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 ...

“…inexhaustible perseverance and patience… knows no defeat.”  RBI announced the MPC decision today. Key Highlights: Repo Rate stands unchanged at 6.50% (unanimous decision) SDF Rate 6.25% and MSF at 6.75% Stance continues to be "withdrawal of accommodation" (Vote 5 to 1) Inflation projected moved 10 bps lower for full FY 24 to 5.2% from 5.30% on crude oil price assumption of $ 85 per barrel ( last policy $ 95) and a normal monsoon.  Inflation Outlook - The risk to inflation trajectory are evenly balanced with upside risk emanating from adverse climatic conditions, higher and likely to stay elevated milk prices into the summer, rising uncertainty in Intl Financial markets and imported cost pressures GDP is projected to grow marginally higher at 6.50% with 10 bps upward revision in both Q3 and Q4 FY 24.  GDP Outlook - The risks to domestic growth are evenly balanced. High Rabi production, steady growth in services sector, GoI's focus on capital expenditure, higher capacity ...

  Data released on  reserves held by depository institutions that were borrowed from the Federal Reserve through the Discount Window (DW), Paycheck Protection Program (PPP) Liquidity Facility (PPPLF), Bank Term Funding Program (BTFP) announced on Mar 12 and other lending facilities show a sharp surge in use of Federal Reserve Facilities. Refer to earlier article. In the press conference, Fed Chair Jerome had explained the Credit Extensions as Fed is lending to the bridge bank and it’s a loan that’s 100 percent guaranteed by the FDIC so there’s no risk in it for us which I had highlighted in the earlier note too. There is a + USD 42 bn increment in the BTFP and Other Credit extensions has risen by USD 37 Bn. Also the foreign repo facility saw an uptake of USD 60 bn.

 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 ...

Data released on  reserves held by depository institutions that were borrowed from the Federal Reserve through the Discount Window (DW), Paycheck Protection Program (PPP) Liquidity Facility (PPPLF), Bank Term Funding Program (BTFP) announced on Mar 12 and other lending facilities show a sharp surge in use of Federal Reserve Facilities. To put things in perspective, the Primary credit discount window as on 8th March was availed to the extent of USD 4.6 bn which surged to USD 153 bn post the SVB Crisis. If you look at the chart number 1 below, on the left hand side of the chart , you would observe the peak usage before the collapse of SVB Bank to the tune of USD 111 bn as on Oct 29, 2008.  The PPPLF is a covid era measure with nothing home to write about. The BTFP facility which became operational on 13th March 2023 saw usage to the tune of USD 12 bn  (Chart 2) . Other credit extensions rose from zero as on 08th March 2023 to USD 143 bn in the aftermath of the crisis  ...

  "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...

 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...

 "The difference between try and triumph is just a little umph!" Q3FY23 Real GDP grew 4.40% yoy lower than consensus estimates of 4.60% following an upward revision of 80 bps to FY 21 to -5.80% (previous est -6.60%) and 40 bps to FY 22 to 9.10% (previous est 8.70%). India's GDP during 2022-23 is estimated to grow at 7.0 %. RBI had projected the real GDP growth for 2022-23 at 6.8 %, with the third quarter and fourth quarter growth at 4.4 % and 4.2 %, respectively. S&P Global Manufacturing PMI expanded for the 20 th straight month with the February reading coming in at 55.3. Input cost inflation accelerated to a four-month high but there was a softer upturn in selling charges. Recent data shows waning momentum after the Dec peak of 57.20. The Conference Board Consumer Confidence Index decreased in February for the second consecutive month to 102.9 down from 106.0 in January. The Present Situation Index—based on consumers’ assessment of current business and labor ...

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...

"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...

RBI will announce the monetary policy decision today where the consensus is for a last 25 bps rate hike in the current cycle to a terminal rate of 6.50%.  While there is a loss of growth momentum but the economic activity is in a position of strength. The major headwind is from a global slowdown as a result of sharp interest rate hikes. Headline inflation is to decelerate in the quarters ahead but the stickiness of core inflation is a concern and RBI rhetoric during the last policy focussed on putting the inflation beast down.  I am leaning with the consensus expectations of a 25 bps rate hike. Regarding the monetary policy stance, I think it would continue with "withdrawal of accommodation" Let's begin by reviewing some of the important data points: 1. Manufacturing PMI reading came in at 55.40 clearly showing a loss of growth momentum though still in expansion mode. A key area of weakness in the report was "Exports" which increased marginally at best and moder...

 A slew of U.S. economic data were released today.  Pending Home Sales rose 2.50% mom against prior revised contraction of 2.60% (prior -4%). Pending home sales sank 33.8% yoy. However, the current surprise uptick in pending homes sales suggests a bottom could be in the offing. The University of Michigan Sentiment rose to 64.90 from prior 64.60 Personal Consumption Expenditure fell 0.20% from prior revised number of 0.10% contraction Core PCE Price Index rose 0.30% mom (4.40% yoy) vs prior 0.20% (4.70%) Market pricing of interest rates continues to be stable. 2Y US Treasuries trade at 4.21% while 10Y trades at 3.52% but the 2Y and 5Y USD SOFR swaps are trading right at 4.22% and 3.41% respectively. The DXY Index is down 11.50% since Sep end and has taken support at 101.50 for the last 8 trading sessions. The index looks ripe for a corrective bounce but in absence of a catalyst, we like to stay on the sidelines or invest about 20% of the capital just to dip our hands.

""Objective analysis should be made of the reaction to the event rather than the formation of the Opinion" US Q4 GDP grew 2.90% vs consensus expectations of a 2.60% growth and Q3 growth at 3.20%. The US Markets rallied on the economic news with S&P 500 closing the session at 4060.  GDP = C + I + G + NX Though the headline print is strong, the internals paint a mixed picture.  Consumer spending +2.1% vs +2.3% prior Net trade added 0.56% to GDP vs adding 2.86% in Q3 Inventories added 1.46% vs a cut of 1.19% in Q3 Govt added 0.64% vs +0.65% in Q3 Within residential fixed investment, the leading contributors to the decrease were new single-family construction as well as brokers' commissions.  Hopes of a soft landing increased as the headline number is strong but the activity is slowing and the growth in inventories in the context of the current global macro environment is not construed as a positive. Instead of a hard landing, the market narrative has been increasing...

 In my earlier  post , I had promised to cover more on forwards. In the earlier post on Jan 23, 2023, I had written  "A quick look at the pattern of outstanding RBI forward book shows that in the last 2 years, RBI is seen paying forwards in the last quarter of the FY. In 2021, RBI's forward book swelled from o/s longs of $ 47.38 bn in Jan 2021 to $ 72.75 bn in March 2021. In 2022, a similar pattern was observed where the book swelled from $ 50bn in Jan to $ 66 bn in March 2022." That prompted the question around the cause of such paying activity. A market veteran guided me to look at RBIs behavior from a balance sheet and capital management perspective and it now makes sense. So what happens when RBI intervenes in spot market: When RBI buys foreign exchange, the Net Foreign Assets rise on the RBI's Balance Sheet.  In lieu of FX purchases, RBI releases INR liquidity in the banking system which the banks deposit as reserves. So the size of the RBIs Balance sheet increa...

EURUSD is currently trading at 1.0880 steadily climbing for 83 trading days off lows of 0.9534 in Sep 2022 shortly after the peak in natural gas prices and a peak in trade deficit . A steady run of 14.60%.  Look at how Euro Area trade deficit worsened in the aftermath of the Russia - Ukraine war. Do we see an opportunity to sell into the rally yet?  Let's look at two aspects here -  1. What are the interest rates telling you?                Key ECB Rates                Deposit facility     2.00 %                Main refinancing operations 2.50 %                Marginal lending facility   2.75 % Market implied interest rates are pricing in a peak terminal rate of 3.5%. Next 5 policy meeting dates are 02 Feb 23 / 16 Mar 23 / 04 May 23 / 15 Jun 23 and 27 Jul 23 where in t...