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...

“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...

"Money may not be everyone's goal for it's own sake, but it's everyone's unit of account" The Fed announced the monetary policy decision overnight and the kept the interest rates unchanged at 5.25% - 5.50%. The key takeaways from the decision, SEP and Post Policy Conference are: SEP Projections: All participants saw the peak Fed Fund Rate at the current levels of 5.25% - 5.50%. For 2023, Real GDP was revised 50 bps higher and Inflation projections were lowered by 50 bps. As per Fed median projections, median estimates are for 75 bps of rate cuts in 2024 and 100 bps of rate cuts in 2025. While cumulative rate cuts over the 2 years stay at 175 bps over the two statements (sep and dec), 25 bps of rate cut has been brought forward in 2024.  In 2024, Fed sees positive but below trend growth ( Fed sees 2024 as the year of below trend growth at 1.40%) , U/R holding steady, Inflation closer to the 2% handle.  The message from the post policy conference was  Economic A...

Risk sentiment is off to a perky start with Equities in the green and Bond yields lower after the FOMC Rate decision.  USD Index closed near the opening levels of 106.67 after peaking at 107.11. We have a Gravestone Doji on the USD Index charts.  On US Yields, US10s broke below the 4.80% - 5.00% consolidation and treasuries closed at the best levels on the day. US2s closed near the best levels on the day at 4.94% (-14 bps) with resistance seen at 4.92%. US2s10s spread closed at -23 bps. FOMC kept the interest rate unchanged at 5.25%-5.50% and the stance restrictive while noting the resilience of the US economy (Q3 GDP 4.9% yoy), rebalancing of the labor market(+266K 3m average), encouraging inflation prints (PCE 3.40% , Core PCE 3.70%) and tightening of financial conditions. The outlook is beset with uncertainties as the lagged effects of monetary policy work through the system and the recent tightening in financial conditions weighs on economic activity. The Fed will be in a ...

 The FOMC increased the Fed funds rate by 25 bps to 5.00 - 5.25%. The March FOMC statement  had mentioned: "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." The May FOMC statement has been revised to say "In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time"..... Which essentially points to a "pause". The Fed fund pricing is pretty much stable with Dec 13, 2023 FFR being priced at 4.39%. USD index is a tad bit lower and 2Y USTs are trading at 3.92% and 10Y at 3.40%. The meltdown in commodities continues. Brent crude prices down further 3.65% to 72.55 USD per barrel. The sharp drop in crude oil prices is a big tailwind for INR. 81.60 continues to be a very important level for the pair. Let's watch tomorrow's opening. Looks lik...

 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...

 While we wait for the Fed Rate decision, let's quickly look at the prior economic projections on Dec 15 2022 . The committee will be announcing the interest rate decision today and also release the Statement of economic projections. Between the Policy on Feb 1, 2023 to now, the financial landscape has materially changed following the collapse of 3 US banks and taker over of a Swiss Bank which complicates the task at hand of managing elevated and sticky inflation on the one side and banking crisis on the other hand. Which way will Fed lean will be clear in 5 mins. This blog is with market consensus and expects a 25 bps hike. Markets are pricing in a 83.40% probability for a 25 bps hike in today's policy. US 2Y and US 10Y yields are trading 4.13% and 3.53% respectively. Euro has continued to appreciate and currently trades at 1.0795 and USDJPY at 132.54. Table 1 Economic projections

After the tumultuous Asian Session yesterday, risk sentiment stabilized overnight as markets took comfort  in the  spate of liquidity measures announced by CBs media reports of  U.S. Treasury Department staff studying if federal regulators have enough emergency authority to insure deposits above the current $250,000 cap on accounts without the consent of Congress  and most recently Tsy Secretary Janet Yellen comments " US aggregate deposit outflows from Regional Banks have stabilised. Tsy, Fed, FDIC actiions reduced risk of further bank failures that would have imposed losses on Deposit insurance fund. Similar actions to protect Depositors could be warranted if smaller institutions suffer deposit runs that pose risk of contagion" Sharp moves were seen across Rates. After the sharp dip in rates on write off of AT1 bonds by Credit Suisse, USD bonds pulled back.  For Domestic markets, RBI injected liquidity through the LAF window to the tune of 79K crore on 20 Mar ...

 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...

"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...

"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...

Minutes of the  FOMC Rate Decision  were released last night. The minutes did not offer anything surprising.  Participants generally observed that maintaining a restrictive policy stance for a sustained period until inflation is clearly on a path toward 2 percent is appropriate from a risk-management perspective. In view of the persistent and unacceptably high level of inflation, several participants commented that historical experience cautioned against prematurely loosening monetary policy. Participants generally indicated that upside risks to the inflation outlook remained a key factor shaping the outlook for policy. No participants anticipated that it would be appropriate to begin reducing the federal funds rate target in 2023. Market pricing for Fed Funds rate is dovish than the statement of economic projections which expects Fed funds rate in 2023 at 5.10%. US Yields closed as 2Y at 4.355% and 10Y at 3.686% with 2x10 spread at 67 bps US Mfg PMI dipped for the s...

 Hi, good morning !! "It is by logic that we prove. It is by intuition that we discover" - Henri Poincare' We had the FOMC rate decision last night where the FOMC raised benchmark interest rates by 50 bps to 4.25% - 4.50%. The Statement of Economic projections is what caught my attention. Real GDP growth for 2023 has been revised lower by a full 70 bps to 0.50%, core PCE inflation has been revised higher by 40 bps to 3.5%, headline PCE has been revised higher by 30 bps to 2.1% and unemployment rate has been revised higher by 20 bps to 4.6%. So between now and 2023, U/R will increase by 90 bps. The projected path of Fed fund rates is for a terminal rate to reach 5.10% in 2023 (up 50 bps) w/o any interest rate cuts and then 100 bps of rate cut in 2024 and 2025 to take the FFTR to 3.10%. The Fed Chair in his press conference also stated “There’s an expectation really that the services inflation will not move down so quickly so that we’ll have to stay at it”. “So we may have ...