"The correctness of a decision cannot be judged from the outcome. Nevertheless, that's how people assess it. A good decision is one that's optimal at the time it's made, when the future is by definition unknown. Thus, correct decisions are often unsuccessful and vice versa"
On Friday, U.S. PCE numbers came in line with consensus expectations rising 2.60% yoy and the Core PCE rose 2.93% yoy. The 3m and the 6m annualized rate is now below 2%.
|
Snapshot |
▲ YoY |
▲ MoM |
▲ 3M Change |
▲ 6m Change |
|
Headline PCE |
2.60% |
0.16% |
0.51% |
2.00% |
|
Core PCE |
2.93% |
0.17% |
1.51% |
1.85% |
|
Headline CPI |
3.30% |
0.30% |
1.78% |
3.30% |
|
Core CPI |
3.90% |
0.31% |
3.29% |
3.18% |
Pending Home Sales rose 8.30% mom from prior -0.30% and 1.30% yoy from prior -5.20%.
The market implied pricing for Fed Fund Rates is now 134 bps of cumulative rate cuts.
US2s10s closed 5 bps tighter over the week.
|
Yields |
W. High |
W. Low |
W. Close |
WoW Change |
|
US 2Y |
4.42 |
4.28 |
4.36 |
-3 |
|
US10Y |
4.19 |
4.08 |
4.14 |
1 |
|
US2s10s |
-0.18 |
-0.29 |
-0.21 |
5 |
|
US30Y |
4.43 |
4.29 |
4.37 |
4 |
|
JGB 10Y |
0.76 |
0.63 |
0.72 |
5 |
|
DE10Y |
2.37 |
2.24 |
2.30 |
- |
This week we have a string of Tier 1 scheduled Economic Releases:
30 Jan - CaseShiller Home Price Index / JOLTS Job Openings have been steadily slowing over the last year and the Nov reading came in at 8.79m. The number is estimated at 8.75m. If you recollect from Waller’s Speech, that if restrictive monetary policy could lower the vacancy rate from 7.5% to 4.5% via a significant decline in job vacancies, there would be a relatively small increase in the unemployment rate—from 3.7% to 4.2%. The vacancy rate (Job openings / (Employed + Job Openings) has fallen to 5.15% and the UR is steady at 3.70%. Hence, I think , that if we get a downbeat surprise on the JOLTS Job Openings, it will be a reason for significant cheer for the markets as it could signal the possibility of a potential pick up in UR as we move ahead.
31 Jan - ADP Employment Est 135K prior 164K / Quarterly Refunding Announcement / FOMC Rate Decision. The consensus expectations are for no change to the Fed Fund Rate. The Real GDP projections for 2023 were est at 2.60% in Dec meeting but the actual outturn has been stronger at 3.10%. On the PCE Projections, headline PCE outturn has been lower by 20 bps at 2.60% (proj 2.80%) and Core PCE outturn has been lower by ~ 30 bps at 2.93% (proj 3.20%). The U/R has been steady at 3.70%. None of the participants saw any further hikes in 2023 but the kept the possibility open should data so surprise. Its the Fed's assessment that they have done enough of Rate hikes but they are not supremely confident and hence not taking the possibility off. The Fed started discussing when do they dial back the amount of policy restraint in place. (read previous rate decision summary)
Inflation has clearly moderated with growth holding strong and labor market coming into better balance. The current Geopolitical Climate clearly poses upside risks to inflation readings.
The minutes suggested that it would be appropriate for the Committee to begin to discuss the technical factors that would guide a decision to slow the pace of runoff well before such a decision was reached in order to provide appropriate advance notice to the public.
In the previous Policy meeting, FOMC members had kept the possibility for a rate hike open since they were not supremely confident if enough had been done. In light of the softer inflation prints, is there merit in keeping the option to hike further or start guidance on rate cuts, timing of rate cuts and the balance sheet run off? The probability of the former is considerably low. So a largely dovish response is expected.
Market has already priced in substantive cuts into 2024, the current pricing is 134 bps. How much lower can the Fed Fund pricing move if the Fed is dovish? The March policy can see significant repricing from -12 bps to -25 bps. The FFR pricing can move lower by 15 - 20 bps. Even at 155 bps the pricing is in sharp divergence to Fed's Guided path of 75 bps of rate cuts without accompanying data deterioration. Do we pay the dip on Rates post the policy meeting or we favor continued weakness?
In terms of levels on US2Y, 4.49% has been finding resistance and 4.12% level is the swing low post CPI release. Above 4.49%, 4.56% is the 38.20% Fibonacci retracement from 5.26% to 4.12%. Below 4.12%, next meaningful support is at 4.00% (78.60% Fibo Retracement of the larger 3.657% to 5.26% move).
In terms of risk reward, USTs can be bought closer to the 4.45% for an initial target of 4.15% with a tight stop loss of 4.55%. Alternatively, I will be closely looking at the swing lows of 4.12% and assess the extent of data deterioration to see if a pay trade is suitable.
01 Feb - Initial Jobless Claims Est 210K prior 214K / Continuing Jobless Claims prior 1.833m / ISM Mfg PMI Est 47.30 prior 47.40
02 Feb - NFP Est 173K Prior 216K / UR Est 3.80% prior 3.70% / Average Earnings 0.30% mom / Factory Orders Est 0.20% mom
On that note, do tell me how are you thinking about the FOMC rate decision and Rates in general. There's never a dull moment in markets !!
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