Making Sense

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 median forecast for CPI Headline U.S CPI 3.10% yoy and 0.43% mom Core CPI 3.70% yoy and 0.32% mom The details of the CPI release are tabled below. Core CPI mom at 0.40% is actually unwounded at 0.358%. Fed Fund pricing shifted from 91 bps to 86 bps at the time of writing and US2Y is 4.616% (10 bps off lows) and US10Y is trading at 4.157% (7.60 bps off lows). USD index trades at 103.17. Post NFP, DXY had traded a low of 102.36. Core Services inflation rose 0.46% mom following a 0.66% mom rise the prior month. Last 12 months core services inflation has been up at an average pace of 0.43% mom and Core goods inflation rose 0.11% mom.  The data does not change expectations much but ofcourse supports the case of a cautious Fed.   We now wait for the PPI data on thursday for estimates of PCE and more importantly the Fed projections for PCE numbers and FFR.

U.S CPI rose 3.12% yoy and 0.10% mom. Core CPI declined further to 4% yoy and 0.28% mom. There has been a lot of discussion around the Shelter Component of U.S Consumer Price Inflation. The Shelter component is a category under the Services Inflation. The Shelter component contributes 32.50% to the Headline CPI. The trajectory of Shelter Inflation has an important bearing and hence it is important to understand the idiosyncrasies in calculation methodology.  The Shelter component is primary divided into 4 main parts mentioned below and the weightage mentioned on the right side. Rent of Primary Residences                    7.30% Owner's Equivalent Rent  (OER)            23.80% Lodging Away from Home                     1% Tenants and Household Insurance         ...

Markets flipped overnight on the hot US CPI report with DXY taking support at the 105.50 level. I mentioned about the risk reward in favor of USD longs in yesterday's post ahead of the DXY support and to play the divergence between the Fed's guided path and market pricing.  US CPI for the month of Sep rose 0.40% mom and 3.70% yoy. The largest contributor to the monthly increase  was the shelter index. Another major component was the gasoline index. Core CPI rose 0.30% mom and 4.10% yoy. Core services excluding rent rose 0.60% mom. The Initial jobless claims came in at 209K and continuing jobless claims rose 30K to 1702K , highest in 6 weeks. Fed Fund Futures implied market pricing for Dec 24 shifted higher to 4.70% from 4.54% we saw yesterday. Yields on USTs rose sharply higher with US2s marking a high of 5.09% and US10s marking a high of 4.73%. The move in US yields was also driven by a poor $ 20 bn 30Y auction  This morning China CPI came in at 0.20% mom below cons...