely still to be felt.  Fed continues to be in data dependent mode and while they await to put a flag on having won the inflation fight , they continue to guard against surprises and hence kept the room open for a hike.  Manufacturing PMI came in at 46.70.  US yields are lower on the day with US 10Y trading at 4.24% 

"The market's not a very accommodating machine. It won't provide high returns just because you need them" US yields moved higher overnight and the US2s10s bear steepened possibly on month end flows. Eurozone CPI was 0.50% lower mom below estimates of 0.20% and Chinese PMI data was softer than consensus estimates pointing to the growth challenges.  Mortgage Rates declined further on the standard 30-year fixed mortgage to 7.22% from prior 7.29%, according to a survey by mortgage-finance giant Freddie Mac.  Economic Releases: Initial Jobless Claims (IJC) rose 218K and prior week saw a +2K revision, Continuing Jobless Claims rose to 1.927 mnn, The IJC continue to be depressed but CJC are seeing a steady rise since Mid Sep. Chicago PMI came in at a whopping 55.80 from previous reading of 44.0 October Pending Home Sales -1.5% with -10bps revision to the previous number. October Personal Income rose 0.2% with +10bps revision to prior month October Personal Spending rose 0.2%...

Brent Crude Oil Prices plummeted to $ 79.94 post the OPEC+ meeting after reaching as high as $84.51 in the session earlier and are trading lower in the Asian Session today. Meeting Highlights OPEC+ reached an agreement to deepen Oil production cuts. The total voluntary cuts for the Q1 total 2.184 mn bpd. Since the nature of cuts was voluntary, it was announced by each member state and not by the group as a whole. Country Cuts ('000) Algeria 51  Kazakhstan 82  Saudi Arabia 1,000  Russia 500  Oman 42  Iraq           211  Kuwait 135  UAE 163    Total 2,184  Brazil (the largest oil producer in Latin America since 2016) would join the OPEC+ group effective in January. Angola has rejected its quota .  What the market thought about announcement??? "this is a repackaging of previously agreed measures, with some uncertain extras".  "the concern is that a lar...