Making Sense

I have two basic rules about winning in trading as well as in life:  1. If you don't bet, you can't win. 2. If you lose all your chips, you can't bet.   ~ Larry Hite Over the last 3 weeks, after the Aug 5 lows, yields on US2s have consolidated in the 3.90% - 4.10% price range and US10s have progressively made lower lows to close the week at 3.92% and 3.80% respectively. US2s10s bull steepened to close the week at -11.90 bps. USD index closed the week at 100.68, 5% off highs of 106.13 June highs and within close proximity to the established range of 100.50 - 106.50 since last year.  There is a 76% probability of a 25 bps rate cut in the Sep Policy. The market is broadly equally divided between a 25 bps and a 50 bps in the November Policy and holds a 87% probability of FFR in the 4.25% - 4.50% range by end of 2024. By next year September Policy, the market assigns a 90% probability of FFR at 3.25% - 3.50%, i.e. 200 bps of cuts in next 1 year.  The Atlanta Fed GDP Now ...

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...

"You don't have to be great to get started, but you have to get started to be great" -  Les Brown The Employment data and the soft ISM print lead to strong bond buying interest with yields on US2s down 14.80 bps and on US10s down 11.80 bps bps over the week. US2s10s steepened 3 bps to close the week at -32.60 bps from -35.60 bps at end of last week. The Atlanta FED GDPNow estimates were revised lower to 1.50%.  We  did not get any post news drift after the initial  sell off in bonds post the Presidential debate barring a move on Monday to 4.795% which was largely faded. Yields on US2s held the 4.76% resistance through the week before dropping sharply. The next support comes in at 4.50% - break below which opens the room for a move likely towards 3.50%. The markets are now pricing in 51 bps of rate cuts into 2024 with 72% probability of the first 25bps rate cut by September 2024.  Fed Chair Powell in his speech mentioned that Inflation is now showing signs of re...

WSJ carried an article "Powell Dials Back Expectations on rate cuts" and the current Fed Fund Pricing implies 41 bps of rate cuts into 2024 with 23 bps of rate cuts priced into the Sep 2024 Policy as against the Fed SEP of 75 bps of rate cuts.  Chair Powell remarked:  "The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence" Fed would leave rates at their current level “as long as needed” We think policy is well positioned to handle the risks that we face”. “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.” USTs continued to sell off on a 6 bps rise in Real Rates. The Housing data release showed weakness. The Industrial Production data , however, rose 0.40% mom. USD Index continued to make cycle highs at 106.52 and I'm looking out for signs of an intermediate corr...

Overnight USD index plummeted and closed at the lows of the day at 104.23 on a soft Services ISM Print. Likewise , US yields surged on strong ADP numbers (actual 184K , prev 140K) but closed a tad bit softer compared to the previous day. Chair Powell's Remarks were in line with the narrative from the earlier post policy conference to which the markets reacted positively. Fed Fund Futures are pricing in 71 bps of rate cuts into 2024 from yesterday's 69 bps. US2s10s bear steepened 1.30 bps. Gold has not seen a meaningful pull back and continues to surge ahead.  Key highlights of the ISM print Headline PMI registered 51.4% in March, indicating expansion in the services sector for the 15th consecutive month. In February, the PMI was 52.6 percent. Employment Challenges: The Employment Index contracted to 48.5% in March, marking the third contraction in four months. In February, the index was at 48%. Supply Chain Concerns: The Supplier Deliveries Index registered 45.4% in March, in...

  We had the release of the U.S PCE Report which broadly came in line with consensus expectations. Snapshot ▲ YoY ▲ MoM ▲ 3M Change ▲ 6m Change Headline PCE 2.45% 0.33% 3.35% 2.50% Core PCE 2.78% 0.26% 3.47% 2.87% Durable Goods -2.02% 0.19% -0.26% -1.76% Non Durable Goods 0.76% 0.66% 0.66% -0.82% Services 3.81% 0.26% 4.84% 4.33% Energy Goods & Services -2.30% 2.30% 2.26% -4.24% Headline CPI 3.17% 0.44% 3.93% 3.18% Core CPI 3.76% 0.36% 4.12% 3.82%   PCE Price Index for Feb rose 0.33% mom and Core PCE Prices rose 0.26% mom following a 0....

S&P 500, NIFTY, SENSEX, Gold made fresh all time highs while Bitcoin recovered Tuesday's drop to 59313 to close at 66941.  U.S. Market Wrap US2s10s bull steepened / Fed Funds are now pricing in 1 full 25 bps rate cut by June 2024 / USD index declined further / Key Employment figures due today Michelle Bowman (voting member)   speech yesterday’s acknowledged continued progress in inflation, the challenge in achieving last mile of inflation,  labor market coming into better balance, strength in consumer spending and recent data shows rebound in jobs market. Her base case is further decline in inflation but there are upside risks to inflation that emanate from Geopolitical developments , loosening of financial conditions and strong labor market could lead to persistently high core services inflation. Uncertainty in economic outlook warrants a data dependent cautious approach and it will be appropriate to reduce rates when there is more confidence that inflation...

"Everything that was good for the markets yesterday is no good for it today" Yields on US Treasuries moved sharply lower and the US2s10s bull steepened by 14 bps. The moves were driven by soft PCE readings with headline number at 0.00% mom and Core PCE prices rose 0.20% mom, soft spending and income growth, upward revision to Q3 GDP to 5.20% and an Initial Jobless Claims data which showed job market holding relatively well. Dovish Speech from Chair Powell at the end of the week pushed the momentum into the close. The economic release supported a soft landing scenario where in unemployment rate does not go drastically up and growth does not go in negative. The data along side a softening inflation print from EZ 2.40% yoy Nov, Germany 2.30% yoy and lower crude oil prices saw a marked downward shift in Fed Fund pricing. The market is now pricing in 122 bps of cuts in 2024 which is the lowest in the last 3 months. Far out into the last 1 year, events around SVB Collapse, Stress i...