Making Sense

There were a couple of key events this week which emanated from Geopolitical developments and a particularly strong data from the US. The USD reversal was quite potent and as I have been expecting here on this blog,  finally came to fruition. USD Index rose 2.50% over the week and market pricing for Fed Fund Rates saw repricing with expectations now firmly for 25 bps of rate cuts into the next policy and a 84% probability of another 25 bps of rate cuts into the December Policy. There is a 85% probability of FFR at the 3.25% - 3.50% range much above the 2.75% - 3.00% range priced at the end of last week. The pricing is now in line with the Fed's Summary of Economic Projections.  The US2s10s bear flattened to close the week at 4.3 bps from 22.90 bps late Sep. The rounded bottom reversal in US2s could see the sell off extend to 4.10%. EURUSD faces immediate support in the 1.0920 - 1.0950 zone and if broken could extend to 1.0800. I see further strength in USDJPY towards 151.50 on...

With my view over the last week on reversal in USD index, it was frustrating to see the moves not playing out on the Dollar Index. Geopolitical Risks were underpriced and Chinese Stimulus (both monetary and fiscal) ahead of the Golden week kept pushing asset prices higher and AUD was the clear beneficiary. Japan Election results also jolted the USDJPY due to PM Ishiba hawkish leanings. For most of the currencies and bond yields, we went no where and closed the week in the middle of the week's range. I could not complete the post yesterday so writing today.  Let's do a quick snapshot of the Economic Data releases this past week. Atlanta Fed GDP is now trending at 3.10% for Q3 and Fed Funds Pricing show an 82% probability of 200 bps of rate cuts i.e. 2.75% - 3.00% by Oct 2025. As of Friday's close, Markets are pricing in a 92% probability of 75 bps cuts by Dec 2024 but are largely seen divided b/w a 25 bps or a 50 bps cut in the next policy. An important thing to note is t...

“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...

“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...

“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...

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...

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 ...

India's Trade deficit widened to $23.50 bn on a sequential 1.50% fall in Exports and a 7.50% rise in Imports. Electronic Goods exports surged by 37.31% to USD 2.81 billion.  Engineering Goods exports grew by 3.66% to USD 9.04 billion.  Drugs & Pharmaceuticals exports increased by 8.36% to USD 2.31 billion.  Meat, dairy & poultry products exports saw a significant rise of 56.18% to USD 0.46 billion.  RMG (Ready-Made Garments) of all Textiles exports increased by 11.84% to USD 1.28 billion. On a Yoy comparison, Merchandize Trade Deficit worsened to $ 85.50 bn from $ 75 bn in the corresponding period last year. The overall Trade Deficit is averaging $ 8bn per month as against $ 6.50 bn in the corresponding period last year.  USDINR Continues to bear the brunt of the rising deficit, Short CNHINR position washouts, persistent reserve accumulation. We broke above the wedge formation in play since 2022. Favor being flat at the current levels on USDINR and ...

 In this Second Part, we look at the economic data prints: A Benign CPI reading - mom inflation at 0.15% mom and Core print at 0.17% mom. Core goods disinflation continued with mom at -0.32% with 3m annualized rate at -1.93%. Core Services Inflation rose at 0.31% mom which is at pace higher than the average 0.18% mom in the prior 2 months. Super Core Services also rose at a mild 0.14% mom. The respite in Shelter inflation seen in June appears short lived with prices rising at 0.38% mom in July. There has also been a talk around re-acceleration in inflation as mild prints in the second half of 2023 weigh on the readings going forward. Fed members have also highlighted that the  Inflation progress last year benefited from supply-side improvements like eased supply chains, increased labor force participation, and lower energy prices.  However, these factors may not continue to reduce inflation, as supply chains have normalized, labor force participation has stabilized, and i...

Hi, Feels like a long hiatus since I wrote the last post. A family commitment followed by fever impeded my writing. Let me begin this post with a quote from Dreyfus and Kelly - "The task of a craftsman is not to generate meaning, but rather to cultivate in himself the skill of discerning the meanings that are already there". A trader like a craftsman, must develop the ability to acutely discern data, market narrative, the leanings and positioning all at once and constantly reassess developments in his mind. The better a trader can do this, the greater is the skill level. A lot has transpired in markets and the Economic data keeps the pendulum moving between soft landing and recessionary concerns. Let's look at the interest rate pricing and what are the points where I'm looking to fade the moves. This will be part 1 of blog post and in the second blog post we cover Economic  data prints in detail.  The Interest Rate Pricing by Sell Side Economists  is tabulated below -...

RBI's policy decision was largely on expected lines and couple of points that stood out to me from the policy document and the press conference are stated below: 1. Inflation is moderating but the pace of disinflation is uneven and slow and there is still a distance to cover to align headline inflation to target.  2. RBI is watchful of all incoming data from domestic as well as external  sources and ready to deal with all emerging situations. However, the Governor noted caution in reading too much from a single month's employment number since Atlanta Fed GDPNow data is still trending at 2.9% and US has demonstrated growth resilience.  3. On the LCR , the draft circular is still under consideration. According to research reports, estimates are that draft guidelines on LCR if implemented could absorb liquidity in the ball park 5 Lac crore range.  4. On the decision to exclude newly issued 14Y and 30Y  bonds from FAR securities, DG Patra explained in detail th...