Making Sense

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...

"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...

"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 Fed Fund Pricing for cumulative rate cuts into 2024 shifted from last week's high of -34 bps to -46 bps and US2s10s bull steepened 2.50 bps over the week. US10Y yields were down 18 bps over the week with 10Y inflation indexed bonds driving gains of 12 bps and the 10Y break even inflation rate driving gains of 6 bps over the week. DXY found resistance at the 106.50 levels and came tumbling down to end the week at 105.08. JPY rallied on BoJ intervention while crude oil prices declined sharply to a 7 week low on an unexpected rise in U.S Crude Inventories. ___________________________________________________________ This week saw significant gyrations in risk assets. The post looks at data in 2 bits - Employment Data and the PMI Data. The data began the week with the Employment Cost Index rising 1.2% QoQ followed by the ADP Employment Change which showed private payrolls increase by 192K and 3m average at 192K. The Jobless claims data had no surprises with claims at very low lev...

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...

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...

"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...

Snapshot Overnight Long end of the curve rose ~ 3.50 bps on 30Y. Comments from Fed Members following Friday's comments from President Williams tried to push back on the market pricing of Interest Rate Cuts. Chicago Fed President Goolsbee told CNBC he was a bit confused by the market's reaction to the latest FOMC meeting/comments. Fed's Mester said markets are a "little bit ahead" of the Fed on rate cuts, says the next phase is not when to reduce rates, even though that's where markets are at, it is about how long policy should remain restrictive (source FT). San Francisco Fed President Daly (FOMC voter), however, said she thinks it's appropriate for the Fed to begin looking ahead to lowering rates in 2024,because of how inflation has improved this year, mindful not to over tighten (WSJ). The Market is pricing in 140 bps of rate cuts by Dec 2024.  DXY consolidated overnight. On the EU side, IFO Expectations, Current Assessment and Business Climate for Germa...

"We may never know where we're going, but we'd better have a good idea where we are" Existing home sales fell to a 13-year low in October with sales dropping a surprising 4.1% mom. Minutes from the Fed’s most recent Nov 1 meeting did not offer any new information and echoed the comments from the Policy meeting and Press Conference. Read the prior decision takeaways here. Minutes Recap 1. Financial Market Conditions tightened - Higher Yields / Lower Equity Prices / Stronger USD  FOMC Meeting US10Y USD INDEX S&P 01-Nov-23           4.93% 106.72 4186 22-Nov-23           4.42% 103.73 4536 Change           -51 bps -2.80% 8.36% Since the last policy, financial conditions have loosened. Does it mean that in the days ahead, Fed starts to sound more hawkish but looking at the data over the last week, there is less reason to do so? 2. Labor - Better alignment of labor...

"Everything should be made as simple as possible but not simpler" - Albert Einstein The HKMA, BoE and Norges Bank kept the interest rate unchanged yesterday following the Fed Reserve. Global Equities surged higher. S&P 500 closed at 4318 (+1.89%). Of the more than 375 S&P 500 companies that have reported earnings to date, about 80% turned in results that beat analyst expectations, according to LSEG. That compares with 67% in a typical quarter.(source WSJ). Long end of the US curve outperformed with yield on US10s dipping to as low as 4.63% , 31 bps lower in 2 days.  Yields on US2s initially dipped to 4.92% but closed near session highs at 4.99%. US2s have been fairly anchored between the 4.90% - 5.25% yields since Sep and break below the 4.90% handle could see further gains accrue. US2s10s spread widened to -34 bps USD index continues the consolidation from October to trade in the 105.50 - 107.00 handle. On the Implied Fed Fund Pricing, Peak Terminal Rates 5.41% Dec 2...

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...

"Daily habits forge your identity" US stocks made broad gains and USD downside momentum held into yesterday's close on Fed speak. Market sentiment was also lifted on reports that China is considering fresh stimulus measures to the tune of CNY 1 trn ( USD 137 bn). Comments from Federal Reserve member Logan "If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate". The same message was echoed from other Fed speakers - Bostic, Kashkari and Waller. Crude oil prices and Gold prices closed the day at the highs on the Israel - Hamas conflict. The markets continued to push the Dec 24 FFR pricing lower to 4.51% from 4.55% the prior day. There is significant divergence between the Fed's guided path (5.10%) and the current implied market pricing.  For the day, we have the US PPI release and FOMC meeting minutes and the more important CPI data tomorrow. On the domestic front, USDINR continued to be ...

 A slew of U.S. economic data were released today.  Pending Home Sales rose 2.50% mom against prior revised contraction of 2.60% (prior -4%). Pending home sales sank 33.8% yoy. However, the current surprise uptick in pending homes sales suggests a bottom could be in the offing. The University of Michigan Sentiment rose to 64.90 from prior 64.60 Personal Consumption Expenditure fell 0.20% from prior revised number of 0.10% contraction Core PCE Price Index rose 0.30% mom (4.40% yoy) vs prior 0.20% (4.70%) Market pricing of interest rates continues to be stable. 2Y US Treasuries trade at 4.21% while 10Y trades at 3.52% but the 2Y and 5Y USD SOFR swaps are trading right at 4.22% and 3.41% respectively. The DXY Index is down 11.50% since Sep end and has taken support at 101.50 for the last 8 trading sessions. The index looks ripe for a corrective bounce but in absence of a catalyst, we like to stay on the sidelines or invest about 20% of the capital just to dip our hands.

The Release : December CPI -0.1% (Exp 0.0%); Core CPI 0.3% (exp 0.3%); Prior 0.2%. The index for gasoline was by far the largest contributor to the monthly all items decrease, more than offsetting increases in shelter indexes. The shelter index continued to increase, rising 0.8 percent over the month. The rent index rose 0.8 percent over the month, and the owners' equivalent rent index also rose 0.8 percent. The index for lodging away from home increased 1.5 percent in December, after falling 0.7 percent in November.  Small note for those who may have missed why the calculation methodologies of the shelter component of the CPI make it a lagging indicator: Shelter inflation is a major driver of the CPI index. Housing represents about a third of the value of the baskets of goods that the Bureau of Labor Statistics (BLS) examines when preparing the Consumer Price Index. For renters, shelter inflation measures both rent and utility payments. For homeowners, the BLS calculates imputed r...

"Discipline is choosing between what you want now and what you want most" - Abraham Lincoln Data releases: Strong US ADP employment numbers and the low level of initial jobless claims boosted the usd index overnight.  According to the Dec ADP employment report, private-sector employment rose 235,000 well above expectations of 150,000. Annual pay for “job-stayers” rose 7.3%. US New jobless claims came in below estimates at 204k (exp. 225k). Meanwhile US Continued Jobless Claims came in at 1.694M (exp. 1.708M). November trade deficit narrowed to $61.5 billion, lowest since September 2020 on a decline in both exports and imports as global demand weakened.  A strong ADP employment report adds to the expectation of a stronger NFP print due to be released today (exp 200k, u/r 3.70%, wage growth 0.40% mom). Initial jobless claims are a leading indicator and the low level of claims goes to show the tightness of the labor market. Labor market tightness fuels concerns that the Fed migh...