Making Sense

With my view over the last week on reversal in USD index, it was frustrating to see the moves not playing out on the Dollar Index. Geopolitical Risks were underpriced and Chinese Stimulus (both monetary and fiscal) ahead of the Golden week kept pushing asset prices higher and AUD was the clear beneficiary. Japan Election results also jolted the USDJPY due to PM Ishiba hawkish leanings. For most of the currencies and bond yields, we went no where and closed the week in the middle of the week's range. I could not complete the post yesterday so writing today.  Let's do a quick snapshot of the Economic Data releases this past week. Atlanta Fed GDP is now trending at 3.10% for Q3 and Fed Funds Pricing show an 82% probability of 200 bps of rate cuts i.e. 2.75% - 3.00% by Oct 2025. As of Friday's close, Markets are pricing in a 92% probability of 75 bps cuts by Dec 2024 but are largely seen divided b/w a 25 bps or a 50 bps cut in the next policy. An important thing to note is t...

This morning, China announced a 25 bps cut to the 5Y LPR while keeping the 1Y LPR unchanged and  RBA released the minutes of the monetary policy meeting on 5 – 6 Feb 2024. China - The consensus expectations were for a 10 bps cuts in the 5Y LPR and 5 bps cut in the 1Y LPR. The LPR cut in the longer tenor is indicative of China taking more constructive measures to revive the property market. On the RBA minutes -  Encouraging progress towards inflation driven by goods inflation and lower energy and food prices while services inflation continues to be sticky. Due to disruptions in Red Sea, there has been an increase in shipping costs which are seen relatively subdued compared to the post pandemic. Labor market is coming into better balance which is helping ease services ex housing inflation. GDP growth in Australia’s major trading partners was expected to ease in 2024. Domestically, inflation in Australia has moderated, but remains above target, with consumption growth subdued. L...

Chains of habi t are too light to be felt until they are too heavy to be broken. After the EIA Inventory build-up and extension of OPEC Meet to 30 Nov in Vienna, Brent Crude Oil prices briefly dipped to $ 80.07 as OPEC will now hold it's next Ministerial meeting online as it discusses the production levels for next year. The reported delay is likely on account of disagreement over the production levels of African Nations. Angola and Nigeria, the cartel’s biggest African producers, disagree so far with production estimates supplied to OPEC by third-party analysts.  Price action was largely muted overnight as US markets were closed for Thanksgiving Holiday. Today, Asian markets are mixed.  Jibun Bank Nov flash manufacturing PMI came in at 48.1, lowest since February while flash services PMI came in at 51.7. Japan's Oct core inflation rate rose to 2.9% (prior 2.8%)and the headline print came in at 3.3%, Prior 3%. On China, Chinese regulators are considering allowing banks to exte...

 Risk means more things can happen than will happen.                                               ~ Elroy Dimson After the sharp gains yesterday, markets consolidated overnight. I am a better seller of USD on rallies in a data light week. US2s +10 bps, 4.94% US10s + 8 bps, 4.65% US2s10s -30 bps (-3 bps) DXY 105.26 +0.20%  FOMC Voter Lisa Cook said the Fed is determined to reach 2% inflation target; hopes that current policy settings are restrictive enough to return inflation to target. While Kashkari commented "we need to let the data keep coming to us to see if we really have got the inflation genie back in the bottle". The SLOOS survey showed a net tightening of  standards on loans for businesses and commercial real estate coupled with falling demand. Standards on loans to households, including credit card and auto loans, also tigh...

"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 ...

US Yields moved higher overnight and equities plummeted over a full percentage point.  US2s high yield of 5.24% US10s high yield of 4.93% US2s10s bear steepened -30.5 bps Fed Fund Futures Jan 31, 2024 5.46% (peak terminal rates) Jun 12, 2024 5.25% (1 cut by mid next year) Dec 18, 2024 4.82% ( 64 bps of cut from peak terminal rates) Fed Fund Futures pricing implied a Fed Fund Rates as low as 3.97% on 08th August 2023 following the last hike of 25 bps on July 26 (Fed Fund rate 5.25% to 5.50%). News of downgrade of small and mid sized banks by Moody's and the Fed speak advocating patience saw significant cuts priced in 2024.  USD index moved higher yesterday after the small reversal seen the day before which was confusing. The Geo - political backdrop also continues to be fluid with the odds of escalation having risen. Fed's Waller said that he expects one more rate hike will be needed while New York Fed President Williams said that he is not yet ready to declare victory over inf...

US Retail Sales surprised to the upside. Sep 2023 Retail sales came in at 0.70% mom and July 2023 to August 2023 % change was revised from up 0.6% to up 0.8%. Excluding autos, sales were up 0.6% mom, above f/c for just 0.2%. Total Industrial production rose 0.30% mom (f/c 0.00%).  Bond market sold off on the release of Retail Sales number. US2Y yields rose to a high of 5.24% , levels last seen in July 2006 and US10Y yields rose to 4.86%. We saw a reversal of the Safe haven buying in bonds (post the Israel-Hamas conflict) and DXY. DXY weakened to 106.02 levels. US equities closed flat.  Today morning, bunch of economic releases from China surprised to the upside. Retail Sales rose 5.5% yoy, Q3 GDP expanded by 4.90% yoy (f/c 4.40%)  and Industrial production rose 4.5% yoy (f/c 4.30%). Crude Oil price and Gold are on a rise. Resilience of the US economic data coupled with today's strong Economic data from China could lift commodity prices higher and support commodity cu...

Markets flipped overnight on the hot US CPI report with DXY taking support at the 105.50 level. I mentioned about the risk reward in favor of USD longs in yesterday's post ahead of the DXY support and to play the divergence between the Fed's guided path and market pricing.  US CPI for the month of Sep rose 0.40% mom and 3.70% yoy. The largest contributor to the monthly increase  was the shelter index. Another major component was the gasoline index. Core CPI rose 0.30% mom and 4.10% yoy. Core services excluding rent rose 0.60% mom. The Initial jobless claims came in at 209K and continuing jobless claims rose 30K to 1702K , highest in 6 weeks. Fed Fund Futures implied market pricing for Dec 24 shifted higher to 4.70% from 4.54% we saw yesterday. Yields on USTs rose sharply higher with US2s marking a high of 5.09% and US10s marking a high of 4.73%. The move in US yields was also driven by a poor $ 20 bn 30Y auction  This morning China CPI came in at 0.20% mom below cons...

In yesterday's trade, headline US retail sales grew 0.40% mom following a downwardly revised -0.70% mom for the month of March. The number was below market consensus for a 0.80% mom increase. Retail sales number after contracting in the month of Feb and Mar 23 turned positive in April. The core retails number or the control group numbers which show non discretionary spending rose 0.70% mom following a downwardly revised March figure of -0.40%. This number was sharply higher than consensus estimates of 0.30% increase. Despite the headline surprising to the downside, resilience of the core retail sales saw US treasury yields move higher as despite the negative shock and tightening credit conditions, consumer spending strength held. 2Y US Treasuries moved higher a full 16 bps to 4.12% before closing the session at 4.09% and 10Y US Treasuries moved 12 bps higher to 3.57% before closing the session at 3.54%. Remember, we are watching the formation of a H&S pattern on US Treasury yie...

  "Volatility is a double-edged sword. It can cut you both ways." OPEC+ announced Production cuts of 1.15 mbpd on Sunday thus pushing crude oil prices higher in the Asian session. WTI prices touched a high of USD 86.44 per barrel. The sharp cuts in production follow the previously announced production cuts in Oct 2022 of 2 mbpd and Russia’s 0.50 mbpd voluntary reduction announced in February. The cuts announced will take effect from May and stay until Dec 2023. These actions are in sharp contrast to Global Oil Demand projections of a rise of over 2 mbpd by both the IEA and OPEC. Do the actions by the OPEC+ suggest a worsening oil demand outlook in the second of the year? Or is it just an acknowledge of OPEC+ running behind production quotas and adjusting global demand mildly. The sharp productions cuts only make the inflation fight worse. The Fed Fund Futures markets pushed out rate cuts with July pricing in 4.88% from previous 4.80%. The US yields also moved higher i...

Let's quickly look at the geopolitical narrative that's shaping up and is making much of the headline. Chinese leader Xi Jinping took a direct aim at the U.S in the recently concluded NPC when he said “Western countries—led by the U.S.—have implemented all-round containment, encirclement and suppression against us, bringing unprecedentedly severe challenges to our country’s development”. This was in sharp contrast to general conduct of avoiding any direct public remarks criticizing U.S.  On Tuesday, Qin Gang ( earlier Chinese Ambassador to the U.S) said the Biden administration was insincere in saying it wanted to preserve relations and warned the U.S. against engaging in what he called new McCarthyism. The remarks further exacerbate the strains in the US - China relationship which has already suffered as a result of the Chinese Balloon incident, U.S. Secretary of State Anthony Blinken's accusation pertaining to the possibility of China supplying weapons to Moscow, U.S supp...

"The goal of a successful trader is to make the best trades. Money is secondary." Quick wrap on the market moves at the start of Asian Session: USDINR is in a strong momentum lower and part of the position was squared off  . Follow the momentum !! 81.75 is an important support but the move could very well stretch to 81.50 or 81.02. We need to look for price action to confirm a reversal trade. Patience !! Patience !! Domestic equity markets are trading in the green with Nifty at 17788, up 1.1% after failing to break the 200 DMA at 17414. FPI flows have been stable with Friday number seen at $ 30 mn inflow. The Services PMI released on friday showed services activity at a 12 year high and robust GST collection of Inr 1.50 trn in the month of February. India Money market operations (figures in bracket show prev day closing numbers) LAF absorption                     -61,000 crores (-82,000 crs) O/S Repo      ...

 "The difference between try and triumph is just a little umph!" Q3FY23 Real GDP grew 4.40% yoy lower than consensus estimates of 4.60% following an upward revision of 80 bps to FY 21 to -5.80% (previous est -6.60%) and 40 bps to FY 22 to 9.10% (previous est 8.70%). India's GDP during 2022-23 is estimated to grow at 7.0 %. RBI had projected the real GDP growth for 2022-23 at 6.8 %, with the third quarter and fourth quarter growth at 4.4 % and 4.2 %, respectively. S&P Global Manufacturing PMI expanded for the 20 th straight month with the February reading coming in at 55.3. Input cost inflation accelerated to a four-month high but there was a softer upturn in selling charges. Recent data shows waning momentum after the Dec peak of 57.20. The Conference Board Consumer Confidence Index decreased in February for the second consecutive month to 102.9 down from 106.0 in January. The Present Situation Index—based on consumers’ assessment of current business and labor ...

"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...

We booked profits on our USDINR short position and stand neutral. The move lower in USDINR came alongside a surge in volume.  After the long consolidation between 82.60 - 82.90, reckon buyers got trapped and then the sharp move lower along with surge in volume suggests big unwinding of positions / initiation of fresh shorts. Yesterday, intraday volume data shows buying interests between the 82.50 - 82.60 zone. We are neutral on the pair ahead of the  CPI Data . Market is positioned for a peak in the CPI inflation numbers and the same can be seen in the lower US yields with 2Y back to price resistance at 4.20% yield and 5Y back to price resistance at 3.52% yield. Taking cues from offshore markets, India Gsec yields are also trading lower and OIS is also tad bit lower. 1Y OIS continues to be rangebound b/w 6.55% - 6.75% and 5Y OIS has seen multiple rejections at the 6.50% level with support coming in at 6.20%. We are neutral on forwards and OIS at the current levels. In another ...

 “Rule your mind or it will rule you. ” – Horace Goodmorning fellas !! Let's take a quick look at the markets. Overnight developments -  According to Bloomberg, Atlanta Fed President Bostic said that the Fed is willing to overshoot when it comes to tightening, adding that the Fed should hold rates at 5% for a "long time". Fed's Bostic is not an FOMC voter. Fed is guiding the markets pricing for US terminal rates higher through comments but there is growing consensus on the US disinflation narrative and the looming recessionary risks. This is where there is divergence between the outlined Fed policy path and market rate hike expectations. Fed statement of economic projections outline terminal fed fund rate of 5.10% through 2023 while market is pricing in a policy pivot post June 23 with around 50 bps of rate cuts priced in by Dec 2023.  China removes all border restrictions Chatter of another sales tax hike in Japan Tokyo CPI released today morning showed CPI excluding...

“You have power over your mind, not outside events.  Realize this, and you will find strength.” US NFP Total nonfarm payroll employment increased by 223,000 in December, and the unemployment rate edged down to 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Notable job gains occurred in leisure and hospitality, health care, construction, and social assistance. Average hourly earnings for all employees on private nonfarm payrolls rose by 9 cents, or 0.3 percent, to $32.82. Over the past 12 months, average hourly earnings have increased by 4.6 percent.  Average hourly earnings offered a welcome moderation. USD declined as market positioning shifted to a 75% probability of a 25 bps hike in the Feb 1 policy. DXY declined 1.65% to a low of 103.87.USDINR traded a low of 82.27 after the market hours. China Reopening The big news over the weekend has been China re-opening to the world after 3 years of isolation as it followed a zero covid policy. Deep declines are see...

China Re-opening narrative / US Data / Indian markets The Chinese reopening story had fueled a risk rally however the evolving situation remains tenuous at best. Chief epidemiologist Wu of the Chinese Center for Disease Control and Prevention said the current outbreak would peak this winter and run in three waves for about three months (mid Dec - mid Jan, mid Jan - mid Feb - Chinese Lunar year starts on Jan 21 which typically sees a lot of people movement. mid Feb - mid March). In another news , A US-based research institute said this week that the country could see an explosion of cases and over a million people in China could die of COVID in 2023. There are 2 narratives on China - one is of optimism that the gradual easing of restrictions will unleash pent up demand and the second is even as China pivots towards reopening , the covid cases will surge and the authorities will be focused on flatlining the infections. The tapering of the covid wave in the second quarter could see re...