Making Sense

“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...

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...

Yields on 10JGBs continued the march higher towards 1.10% as Services Sector inflation came in higher than expectations. The next BoJ meeting is scheduled for 13 - 14 June. BoJ intervened to the tune of $ 62.20 bn over two days of intervention. JPY weakened past the 160 handle when BoJ first intervened and dropped to lows of 154.50.  We have the Bank of Canada and the ECB Monetary policy meeting where expectations are for 25 bps of rate cuts.   The implied Fed Fund Futures priced in 29 bps of rate cuts for 2024 from 32 bps last week. The Fed Fund Futures are pricing in first complete rate cut by the November policy.  The PCE release was on expected lines. Prices of Energy and Non Durable goods rose at an uncomfortable mom momentum while prices of durable goods showed mom contraction. The Services component of the PCE release showed mom price rise of 0.27% which was lower than the average 0.37% mom pace over the last 6 months.  The Market reaction to the PCE rele...

Just in, PBOC would cut the CRR by 50 bps from Feb 5 and cut re-lending and re-discount rates interest rates bby 25 bps for the rural sector and small firms from Jan 25.  Overnight, U.S equities continued the trend higher after breaking out of the right-angled triangle. Three targets are in sight for the S&P 500. AB=CD Target of 4908, Right Angled Triangle break out target of 4935 and Trendline resistance close to 5075. If we cross the trendline resistance, then the next meaningful resistance comes in at 5180 which is the 1.27% of the move from 4820 to 3492. The implied market pricing for Fed Fund Rates moved 4 bps lower to 137 bps of cumulative rate cuts and March is now pricing in 12.5 bps of rate cuts. The US2s10s tightened 4.4 bps to 24 bps. Yields High Low Close DoD ▲ US 2Y          4.42          4.37 ...

"Failure of Imagination" is the inability to understand in advance the full range of outcomes. Overnight, USD index weakened and USTs were unchanged. The implied Fed Fund pricing shows 20 bps of Fed Fund Rate cut priced into the March Policy and a cumulative 143 bps of Rate cuts priced until the Dec 2024 policy. Post the FOMC Rate decision, Markets had priced in 23 bps of rate cuts by March Policy and 148 bps of rate cuts by Dec Policy. We had comments from 2 Fed Speakers both of whom are FOMC Voters into 2024. Raphael Bostic reiterated his view of 2 rate cuts into 2024 starting sometime in Q3 and  stated that there is no urgency to back away from restrictive policy stance. Thomas Barkin stated that inflation continues to move in the right direction and if inflation trajectory evolves on expected lines, the Fed would act appropriately. U.S released housing data where Housing Starts rose 14.80% mom while Building permits at 1.46 mn were below consensus of 1.465 mn. On the dome...

"The first principle is that you must not fool yourself — and you are the easiest person to fool.” - Richard Feyman US equities closed in the green with S&P closing 0.65% higher, having risen 2.30% off Oct 27 lows. The U.S. Treasury quarterly refunding statement announced earlier plans to borrow $776 billion in Q4, $76 billion lower than July estimates assuming an end of Dec cash balance of $ 750 bn. During Jan - Mar 24 Treasury expects to borrow $ 816 bn assuming an end of Dec cash balance of $ 750 bn. The news was in line with expectations. Today, Treasury will announce the borrowing calendar.  Asian equities are off to a better start. Expect range bound moves ahead of the FOMC Rate Decision. Sell of in 10Y JGBs persisted after yesterday's monetary policy decision with yields at 0.976% at the time of writing. BoJ increased the flexibility in the conduct of YCC while retaining the target of 10Y JGBs at 0.00% with upper bound at 1% as reference which implies that 1% is no ...

"What we hope ever to do with ease, we must learn first to do with diligence" Asian markets are trading higher as China resumes after week long Lunar Holidays. China re-opening alongside lower quantum of rate hikes from the US Fed has lifted the sentiment around EM currencies.  USDCNH (6.75) is now back in the consolidation range of 6.65 - 6.78 in which the currency was trapped from May until mid August 2022.  USDKRW (1228) is trading below the May 2022 lows and now finds support at 1206-1207 levels. USDTHB (32.73) is also fast approaching the Feb 2022 lows at 32.07. While KRW and THB have appreciated over 15% against the USD followed by CNH, IDR has been a relative underperformer, appreciating only 5.50% from peak to trough.  USDJPY has been facing resistance at 130.60 - 131.00 levels since 23rd Jan 2023 with market consensus leaning towards further widening of the YCC band. Today, a report by a panel of academics and business executives urged the BOJ to make its 2% infl...

 The big news today morning was the release of the Tokyo CPI Inflation. The core CPI for the area of Tokyo in Japan jumped 4.3% in January 2023, accelerating at the fastest pace since 1981 and exceeding forecasts for a 4.2% rise amid broadening inflationary pressure. Tokyo’s core inflation rate, a leading indicator for nationwide price trends, also followed a revised 3.9% gain in December and surpassed the Bank of Japan’s 2% target for the eighth straight month, signaling that upward price trends in the country have not reached its peak yet. **trading economics The BoJ announced the  Funds-Supplying Operations to Support Financing for Climate Change Responses for a notional of $ 21.73 bn as yields inched closer to the upper bound of the YCC band at 0.50%. The CPI data sparked a sell off in yields in the Asian session with US 2YT at 4.19% and US 10YT at 3.53% and the 2x10 inversion at 66 bps. Domestic yields also opened higher with 10Y treasury trading at 7.39% from Wednesday's...

Bank of Japan made no changes to the Yield curve control policy. It kept the band at +/-  0.50% and amended the rules for a fund supply market operation. Under the amended rules, BoJ can offer funds upto 10 years against collateral to financial institutions for both fixed and variable rate loans.  Post the announcement, JGBs yields quickly fell to lows of 0.36%. I anticipated JPY to depreciate after a pull back on the sharp fall in yields but nah nah nah.. JPY completely reversed course.  The price development only goes to show that the market anticipates YCC to likely end in march which is the last policy announcement by Governor Kuroda before the end of his term. The inflation data released today further emboldens the expectation. Japan's core consumer prices in December rose 4.0% from a year earlier, double the central bank's 2% target, hitting a fresh 41-year high. Dates ( according to Reuters) 10th Feb - Present nomineed to Parliament 16-17th Feb - hea...

Good morning !! The hard work in trading comes in the preparation. The actual process of trading, however, should be effortless. BoJ monetary policy meeting kept the yield curve unchanged at +/- 50 bps. It is the only Central Bank that has a NIRP (Negative Interest Rate Policy). The bank will continue with its current monetary policy of maintaining its short-term interest rate at minus 0.1% and its long-term interest rate around 0%. The Bank will offer to purchase 10Y JGBs at 0.50% every business day through fixed rate purchase operations unless it is highly likely no bids will be submitted. You may revisit the earlier decision  here . Earlier local media reports suggested that policymakers will be looking to review the side effects of current ultra-easy monetary policy and potential risks following the December move. This had lead to consternation among the market participants with market opinion widely divided between status quo / widening of the band / abandonment of YCC policy....

 Goodmorning!! “A man is but a product of his thoughts. What he thinks he becomes.” - Mahatma Gandhi A quick wrap up of yesterday developments -  BoJ will apply a negative interest rate of minus 0.1 percent to the Policy-Rate Balances in current accounts held by financial institutions at the Bank. BoJ expanded the band around the 10Y yield target to +/- 0.50% from +/- 0.25% and increased the monthly bond buying under the new quarterly bond buying plan to yen 9 trn from earlier yen 7.3 trn. The move was attributed to improve the market functioning and formation of the yield curve. The JGB curve steepened with the 1x10 curve at 0.5350% from the earlier 0.34%. BoJ emphasized the current move as not a rate hike or policy accommodation removal. He also mentioned that he will be closely watching the next Spring's wage negotiations and the Trade Unions have announced a nominal wage growth target of 5%. However, the market does not believe the BoJ narrative and interprets the re...

Expect the unexpected !! The Big news today morning is the Bank of Japan (BoJ) monetary policy decision. BoJ Governor Kuroda who is nearing an end to his term did not fail to shock and awe the markets.  BoJ decided to modify the conduct of YCC (Yield curve control) in order to improve market functioning and encourage a smoother formation of the entire yield curve while maintaining accommodative financial conditions. Please note the modification was not attributed to higher inflation. So BoJ tightened and eased at the same time. BoJ expanded the band around the 10Y yield target to +/- 0.50% from +/- 0.25% . It will offer to purchase 10Y JGBs at 0.50% every business day through fixed rate purchase operations. It will also make nimble responses for each maturity by increasing the amount of JGBs even more and conducting fixed rate operations. BoJ increased the monthly bond buying under the new quarterly bond buying plan to yen 9 trn from earlier yen 7.3 trn.  BoJ's monetary polic...