Making Sense

There were a couple of key events this week which emanated from Geopolitical developments and a particularly strong data from the US. The USD reversal was quite potent and as I have been expecting here on this blog,  finally came to fruition. USD Index rose 2.50% over the week and market pricing for Fed Fund Rates saw repricing with expectations now firmly for 25 bps of rate cuts into the next policy and a 84% probability of another 25 bps of rate cuts into the December Policy. There is a 85% probability of FFR at the 3.25% - 3.50% range much above the 2.75% - 3.00% range priced at the end of last week. The pricing is now in line with the Fed's Summary of Economic Projections.  The US2s10s bear flattened to close the week at 4.3 bps from 22.90 bps late Sep. The rounded bottom reversal in US2s could see the sell off extend to 4.10%. EURUSD faces immediate support in the 1.0920 - 1.0950 zone and if broken could extend to 1.0800. I see further strength in USDJPY towards 151.50 on...

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...

Nasdaq led losses closing 2.47% lower on the day and S&P 500 closed 1.43% lower on the day. Yields on US2s rose 8 bps off lows to days high of 5.13%, the moves on US10s were dramatic , rising as much as 16 bps off lows to trade a high of 4.97%. US2s10s curve steepened with highs seen at -17 bps. On Tuesday, the spread had widened to as much as -30 bps. US Equities and Bonds tanked while Crude Oil, Bitcoin and USD index gained strength. 759,000 New Homes were sold in the US far more than consensus estimates of 680,000. After the strong PMI data release, the new home sales number only supports the Fed's case for higher for longer. Mike Johnson was elected as House speaker and WSJ writes "The quick take on Wall Street seems to be that this makes the possibility of a government shutdown a little less likely". On the implied Fed Fund Pricing, Dec 2024 pricing shifted 5 bps higher to 4.68% while the pricing for peak terminal rates was unchanged at 5.43%. The Geo-political s...

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...

Recapping the last week's price action,  Risk sentiment deteriorated in the immediate aftermath of the Israel-Hamas Conflict at the start of the week but improved on Fed Speak. Higher UST yields and as a consequence tighter financial conditions were seen by Fed Members as having done the job for Federal Reserve and the suggestion that the narrative should shift from how high to how long supported the risk sentiment before the strong US CPI data and resumption in crude oil price rally dented the sentiment again. The extremely fluid geo-political situation and how the war escalates and embroils other nations will continue to weigh on the market sentiment.  The week ahead is light on data. India only releases the WPI data today while US releases Retail Sales / Industrial production / Building Permits / Jobless Claims / Home Sales data coupled with Fed Speak. Keep a close watch on the Fed Chair Jerome Powell's Speech on Thursday before the start of the blackout period ahead of the...

"Mental Resilience comes from training the mind day in and day out" Price action: After the initial sell off in risk assets into the Asia open yesterday, markets reversed overnight on Fed Speak. Fed's Jefferson echoed the comments from Fed's Mary Daly last week wherein the recent rise in long term yields has tightened financial conditions and done part of the job for Federal Reserve. The FFR saw repricing - the market is now pricing in a 13% probability of a rate hike as against 27.10% on Oct 6. The Dec 24 pricing shifted 17 bps lower with market pricing shifting from 4.72% on Friday to 4.55% as at close of yesterday. The move lower in UST yields saw USD reverse gains into the close.  With Geopolitical risks lurking in the background after the surprise attacks by Hamas on Israel, the USD reversal came as a surprise. It is too early to call how the events unfold in the next few days and weeks and does the recent conflict escalate into a more broader conflict. So far pr...