Making Sense

 Hi, Just been very caught up with some personal work and hence not had a chance to write. Today's day is lined up with a host of data releases. India - March CPI Inflation consensus estimates call for a reading of 5.80% following previous 6.44%. My own estimates call for a reading of 5.65%. The disinflation is lead by fall in prices of edible oils, cereals and vegetable prices. Core inflation has been sticky and will be keenly watched for direction of monetary policy. The market is currently pricing in 6.50% - 6.75% policy rate through this year followed by 2 rate cuts in 2024. Unless the data materially surprises on the upside, reckon the reaction to be muted as the evolving inflation trajectory is projected to be lower. RBI projects FY 23 - 24 inflation at 5.20%. Based on the inflation projections, real Rates are in positive territory.   March Industrial Output is estimated to grow 5.10% yoy  US - YoY US CPI Inflation (NSA) and YoY Core CPI (NSA) is expected ...

  "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...

 The Federal Reserve announced the FOMC Rate decision by hiking rates by 25 bps as was expected.  Fed introduced a line regarding the current banking crisis assuring the markets of the resilience of the US banking sector The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Interestingly  , the projected path of monetary policy hasn't changed much  The only significant revision to economic projections is in Year 2024 where GDP growth has been knocked off by 40 bps to 1.20% and the Year 2023 has seen a 20 bps hike...

  "The only limit to our realization of tomorrow will be our doubts of today." Yesterday, US released the Advance Retail Sales data. Adv Retail Sales and Food Services Data fell 0.40% mom against consensus estimates of a 0.30% contraction and following a revised 3.20% in the month of January 2023. Compared to Dec 22, Retail Sales are up 2.81%. The data offers limited insight. US also released the PPI data which fell 0.10% mom against consensus estimates of a rise of 0.30% following a downward revision to the Jan number to 0.30% rise from earlier reported 0.70% rise. This is seen as a welcome moderation in the data. Overnight we saw the market deeply concerned about the contagion risk moving to European Banks. European Banking index was down 8.40% with concerns centred around Credit Suisse. Later, during the day, FINMA and SNB issued a statement expressing comfort on the Credit Suisse capital and liquidity metrics. SNB offered a $ 54 bn covered loan facility to the bank. At th...

India CPI inflation for the month of February came in at 6.44% , marginally lower than 6.52% recorded in the month of January and above my estimates of 6.00% - 6.20%.  Let's quickly crunch the data: Mom headline CPI rose 0.21% . Only F&B (w. 45.86%) recorded negative momentum in prices but the rest of the basket saw mom rises. Housing (w. 10%) was up 0.80% mom; pan, tobacco and intoxicants plus clothing and footwear plus miscellaneous (w. 37% ) was up 0.40%, while food and beverages was down a marginal 0.06% (w. 46%). While declines were recorded in most of the F&B sub components, cereals, milk, spices, prepared mails recorded a rise.  Core CPI continues to be elevated at 6.10%. RBI projects Q4 FY 23 inflation at 5.70%. The Jan and Feb outturn at 6.52% and 6.44% was higher. My own estimates for March 23 inflation are at 5.62% which if the data comes in line will take the quarterly average at 6.16% above RBI's Estimates.  Market is pricing in another 25 bps of rate...

 The U.S Employment Situation Report was released on Friday . Details of the economic release: 1. NFP 311K - above consensus estimate of 205K and following a revision to January number to 504K from 517K. E mployment gains in December and January combined were 34,000 lower than previously reported 2. Participation Rate moved higher to 62.50% from previous 62.40%  3. Unemployment Rate moved higher to 3.6% from decadal lows of 3.40%  4. Average hourly Earnings (AHE) rose 0.24% mom with the pace of monthly rise decreasing from previous 0.27% The report showed strength and the softening in momentum of rise in AHE.  However, the Employment Report coincided with the news of the closure of the Silicon Valley Bank (SVB). SVB is the 16th largest bank in the United States and the largest bank by deposits in Silicon Valley. The pace at which the whole situation unravelled in mindboggling. Closure of SVB Bank comes in quick succession to the closure of Silvergate Bank. SVB had $...

 The Jan ADP report released yesterday showed solid Job gains and elevated wage growth.Private sector employment increased by 242,000 jobs in February and annual pay was up 7.2% yoy. Job losses were seen in the Construction sector (-16K) and professional / business services (-36K) while solid gains were seen in leisure (+83K) / hospitality followed by financial services (+62K) and manufacturing (+43K). The Jan trade deficit widened to $68.3 billion as imports increased $9.6 billion over December imports and exports increased $8.5 billion over the prior month. The data shows expansion of global trade activity. The Job Openings and Labor Turnover Summary (JOLTS) showed a decrease in job openings to 10.8 million following a revised 11.234 million in December. The number shows employers are still struggling to fill vacancies. USD index continued to hold onto gains. The yield on the 2Y UST increased to a high of 5.085% while the 10Y touched a high of 3.995%. Markets continued to push th...

Do not attribute your success / failure to other people. Take responsibility for your actions and cultivate a sense of willingness to improve the quality of your actions. And that my friend shall put you on the path to success. Fed Chair Jerome Powell's semimanual monetary policy testimony to the Congress and the NFP are 2 major events this week. In prepared remarks, on day 1 of the 2 day testimony, Fed Chair said a lot of ground has been covered on monetary tightening but the full effects are yet to be felt. He said the declining trends in economic data seen in December reversed in January which could partially be on account of warmer weather. The breadth of reversal suggests inflationary pressures are running higher than expected.  PCE                     5.38% yoy (Recent peak 6.98% June 2022) Core PCE         4.70% yoy ( Recent Peak 5.42% Feb 22) He attributed the recent decline in inflation pr...

"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      ...

 Meditate!!  The February ISM Manufacturing Index came in at 47.70 (prev 47.4). The reading reflected contraction in manufacturing activity for the 4 th straight month. However, what stood out in the report was the sharp increase in the Prices Index which jumped to 51.3 from 44.5 and the new orders index rose to 47.0 (prev 42.50). The activity contracted at a slower pace amid a backdrop of rising prices which adds to fears around Fed tightening. Comments from FOMC voting member   Neel Kashkari also pushed rates higher. “We’re not yet seeing much of a sign of our interest-rate increases slowing down the services sector of the economy and that is concerning to me,” he said. “Wage growth is at a level that it actually is too high to be consistent with our” 2% inflation target. He also said that if the Fed declares "victory too soon, there will be a flood of exuberance" and it will need to do even more work that if the Fed declares "victory too soon, there will be a flood...

"Details create the big picture"  US Durable goods orders fell 4.50% to $ 272.3 bn from a downwardly revised $ 285.2 bn. 13.30% fall was reported in new orders for transportation equipment driven by sharp fall in New orders for nondefense aircraft and parts which declined a whopping 54.60%. The core durable goods order which excludes transportation increased 0.7 %. Non defense capital goods order excl aircraft orders , a proxy for business investment, rose 0.80% mom.  Pending home sales data, a  monthly measure of homes under contract but not yet closed, rose 8.10% following a revision to Dec number to 1.10%. The data did not change the Fed fund pricing. Bond yields came off highs which appears more on positioning and month end flows rather than any catalysts.  In the week ahead, there are no meaningful catalysts to drive USD price action higher barring the US PMI numbers this week. Hence this week, could see consolidation or a minor pull back across USD index and Ra...

Success is a moving target. You have to be constantly aiming for the bull's eye and adjusting your aim as you go!! Bureau of Economic Analysis released the PCE data on Friday. PCE is the preferred inflation gauge of the Federal Reserve. Fed’s 2023 median projection for PCE inflation is at 3.10% ( range 2.9% - 3.5%) while Core PCE inflation is projected at 3.5% ( range 3.20% - 3.70%). PCE price index for January increased 0.6 %. Prices for goods and services both increased 0.6 % as well. Food prices increased 0.4 % and energy prices increased 2.0 %. Excluding food and energy, the PCE price index also increased 0.6 %. The PCE price index for January increased 5.4 % yoy, with increase in goods prices of 4.7 % and services price of 5.7 %. Food prices increased 11.1 % and energy prices increased 9.6 %. Excluding food and energy, the PCE price index increased 4.7 % yoy. PCE data showed no signs of disinflation and the market toed the Fed’s line of higher for longer and accordingly pu...

"The details are not the details. They make the design" RBI MPC Meeting minutes: Dr. Ashima Goyal and Prof. Jayanth R. Varma voted for no change in policy rates and favored a change of monetary policy stance to neutral while the other 4 members voted to increase the policy rate by 25 bps and maintained stance to withdrawal of accommodation. Dr. Bhide / Dr. Ranjan / Dr. Patra and the Governor expressed concerns on the sticky core inflation and maintained durable disinflation in prices is a necessary condition to necessitate a pause in hikes.  Fed Meeting minutes: The Federal Reserves also released the minutes of the monetary policy meet on Feb 1, 2023. The committee acknowledged that while significant progress had been made towards a sufficiently restrictive policy stance and inflation pressures have moderated, inflation continues to be elevated and labor markets continue to be tight contributing to wage price pressures. The consensus was for a 25 bps rate hike as a slower p...

"STARTING STRONG IS GOOD. FINISHING STRONG IS EPIC." This is the first article I am writing this week post the higher-than-expected CPI inflation print from India and the US.  Data Release: US CPI rose 0.5% in January on a seasonally adjusted basis following an upward revision in Dec data to 0.1 % from -0.10%. Headline CPI rose 6.4 % before seasonal adjustment against market consensus of a 6.20% reading. Core CPI rose 0.40% mom, services (excluding energy services) rose 0.50% mom, shelter rose 0.70% and transportation services rose 0.90% mom. The food index increased 0.5 % mom. Interesting point to note - Egg price index rose  8.5% mom on account of Avian Flu, high cost of feed and transportation etc. In the US , a dozen eggs cost INR 400 / INR 33.33 per egg. Compare that to India where 1 egg costs Rs. 7. The energy index increased 2.0 % mom. The rent index and the owners' equivalent rent index each rose 0.7% mom while the index for lodging away from home increa...

"Optimism isn't a belief that things will get automatically get better, it is a conviction that we can make things better" Hi everyone, so this has been an extremely action packed week both on the domestic data front and global data front. For this article, we will be purely focussing on the EURUSD Trade  recommended earlier to sell at 1.0950 with a SL at 1.1000. Unfortunately, we got stopped out of the trade. What I have realised during the course of trading is to give ourselves some leeway in terms of time for the view to play out. It is also helpful to understand whether a trade is driven by technical considerations or there is a catalyst to drive a pivot in price. If a trade is driven by technical considerations then you wait for the price to consolidate to give you a clear entry and exit point. However, if the trade is driven by a catalyst, then you study the catalyst and dive in.  In this trade, we were driven by technical levels and hypothesis around fundamental fa...

If you personalize losses, you can't trade. It is important to know the probability of your wins so when you loose , take comfort in knowing that you will make money only x % of the time. Initial Jobless Claims came in for the week ending Jan 14 decreased by 15,000 to 190,000 and Continuing jobless claims for the week ending Jan 7 increased by 17,000 to 1.647 million. The employment data has been resilient.  Dec total housing starts declined 1.4% mom in December to 1.382 million units while total building permits declined 1.6% mom to 1.330 million. High mortgage rates are biting into spends on housing as can be seen in the chart below. Remember, we are seeing goods disinflation and due to the construction of the shelter component of CPI, shelter inflation will also start coming off from Q2, the services excluding shelter component could be sticky.  What is important here to understand is - there is divergence in the embedded market pricing of Fed Funds rate and Fed's proj...

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...

 “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...

"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...