Making Sense

With my view over the last week on reversal in USD index, it was frustrating to see the moves not playing out on the Dollar Index. Geopolitical Risks were underpriced and Chinese Stimulus (both monetary and fiscal) ahead of the Golden week kept pushing asset prices higher and AUD was the clear beneficiary. Japan Election results also jolted the USDJPY due to PM Ishiba hawkish leanings. For most of the currencies and bond yields, we went no where and closed the week in the middle of the week's range. I could not complete the post yesterday so writing today.  Let's do a quick snapshot of the Economic Data releases this past week. Atlanta Fed GDP is now trending at 3.10% for Q3 and Fed Funds Pricing show an 82% probability of 200 bps of rate cuts i.e. 2.75% - 3.00% by Oct 2025. As of Friday's close, Markets are pricing in a 92% probability of 75 bps cuts by Dec 2024 but are largely seen divided b/w a 25 bps or a 50 bps cut in the next policy. An important thing to note is t...

One of my favorite poem is by Kahlil Gibran and thought I'd share a couple of lines with you all...  Do not live half a life  and do not die a half death If you accept, then express it bluntly,  Do not mask it If you refuse then be clear about it for an ambiguous refusal is but a weak acceptance Do not accept half a solution,  Do not believe half truths,  Do not dream half a dream,  Do not fantasize about half hopes To reach and not arrive, Work and not work The half is a mere moment of inability, but you are able for you are not half a being You are a whole that exists to live a life not half a life” On that note, quick weekly roundup for the US markets below: The Fed Fund Futures are pricing in 88% probability of a rate cut by September Policy.  The Atlanta FED GDPNow Estimates for Q3 growth readings are running at 2.8%. The Cleveland Fed estimates for Core CPI and Core PCE are running at 0.27% and 0.22% respectively mom.  In the last blog piece...

"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...

"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...

"Champions aren't made in the gyms. Champions are made from something deep inside them -  a desire, a dream, a vision" ~ Muhammad Ali Fed Fund Pricing for interest cuts was seen at 47 bps for 2024. Q1 GDP came in line with estimates at 1.4%, however, consumer spending was revised lower to a modest 1.50% which means consumer coming in at a lot weaker position in Q2.  The Atlanta Fed GDPNow estimates were revised lower to 2.20% IN Q2 from 3.00% at the end of prior week. DXY found resistance at the 106.13 levels and is seen lower in Asia Open today at 105.67.  Durable Goods Orders rose 0.10% mom driven by an increase in new orders for transportation equipment.  U.S. PCE Prices showed a welcome moderation with headline number flat over the month and the Core PCE numbers 0.10% higher over the month. Deflation in Durable goods at -0.79% mom and -0.15% in non durable goods alongside a less than 0.20% rise in price of Services and -2.12% mom change in price of core services ...

"If you can trust yourself when all men doubt you, B ut make allowance for their doubting too;    If you can wait and not be tired by waiting..... If you can fill the unforgiving minute,  With sixty seconds’ worth of distance run,    Yours is the Earth and everything that’s in it...." ~ Rudyard Kipling  Let's Quickly review the U.S Economic Data released over the week.  The GDPNow Model estimate for real GDP growth in Q2 was revised downwards to 3% after the release of the data this week. CBO estimates show that U.S Budget Deficit will be around $ 400 bn larger this year at $ 1.90 trn.  USTs consolidated last week's gains in a 9.50 bps range and US2s10s closed relatively unchanged for the week at - 48 bps and DXY continued to climb higher after taking support at the 103.00 level at the start of the month and S&P 500 made fresh highs at 5517. On the DXY, 106.25 is a crucial resistance zone for DXY bears and an important point of reversal. S...

"The Desire for more, the fear of missing out, the tendency to compare against others, the influence of the crowd and the dream of the sure thing - these factors are near universal. Thus they have a profound collective impact on most investors and markets. The result is mistakes and those mistakes are frequent, widespread and recurring." The FOMC Rate Decision was on expected lines but the surprising bit came out from the Summary of Economic Projections where 2024 FFR projections were revised higher to 5.10% from 4.60% and for 2025 , FFR was revised higher to 4.10% from 3.90% . The estimates of PCE were revised higher by 20 bps for 2024 and 10 bps for 2025.  At 5.10%, in light of the benign CPI Data and market pricing well in line with the Fed's revised guided path of 1 rate cut into 2024, 2024 FFR SEP was largely seen as an adjustment to the Fed's policy projection rather than new information which could be construed as hawkish .   15 of the 19 members were seen a...

"To achieve superior investment results, your insight into value has to be superior. Thus you must learn things others don't, see things differently or do a better job of analyzing them - ideally, all three." Fed Fund Futures closed the week with 28 bps of Rate Cuts priced into for 2024. We had a slew of employment data which is summarized below. ADP numbers  showed private employers added 152,000 jobs, though job gains slowed due to a significant decline in manufacturing and weaker hiring in leisure and hospitality. Pay gains for job-changers decelerated, with yoy increases dropping for the second consecutive month to 7.8%. Meanwhile, pay growth for job-stayers remained steady at 5% for the third month. These trends suggest a cooling labor market, with particular weaknesses in specific sectors and a slowdown in wage increases for job-changers. Jobless Claims data For the w/e June 1, initial claims for unemployment rose to 229,000, up by 8,000 from the previous week's...

Fed Fund Futures implied interest rate pricing closed the week at 32 bps of rate cuts priced into from 43 bps cuts seen at the start of the week. Also making the headline was Goldman Sachs changing it's Fed cut call to September. The street is now divided for the first rate cut between September and December policy meetings. I still think there is more legroom before we start thinking if the FFR pricing is rich . The Us2s10s Curve bear flattened 7.40 bps.  Governor Waller's speech "Some Thoughts on r*" is an interesting one and a recommend reading as he looks at factors affecting  r* from the lens of supply and demand and contributing factors that led to the decline of r*. He then goes on to delve into factors that could have reversed to explain if r* has moved higher in the current environment.  S&P Flash PMIs showed US Global Composite PMI at a 25 month high and Services PMI at 12 month high while the Mfg PMI showed an overall improvement in business conditions....

Liquidity conditions were very market supportive over the last week as equities rallied, Roaring Kitting was back, USD index and bonds yields declined over the week. Gold prices touched fresh all time highs, Bitcoin surged and Copper went parabolic touching all time highs. US2s10s bull flattened. Over the last week, we did not get the much hoped for USD bounce and it was a one way USD decline through the week holding the 105.75 resistance. Any retracement into the 104.80 - 105.00 levels now offers resistance.  Markets continue to price in 43 bps of rate hikes into 2024 and 65 bps of rate hikes through to March 2025.  Markets are pricing in 28 bps of rate cuts by the November policy with 19 bps of rate cuts priced into by the Sep policy. Largely, what this means is markets are pricing the chance of first rate cuts between the Sep - Nov Policy and and another 15 bps of rate cuts into the year end.  Chair Powell's leaned dovish in his comments "We did not expect this to be a...

The U.S GDP Data released overnight showed Q1 GDP grew at an annualized 1.60% qoq while Core PCE Q1 prices rose an annual 3.70%, sharply higher from consensus expectations of 3.40% and was up 2.90% from a year ago. Nick Timiraos makes an interesting point - The GDP report implies that without upward revisions to Jan (0.45%) or Feb (+0.26%), March would be at 0.48% Massive shift in interest rate pricing with 24 bps of rate cuts implied by the November Policy which is a day after the November Elections and 34 bps of rate cuts in 2024.  The initial jobless claims data showed employment numbers remain firm.  We square our USD shorts ahead of the weekend and release of the US PCE Report.

Over the week, US2s found support at the 4.75% level and US10s found support ahead of the 4.35% level.  U.S Monetary policy is in a restrictive territory and Fed projections show 75 bps of rate cuts into 2024. Stickiness of Inflation and reaching the last mile of inflation is a dominant concern for the Federal Reserve and the same has resonated in the Fed Speak. Fed's Barkin commented "I am in no hurry to cut rates" as echoes by Fed Williams and Fed Bostic.  However, the market paused repricing Fed Fund Rates over 2024 as the pricing largely converged with the Fed Projections.   USD index languished between the 103.60 and 104.25 levels. Fed Fund pricing for rate cuts into 2024 largely hovered around the 80 bps mark over the week before slipping to 92 bps post the ISM Mfg Release with 25 bps of rate cuts fully priced into the June meeting.  Yields High Low Close WoW ▲ Weekly Range US 2Y ...