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...

“There’s a big difference between probability and outcome. Probable things fail to happen—and improbable things happen—all the time.” That’s one of the most important things you can know about investment risk.” ~ Howard Marks With Fed Chair's Front and Center focus on evolving outlook of the US employment situation , this week carried extra significance and the Employment data catalyzed the move in Yields. Yields on US2s fell 35 bps (High - Low Range) and on US10s 28 bps (High - Low Range) over the week . On US2s Yields, we closed right at 3.65% and on US10s at 3.71% which is in close proximity to the braking point we mentioned earlier in the backdrop of the larger H&S Formation. We did not get the upticks towards the 4.10% handle we were hoping for. Another Trade I had thought about and did not write was the break below the 3.90% - 4.10% consolidation range but that's because consolidation break outs many times chop you out so better to trade at the top of the consolidatio...

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...

"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...

The Fed Fund Pricing for cumulative rate cuts into 2024 shifted from last week's high of -34 bps to -46 bps and US2s10s bull steepened 2.50 bps over the week. US10Y yields were down 18 bps over the week with 10Y inflation indexed bonds driving gains of 12 bps and the 10Y break even inflation rate driving gains of 6 bps over the week. DXY found resistance at the 106.50 levels and came tumbling down to end the week at 105.08. JPY rallied on BoJ intervention while crude oil prices declined sharply to a 7 week low on an unexpected rise in U.S Crude Inventories. ___________________________________________________________ This week saw significant gyrations in risk assets. The post looks at data in 2 bits - Employment Data and the PMI Data. The data began the week with the Employment Cost Index rising 1.2% QoQ followed by the ADP Employment Change which showed private payrolls increase by 192K and 3m average at 192K. The Jobless claims data had no surprises with claims at very low lev...

USDJPY / EURUSD / AUDUSD broadly performed in line with expectations as highlighted in the view earlier  with strong gains in JPY and w e hit our  SL on the GBPUSD  trade.  USDINR is seeing a rounded top technical formation and we may be breaking out lower. Today's close will be important and then the next immediate support is seen as 82.66.  Fed Chair Powell's testimony offered nothing new - Fed believes that they are peak of the tightening cycle.  T he statement reflected a cautious approach to monetary policy, with a recognition of the uncertainty surrounding the economic outlook and a focus on achieving the central bank's inflation target while supporting economic growth and employment and the delicate balance that policymakers must strike. The statement acknowledged that if the economy continues to develop as expected, there may be a need to start easing the current policy stance at some point during the year. The Central Bank would follow a data driv...

Overnight, US2s10s saw 6 bps of flattening as US Consumer Confidence and JOLTS data surprised on the upside. The Consumer Confidence increased to levels not seen since end of 2021 and the JOLTS Job openings data showed openings at 9.026 mn with vacancy rate at 5.30%. All eyes today will be on the FOMC Rate Decision and Powell's press conference.  Yields High Low Close DoD ▲ US 2Y          4.39          4.30          4.34                 1.70 US10Y          4.10          4.03          4.03      ...