"It is important to be aware of the mood swings of the market, the Pendulum as Howard Mark says. W*-/*-/hen the Pendulum is at the extreme , it is inevitable it will move back towards the mid point sooner or later. The movement towards an extreme itself that supplies the energy for the swing back.
Risk management is a challenge purely when one looks at measures of deviation move to the extreme. The timing of the move to the mid point, if captured wrongly, will prompt you to act in ways that will reduce the overall returns. Hence, it is of paramount importance, that we assess if we have reached cycle extremes. This understanding could be built through how leading Houses are updating the view and whether , in price - support or resistance levels are holding and how price is reacting to news flow. At which point of time, the levels become clearer and risk management can be more tight.
On that note,
Over the week, the front end of the curve rallied and US2s10s bull steepened. USD index was relatively unchanged and Gold prices rallied 1.00%. The super high vol asset, Bitcoin, closed 9% lower in the classic buy rumor, sell the fact as SEC approved the BTC ETF.
Yields | W. High | W. Low | W. Close | WoW Change |
US 2Y | 4.41 | 4.12 | 4.15 | -23.50 |
US10Y | 4.08 | 3.92 | 3.94 | -10.90 |
US2s10s | -0.21 | -0.36 | -0.21 | 12.80 |
US30Y | 4.26 | 4.14 | 4.18 | -2.60 |
JGB 10Y | 0.62 | 0.57 | 0.58 | -2.60 |
We had the PPI Release from the U.S. PPI declined 0.13% mom from prior 0.09% mom decline and the annual pace of PPI declined to an annual rate of 0.95% from a downwardly revised 0.80% yoy reading for the prior month. The December decrease in the index for final demand is attributable to a 0.4% drop in prices for final demand goods.
The soft PPI print follows the CPI readings which were largely in line with market estimates. Shelter Component rose 0.46% mom and has maintained an average of 0.50% growth mom. As the shelter inflation catches down to real time rent measures, the component which is 35.17% of the CPI basket will start imparting a negative impulse to the headline print. The core services inflation has been sticky, maintaining an average pace of 0.43% which is likely to slow down going forward as shelter component eases.
The core goods inflation has exhibited mom declines since May 2023 with the Dec print at 0.10% yoy. Upside Risks to the Core Goods component emanate from the recent disruptions in the Red Sea but the market chatter is that the cost escalation will partly be offset by reduced Global demand. The trend of deflation in China also alleviates the concern to some extent.
|
Snapshot |
YoY |
MoM |
Prior YoY |
Prior MoM |
2023 High |
2023 Low |
|
|
|
|
|
|
|
|
|
CPI |
3.30% |
0.30% |
3.12% |
0.10% |
6.35% |
3.09% |
|
Food |
2.72% |
0.21% |
2.96% |
0.22% |
10.13% |
2.72% |
|
Energy |
-1.99% |
0.41% |
-5.38% |
-2.29% |
8.40% |
-16.54% |
|
Core CPI |
3.90% |
0.31% |
3.99% |
0.28% |
5.60% |
3.90% |
|
Core Goods Inflation |
0.09% |
0.00% |
-0.04% |
-0.30% |
2.08% |
-0.04% |
|
Core Services Inflation |
5.30% |
0.44% |
5.49% |
0.47% |
7.27% |
5.30% |
Goldman says "we estimate that the
core PCE price index rose 0.17% in December, corresponding to a YoY rate of
+2.93%. We expect that the headline PCE price index increased 0.17% in
December, or increased 2.60% YoY".
Markets are now pricing in 166 bps of Rate cuts in 2024 much below the Fed's guided path. Post the July hike, in the Sep Projections, Fed saw FFR at 5.10% which was later revised down in Dec policy to 4.60%. The current Effective FFR is at 5.33%. There is also the talk of when Federal Reserve would stop the decline of Balance Sheet. The BS size has gradually come off from peak of $ 8.97 trn to $ 7.69 trn. Markets expect Federal Reserve to end QT in June / July. The deviation between the Market Pricing (166 bps) and the Fed Projections (75 bps) of 91 bps appears to be at an extreme without any credit event or significant deterioration of Economic data.
On the US2Y yields , I'm looking at support at 4.00%, 3.80% and 3.65%; Narrative Shifts from cyclical disinflation to inflation stickiness, resilience of the labor market and price reaction to news flow to better time the pay trade and manage risk.
Economic Calendar is light this week, Tier 1 data in the week ahead:
17 Jan Retail Sales mom Est 0.40% , Prior 0.30% and Industrial Production mom Est 0.00%, Prior 0.20%
18 Jan Housing Starts Dec Est 1.439M Prior 1.56M and Initial Jobless Claims data
19 Jan U. Michigan Sentiment Est 69.6 Prior 69.70
U.S Markets are closed for holiday today on account of Martin Luther King Jr. day.
Please do leave your comments. Any other pointers on the above subject, will be highly appreciated.
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