Making Sense

As I write this article, I will quote Howard Marks again in the context of the cyclical extreme as I had quoted him earlier in one of my articles on Jan 15, 2024 which was the point of turn of the market pendulum.  "It is important to be aware of the mood swings of the market, the Pendulum as Howard Mark says. When 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.  __________________________________________________________________________________ Over the week, US economic calendar had the PMI release wherein the Services and ...

On the headline number, steady disinflation in PCE prices from 7.12% highs in June 2022 has stalled over the last 2 months and the pace of change in prices over a 3 month period has been concerning.  Going Forward, base effects kick in (core PCE Prices fell from 4.25% to 3% over June to Dec 2023), energy prices have been on a rise amid escalation in Geo-political tensions with great uncertainty on the outlook of future prices,  the immaculate disinflation in prices of durable goods seen in second half of 2023 has clearly reversed as prices rose for 3 consecutive months at an average 0.15% and Non Durable Goods are also seeing some price pressures build. Goods have a relative importance of 33% in construction of PCE Price Indices. Services inflation has seen a steady price build up. The U.S PCE Release showed headline PCE Prices rose 0.32% and Core Prices also rose 0.32%.  Over the 3 months, Price of Services rose 5.55% while energy good and services rose 8%. PCE Services ...

The U.S GDP Data released overnight showed Q1 GDP grew at an annualized 1.60% qoq while Core PCE Q1 prices rose an annual 3.70%, sharply higher from consensus expectations of 3.40% and was up 2.90% from a year ago. Nick Timiraos makes an interesting point - The GDP report implies that without upward revisions to Jan (0.45%) or Feb (+0.26%), March would be at 0.48% Massive shift in interest rate pricing with 24 bps of rate cuts implied by the November Policy which is a day after the November Elections and 34 bps of rate cuts in 2024.  The initial jobless claims data showed employment numbers remain firm.  We square our USD shorts ahead of the weekend and release of the US PCE Report.

  The Market Implied Fed Fund pricing for Interest Rate Cuts by the US Federal Reserve is now seen at 40 bps of rate cuts into 2024 from 38 bps of rate cuts seen yesterday morning. We have sideways consolidation across Bonds and USD index though US Equities made a strong come back and Gold Prices posted a big negative day, an outside day candle after the one day reversal candle seen on Friday. I continue to favor USD Shorts into the 106.45 - 106.75 Levels. Yields on IN10s also posted a big outside day reversal candle and if the hypothesis about the a turn in USD index is correct and US Yields start moving lower, we would have timed the reversal in IN10s accurately. I am now looking for a pull back into the 7.20% - 7.22% to go long IN10s.  On the USDINR, the pair held the resistance at the weekly wedge at 83.70 and moved lower supported by FPO flows. I am now looking for a pullback into the 83.50 area for initiating USDINR shorts.

The MPC Minutes show an unwavering commitment to a durable decline in inflation esp. in the backdrop of strong economic growth momentum. The macro economic outlook is subject to considerable uncertainties on weather related factors, geopolitical tensions, monsoon progress and commodity price rise among others. Steady disinflation in Core prices and deflation in energy prices has negated the food price rise on the headline inflation but going forward how much space does monetary policy get when core prices start rising as is indicated in the more frequent PMI readings is to be watched out for. What this means for Monetary Policy ? Status quo to be maintained going forward. The MPC will witness changes in its external members, with Ashima Goyal, Jayanth Varma and Shashikant Bhide completing their non extendable term in Oct 2024. Though Dr.  Ashima Goyal has spoken at length about the elevated real rates in her remarks, as the term draws to a close, both Dr. Goyal and Dr. Bhide's poli...

The Market Implied Fed Fund pricing for Interest Rate Cuts by the US Federal Reserve shifts to 38 bps with 27 bps rate cut implied by the November Policy. 

This was an interesting week, for all the tensions in the ME, crude oil prices closed 3.30% lower. Crude Oil touched a weekly high of $ 90.80 and closed the week at $ 87.15. It appears markets base case is of no escalation to the State Conflict and Iran continues to fight the proxy war across the Middle East through Hezbollah, Hamas, Shi'ite and the Houthis.  Iran's oil exports are surging and Iran would not prefer a situation where the progress is impeded. EU and US are preparing new sanctions on Iran but with Iran's proclivity to circumvent sanctions, it is to be seen if any meaningful progress can be made in bringing Iranian supply lower.  Disruption to crude oil supply either through destruction of Oil production facilities in Iran or supply route through the Strait of Hormuz or maximum pressure sanctions are events that could catalyze a spike higher in crude oil prices. A huge deterrent also comes from the U.S as President Biden tries to contain the situation ahead of ...

  Moves in US2Y stalled ahead of the 78.60% Fibo retracement of the 5.26% to 4.15% and have been congesting around the 4.90% - 5.00% over the last 6 trading days. US10Y found support at the upper end of the trend channel. Interestingly, also look at the TLT chart 20+ Year Treasury Bond ETF which has moved back within the channel. USD index saw a pullback from 106.52 (88.6% of the Fibo move from 107.35 to 100.62. I have been writing about the 106.45 - 106.75 zone as the level to look for to get a potential turn / correction in the USD index. The next crucial resistance on the pair will be previous highs at 107.35. For 107.35 levels to be truly taken out, watch for a strong catalyst - may be tensions in ME blow out crude goes to $ 100 levels etc..  So now we know the levels, we have some evidence of levels holding up, reckon we can play for tactical USD shorts with tight stops.

WSJ carried an article "Powell Dials Back Expectations on rate cuts" and the current Fed Fund Pricing implies 41 bps of rate cuts into 2024 with 23 bps of rate cuts priced into the Sep 2024 Policy as against the Fed SEP of 75 bps of rate cuts.  Chair Powell remarked:  "The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence" Fed would leave rates at their current level “as long as needed” We think policy is well positioned to handle the risks that we face”. “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.” USTs continued to sell off on a 6 bps rise in Real Rates. The Housing data release showed weakness. The Industrial Production data , however, rose 0.40% mom. USD Index continued to make cycle highs at 106.52 and I'm looking out for signs of an intermediate corr...

India's Trade deficit narrowed sharply to $ 15.60 bn while the services surplus narrowed to $ 12.70 bn from $ 16.70 in the previous month. POL Deficit as a % of Trade deficit was sharply higher at 76% as POL exports were sharply down to $ 5.40 bn from an average of $ 7.10 bn over the previous 11 months. The sharp deficit in gems and jewelry imports recorded in February eased to $ 2.20 bn in the month of March.  For the year as a whole, Merchandize trade recorded a deficit of $ 238 bn and Services Trade recorded a surplus of $ 167 bn , thus on trade combined India recorded a deficit of $ 78 bn from previous year's $ 122 bn.  On the transfers and income, India has so far recorded a surplus of $ 41 bn and in the last quarter assuming a number of $ 14 bn, the transfers and income surplus will likely aggregate $ 55 bn , thus leaving a Current Account Deficit for the year as a whole to $ 23 bn.  In my February Post on release of the Trade data , I had estimated Current Account ...

USD index made overnight highs of 106.245 and continues to make gains to trade Asia Session highs of 106.39. Catalyst for the move higher is the resilience of the US Economy and Geopolitical temperature notching a few degrees higher as the head of Israel's army said Iran's attack on Israel would be "met with a response". Crude Oil prices dipped to $ 88.76 yesterday but have since recovered back to $ 90.63 levels.  China's GDP grew 5.30% in Q1 beating consensus expectations however the Industrial Output numbers (4.50% yoy, exp 5.40%) and Retail Sales numbers (3.10% yoy, exp 4.50%) disappointed markets.  Yield in JGB10s continued to creep higher to 0.87% highs overnight and USDJPY rose to 154.26 levels and continues to make gains to Asian Session highs of 154.42.  EURUSD continued to suffer on rising yield differentials.  Retail Sales for March rose 0.70% mom following an upwardly revised 0.94% mom growth in the month of Feb. Real Retail & Trade Services Sales...

G eopolitical Tensions further escalated as Iran fired drones and missiles over the weekend in response to Israel's attack on the Embassy in Damascus. Israel successfully defended the attacks with the support of the allies with no casualties or damage. Of course, post the retaliation, Israel's allies have come to it's support and are trying to contain the situation. Tweet from the official account of Iran to U.N says "the matter may be deemed concluded" if Israel deters from a response and warned that U.S must stay away from a conflict between the two nations.  Price action in Crude Oil prices continues to be muted during Asia Trading hours with crude oil prices trading around Friday's close of $ 90.15 which suggests markets may be discounting a base case of no further retaliation from Israel.  Risk sentiment may continue to be tenuous for the next few days as string of headlines from both sides and Global Powers dominate wires.  Meanwhile, DXY closed the wee...

Headline CPI rose 4.85% yoy and flat mom. Q4 FY24 inflation averaged 5.01% in line with RBIs estimates.  Largely a benign CPI print with Fuel and Light driving major disinflation. Miscellaneous group (Household G&S, Health, Transport and communication, recreation and amusement, education, personal care and effects) rose 0.28% mom. The fuel disinflation is on account of cut in prices of LPG (Mar 8) / prices of Petrol and Diesel (Re. 2 on Mar 15).  Prices of Meat and Fish (wt. 3.61%) saw prices rise 1.3% mom. Interestingly, in a retail shop in Bandra from where we buy Meat, the gentleman informed that the price has gone up from Rs. 240 a kg to Rs. 280 a Kg. Price of Fruits (wt 2.5%) saw a 1.77% mom decline. Personal care ad effects category saw 1.37% mom rise in prices.  Price of Spices has seen good deceleration over the last 3 months.  The Core CPI rose 3.25% mom. Going ahead the base effects are going to start kicking in which could impede the momentum of decele...

Yesterday's CPI release had the bond bears growl. The headline and core reading were above consensus exp. of 0.30% and are mentioned in the table below. The core gds inflation provided a bit of relief but the core services component rose 0.52% mom, the much spoken about decline in shelter inflation still eludes us. Atlanta Fed's sticky Price CPI which excludes Food, Energy and Housing rose 5% yoy.  Last week's curve steepening flattened out this week with US2s10s back to -43 bps from highs of -33 bps at the start of the week.  Fed Fund pricing materially pared back rate cut bets into 2024 from 66 bps before the CPI release to 42 bps after with 22 bps now priced until the Sep policy.  JPY bears finally had a catalyst in rising bond treasury yields and broke above the 152.00 handle after consolidating for over 14 trading days. Markets are talking about 155 and 160 levels on USDJPY. The yield spread on German - US 10Y bonds worsened to -210 bps , a level last seen in Oct 20...

I am presently learning air rifle shooting and the first principle taught was "Do Nothing". You do nothing till the posture, the stance, the focus , the breath all align and then you slowly squeeze the trigger.... Even after squeezing the trigger you hold tight  and follow up your action to see the errors and then use that as a feedback to improve next time. Tomorrow's CPI data release is a bit like I don't know, could be this way or that way and look at the price, I don't know. The risk reward does not feel right and yada yada. A lot in trading is about "price" and the current levels are expensive for a break out trade in yields but neat for a bond rally. For me , the CPI release has a lot riding on it and a significant amount of bearishness is built into the price.  Overnight, the sell off in bonds continued unabated with the yield on US2s up 4 bps. US2s10s bear flattened 2.20 bps. US10s ended the session + 1.80 bps and US30s -0.60 bps. We saw strength...

 The Non-Farm payroll numbers came in at 303K, sharply higher compared to consensus expectations of 200K and +22K revision to the last 2 month figures. Average Hourly Earnings (AHE) rose 0.35% mom, hourly earnings grew at an average pace of 0.34% over the last 3 months. Yoy number grew 4.14% (prior 4.28% ), the decline in annual rates on Higher Base effects . The Labor Force increased by 469K driven by a 498K increase in employment level and reduction of 29K in Unemployment level. The Average Weekly Hours rose 34.40 from 34.30 in the prior month. The data follows release of above consensus ADP numbers and a lower level of Job Openings. The ISM Manufacturing print gave a strong beat but the Services PMI price subcomponent brought some welcome relief to the markets. The Jobless Claims data ticked slightly higher by 9K but Continuing Jobless Claims fell 19K.   After pricing in as much as 166bps of rate cuts into the start of the year, markets are now leaning towards the poss...

From the Post Policy RBI Conference, the most important remark came in the context of high Real Rates to which RBI Chief commented that Real Rates are not as high as being suggested. GDP over the last 3 years has gone up by an average of 8% which suggests potential GDP has moved higher. Real Rates should be seen in the context of potential GDP Growth.  A quick understanding of the concept demands an understanding of the natural rate of interest. The Natural  rate is generally defined as the level of the short-term real interest rate that would prevail in the absence of business cycle fluctuations, with output at potential, saving equating investment and stable inflation.  The natural rate is commonly thought to be determined by real forces that structurally affect the balance between actual and potential output, or equivalently between saving and investment.   RBI would undertake a study on Real Rates and Potential GDP after the release of this quarters GDP. The OIS ...

Crude Prices rallied further to $91 a barrel, levels not seen since Oct 2023, on escalating Geopolitical tensions in the Middle East following the Israeli attack on Iranian Embassy compound in Damascus and  UAE's suspension of diplomatic coordination with Israel in the wake of the death of seven World Central Kitchen humanitarian workers in Gaza. 

The Monetary Policy Decision :  Interest Decision               No change  6.25% - 6.50% - 6.75% (SDF - Repo - MSF).  Voting 5 / 6 in favor of no change Policy Stance           Withdrawal of Accommodation Liquidity management            No measures announced. Central Bank will continue to be  nimble in liquidity management Projections Projections were largely unchanged and though the March monthly bulletin had higher growth projections, the same was not revised in the monetary policy. 

India's manufacturing sector, as per the HSBC India Manufacturing PMI®, soared to a 16-year high of 59.1 in March, reflecting robust expansion. Notably, new orders and output surged , with growth across consumer, intermediate, and investment goods sectors. Input purchases rose significantly, indicating preparations for future sales uptick. Despite increased costs for materials like cotton and steel, output charge inflation softened. The outlook remains optimistic, with 28% of firms forecasting growth. The data suggests strong momentum in manufacturing, underpinning a positive economic outlook, contingent on managing cost pressures and sustaining growth. India's Services PMI for March 2024 surged to 61.2, indicating robust expansion in the service sector , with the Business Activity Index marking one of the strongest growth rates in over 13-and-a-half years. New order intakes soared, with a notable uptick in new export business, expanding at the fastest rate since Septemb...

Overnight USD index plummeted and closed at the lows of the day at 104.23 on a soft Services ISM Print. Likewise , US yields surged on strong ADP numbers (actual 184K , prev 140K) but closed a tad bit softer compared to the previous day. Chair Powell's Remarks were in line with the narrative from the earlier post policy conference to which the markets reacted positively. Fed Fund Futures are pricing in 71 bps of rate cuts into 2024 from yesterday's 69 bps. US2s10s bear steepened 1.30 bps. Gold has not seen a meaningful pull back and continues to surge ahead.  Key highlights of the ISM print Headline PMI registered 51.4% in March, indicating expansion in the services sector for the 15th consecutive month. In February, the PMI was 52.6 percent. Employment Challenges: The Employment Index contracted to 48.5% in March, marking the third contraction in four months. In February, the index was at 48%. Supply Chain Concerns: The Supplier Deliveries Index registered 45.4% in March, in...

Bonds / Equities and Bitcoin sold off in yesterday's session  and Brent Crude Prices   ( H&S in play as written earlier) rallied higher to highest levels since Oct and Gold rose to highest levels of 2282.  5.60 bps of Bear Steepening in US2s10s  Interest Rate pricing was relatively unchanged with FFR pricing in 69 bps of rate cuts into 2024 with first full cut priced in for July 2025 policy. In the December Policy, 5 participants had judged the appropriate FFR to be below 4.63% - 4.87% i.e. lower bound of the corridor to be below 4.50%. In the most recently policy, there is now only 1 participant who judges FFR between 4.38% - 4.62%.  On the data front, February Job Openings , Hires and Total Separations were little changed.  Data snapshot below. We also had the release of the Factory orders data which rose 1.40% mom following a downwardly revised -3.80% number. 

Quick Snapshot from yesterday: Solid Beat on the ISM Mfg PMI and Prices Paid component lead to a sharp sell off in Rates and USD Index Moved higher. Crude Prices moved higher / Gold Prices moved higher and US2s10s bear steepened. Fed Fund Rate implied pricing pared back rate cut expectations into 2024 with markets now pricing in 68 bps of rate cuts. Today , we will have the release of the US JOLTS number and the Durable Goods Order. Job Openings have steadily been coming off after the peak in Mar 2022 and were last reported at 8863K. Consensus expectations are for a reading of 8.74M. 105.60 - 105.90 is an important resistance area for the DXY. 

  The MPC is scheduled to announce the interest rate decision on April 5, 2024 Expectations: Interest Decision             No change expected, 6.25% - 6.50% - 6.75% (SDF - Repo - MSF) Policy Stance          With FY25 Inflation estimates at 4.40% and RBI Policy Rate at 6.50%, RBI is well into restrictive territory with Real Rates on a Forward-Looking basis at over 2%. A whole new discussion around higher Neutral Rates has espoused as growth has consistently outpaced expectations.  PMIs have been in expansion territory and credit growth has been robust at an average 15.39% for the calendar 2023. Expectations into FY25 growth are robust with through the year growth seen at 7.40% and FY24 growth seen clocking 8%.  Outlook for inflation is benign with through the year inflation numbers likely in the vicinity of the lower band of the 4% - 6% target. According to RBI Monthly B...