Making Sense

This morning, China announced a 25 bps cut to the 5Y LPR while keeping the 1Y LPR unchanged and  RBA released the minutes of the monetary policy meeting on 5 – 6 Feb 2024. China - The consensus expectations were for a 10 bps cuts in the 5Y LPR and 5 bps cut in the 1Y LPR. The LPR cut in the longer tenor is indicative of China taking more constructive measures to revive the property market. On the RBA minutes -  Encouraging progress towards inflation driven by goods inflation and lower energy and food prices while services inflation continues to be sticky. Due to disruptions in Red Sea, there has been an increase in shipping costs which are seen relatively subdued compared to the post pandemic. Labor market is coming into better balance which is helping ease services ex housing inflation. GDP growth in Australia’s major trading partners was expected to ease in 2024. Domestically, inflation in Australia has moderated, but remains above target, with consumption growth subdued. L...

"Failure of Imagination" is the inability to understand in advance the full range of outcomes. Overnight, USD index weakened and USTs were unchanged. The implied Fed Fund pricing shows 20 bps of Fed Fund Rate cut priced into the March Policy and a cumulative 143 bps of Rate cuts priced until the Dec 2024 policy. Post the FOMC Rate decision, Markets had priced in 23 bps of rate cuts by March Policy and 148 bps of rate cuts by Dec Policy. We had comments from 2 Fed Speakers both of whom are FOMC Voters into 2024. Raphael Bostic reiterated his view of 2 rate cuts into 2024 starting sometime in Q3 and  stated that there is no urgency to back away from restrictive policy stance. Thomas Barkin stated that inflation continues to move in the right direction and if inflation trajectory evolves on expected lines, the Fed would act appropriately. U.S released housing data where Housing Starts rose 14.80% mom while Building permits at 1.46 mn were below consensus of 1.465 mn. On the dome...

 Risk means more things can happen than will happen.                                               ~ Elroy Dimson After the sharp gains yesterday, markets consolidated overnight. I am a better seller of USD on rallies in a data light week. US2s +10 bps, 4.94% US10s + 8 bps, 4.65% US2s10s -30 bps (-3 bps) DXY 105.26 +0.20%  FOMC Voter Lisa Cook said the Fed is determined to reach 2% inflation target; hopes that current policy settings are restrictive enough to return inflation to target. While Kashkari commented "we need to let the data keep coming to us to see if we really have got the inflation genie back in the bottle". The SLOOS survey showed a net tightening of  standards on loans for businesses and commercial real estate coupled with falling demand. Standards on loans to households, including credit card and auto loans, also tigh...

Form a main idea and anticipate what may change to reverse the idea The main idea here is for the current trend in USD index to continue. As China is out for national  day Golden week, expect USDCNH to be range bound. Moves in AUDUSD are likely to be the result of the broad USD move or large surprises in Services and Composite PMI data and AUD trade data.  RBA Rate decision - Michelle Bullock's first policy statement was largely unchanged from the Sep meeting. RBA kept the interest rate unchanged at 4.10% as uncertainties regarding the lag effects of monetary policy and uncertain economic outlook continue to weigh on decision making. Inflation continues to be elevated with price pressures on goods inflation easing while prices of some services and oil continuing to rise. RBA expects inflation to decline to within the 2-3% range in late 2025 and U/R to gradually rise to 4.50% late next year.  AUDUSD broke the recent 46 day, 32 trading day 0.6360 - 0.6500 consolidation rang...