FOMC -Higher Neutral Rates and a Resilient Economic backdrop | Street Divided between 25

FOMC -Higher Neutral Rates and a Resilient Economic backdrop | Street Divided between 25 - 50 bps of rate cuts into 2024

"The Desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing - these factors are near universal. Thus they have a profound collective impact on most investors and markets. The result is mistakes and those mistakes are frequent, widespread and recurring."

The FOMC Rate Decision was on expected lines but the surprising bit came out from the Summary of Economic Projections where 2024 FFR projections were revised higher to 5.10% from 4.60% and for 2025, FFR was revised higher to 4.10% from 3.90%. The estimates of PCE were revised higher by 20 bps for 2024 and 10 bps for 2025.

At 5.10%, in light of the benign CPI Data and market pricing well in line with the Fed's revised guided path of 1 rate cut into 2024, 2024 FFR SEP was largely seen as an adjustment to the Fed's policy projection rather than new information which could be construed as hawkish. 15 of the 19 members were seen anticipating either one or two rate cuts this year, evenly split.

In the Press Conference, Chair Powell clarified that on days when there is an economic data release, the members have the chance to updates their f/cs which they may or may not update. So the current conundrum of 25 - 50 bps of rate cuts into 2024 sits well. The current implied pricing for 2024 rate cuts is at 38 bps of rate cuts which is right in the middle of the 25 - 50 bps range.

The long run neutral rate was revised higher to 2.80% from 2.60%. The revision meant that Economy can sustain higher interest rates without triggering inflation, making the current policy stance less restrictive to that extent.

In the Post policy conference, Fed Chair mentioned that the base case remains for interest rate cuts and that the Fed would be looking at sustained progress towards 2% inflation target and be cautious in reading too much from 1 soft print. Signs of weakness in employment data and sustained progress towards the inflation target of 2% could be leading indicators to alter the monetary policy stance.

The estimates for May Core PCE Inflation are lower at 2.60% and the Fed's year end projection stands at 2.80% which had the street wondering if Federal Reserve anticipates a rise in the inflation trajectory. To which Chair Powell remarked the impact from low base effects and conservative estimates explain the same and a reading of 2.6% - 2.7% is a good place to be in.

Last week, the slew of data was largely rates supportive (soft CPI and PPI prints / Jobless Claims data / Consumer Sentiment / strong bond auctions) which explains the sharp move down in US Yields.

US CPI declined to 3.25% yoy from 3.36% and Core CPI declined to 3.41% from 3.62%.

U.S PPI estimates came in below expectations with the headline PPI at a -0.25% mom following a 0.52% rise in the prior month. Break down of the PPI across Services| Goods| Energy points to progress towards lower inflation.

Following the CPI and PPI print, the estimates for PCE Inflation for June are now pegged at 0.10% mom, 2.55% yoy (prior 2.65%) on the headline number and 0.07% mom, 2.60% yoy (prior 2.75%) on the Core number.

The Jobless Claims data this week showed softening labor market trends with Initial Jobless Claims at the highest since the start of the year.

The University of Michigan Consumer survey data showed a drop in sentiment and stable inflation expectations. Assessment of personal finances dipped due to modestly rising concerns over high prices as well as weakening income. Declining consumer confidence is generally associated with declining trends in growth.

An interesting point to note here is the change in methodology for collecting the survey responses from telephone to email which started in April and could very well be overstating the decline in numbers. Though the press release clarified that the decline in sentiment was uniform across both the groups, we would read the print with caution.

The week ahead calendar includes Retail Sales, Housing data, Initial Jobless Claims, S&P PMI data and Fed Speak.

Snapshot of Levels:

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The Moment of Reckoning is here !! 25 or 50 Bps and the SEP || Benign PCE Expectations || USDJPY 145.75 or 137.50 ??

“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...

Continued Moderation in the Labor Market - Call for Action

“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...

Benign PCE but a Presidential Debate seems to have rocked the boat - US10s +14.30 bps

"Champions aren't made in the gyms. Champions are made from something deep inside them - a desire, a dream, a vision" ~ Muhammad Ali Fed Fund Pricing for interest cuts was seen at 47 bps for 2024. Q1 GDP came in line with estimates at 1.4%, however, consumer spending was revised lower to a modest 1.50% which means consumer coming in at a lot weaker position in Q2. The Atlanta Fed GDPNow estimates were revised lower to 2.20% IN Q2 from 3.00% at the end of prior week. DXY found resistance at the 106.13 levels and is seen lower in Asia Open today at 105.67. Durable Goods Orders rose 0.10% mom driven by an increase in new orders for transportation equipment. U.S. PCE Prices showed a welcome moderation with headline number flat over the month and the Core PCE numbers 0.10% higher over the month. Deflation in Durable goods at -0.79% mom and -0.15% in non durable goods alongside a less than 0.20% rise in price of Services and -2.12% mom change in price of core services ...

Broad based Deceleration in CPI || FFR pricing - 98% Prob. of a Rate Cut & Bull Steepening || Constructive Technical Set on US2s - Yields at 3.50% ??? || SPX Correction ???

"I fear not the man that has practiced 10,000 Kicks once, but I fear the man that has practiced one kick 10,000 times." ~ Bruce Lee Morning Everyone , This Week gave us a sense of how the prices or inflation has evolved and we had benign readings across CPI and PPI and the updated PCE estimates are now for a reading of 0.01% mom on the headline PCE and -0.01% on Core PCE Prices which translates to an annual reading of 2.4% yoy and 2.4% on Core PCE Prices. The Implied pricing off Fed Fund Futures is now pricing in o ne full 25 bps of rate cut into the September Policy and 61 bps of cumulative rate cuts for 2024. If you go further out the curve, 100 bps is priced in until March 2025 and 138 odd bps until June 2025. In the 23rd June Wrap, I had written On the DXY, 106.25 is a crucial resistance zone for DXY bears and an important point of reversal. So keep a watch on the levels with SL above 106.75. DXY declined over the last 2 weeks fro...

The Pendulum Swings Again - From Soft Landing to Fears of a Recession | Employment | US2s and US10s Technical Levels | Macro Musings

As Howard Marks says The most important thing is "Awareness of the pendulum'. The mood swings of the market resemble the movement of a pendulum. Although the mid point of the arc best describes the location of the pendulum "on average", it actually spends very little of its time there. In fact, it is the movement towards an extreme itself that supplies the energy for the swing back. Investment markets follow a pendulum like swing - b/w euphoria and depression, between celebrating positive developments and obsessing over negative ones and thus between over priced and underpriced. While we may not know what the futures holds but me must have a fair sense of where we are headed. I hope this blog has helped you navigate the course of the markets by identifying these pendulum type swings and through the analysis, has helped you get a sense of how the data is evolving. The Economic calendar was heavy with Top Tier Data. BoJ raised the overnight call rate by 15 bps to 2...

DXY holds 100.50 support| US2s10s Steepening persists| Economic Data at Cross Roads | Is more than 200 bps of Rate Cut space available?

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...

Embedded Narrative - Soft Landing | Benign Inflation | US2s H&S in play | US2s10s bull steepening

One of my favorite poem is by Kahlil Gibran and thought I'd share a couple of lines with you all... Do not live half a life and do not die a half death If you accept, then express it bluntly, Do not mask it If you refuse then be clear about it for an ambiguous refusal is but a weak acceptance Do not accept half a solution, Do not believe half truths, Do not dream half a dream, Do not fantasize about half hopes To reach and not arrive, Work and not work The half is a mere moment of inability, but you are able for you are not half a being You are a whole that exists to live a life not half a life” On that note, quick weekly roundup for the US markets below: The Fed Fund Futures are pricing in 88% probability of a rate cut by September Policy. The Atlanta FED GDPNow Estimates for Q3 growth readings are running at 2.8%. The Cleveland Fed estimates for Core CPI and Core PCE are running at 0.27% and 0.22% respectively mom. In the last blog piece...

Shroedinger's Cat ~ Preparation is the Key to play markets || US Politics || Macro Musings

"Many of life's failures are people who did not realize how close they were to success when they gave up" ~ Thomas Edison Bonds made fresh highs this week as yields on US2s dipped to 4.411% and later bounced off lows to close the week at 4.517%. Likewise for US10s, yields closed at 4.241% after printing lows of 4.144% at the start of the week. US2s10s bull steepened to -22.2 bps before pulling back to close the week at -27.60 bps. S&P saw sharp price correction as markets reversed off 5 642 levels. We identified last week that 5642 levels correspond to the 1.618% of the corrective move from 4820 to 3492 and is a level worth watching to see if prices stall here for a corrective move lower. On DXY we briefly dipped under the 104 handle to touch lows of 103.65 before closing higher on the week at 104.37. The move in USD index could stall at the 104.50 levels or could stretch towards 105 levels. On the US2s we closed right at the H&S Neckline at 4.52%. The narrativ...

Recalibration of Policy Stance | Ride in Risk Assets | Soft Landing | Close out US2s10s Bear Steepeners

“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...

Chair Powell - Unequivocally Dovish at Jackson Hole ! Front and Centre Focus on Employment Numbers | USD Index at lower end of the 100.50 - 106.50 Range

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 ...

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