Making Sense

"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...

"Success comes down to rare moments of opportunity. Be open, alert and ready to seize them." At the start of this week, I wrote in the Sunday's US Employment wrap that I'm now in mode READY to fade the richness in pricing in Fed Fund Futures and voila, CPI release was the trigger.  Yields on US2s dipped to 4.67%  (17.7 bp off highs) and US10s to 4.25% (17.60 bps off highs) and DXY fell from 105.30 levels to 104.25 levels on the CPI release. The U.S. CPI report was benign in much aspects,  coming in below consensus expectations and  printing a mom reading of 0.01% on the headline number.  Readings on Super Core Services at -0.07% mom were a reason for celebration while readings on the shelter component were a sore reminder of the stickiness of the numbers. Going into second half of the year, as adverse base effects kick in, inflation stickiness could add fuel to the "higher for longer" narrative.  Please look at the table below for a summary.  Post the ...

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...

Yesterday's CPI release had the bond bears growl. The headline and core reading were above consensus exp. of 0.30% and are mentioned in the table below. The core gds inflation provided a bit of relief but the core services component rose 0.52% mom, the much spoken about decline in shelter inflation still eludes us. Atlanta Fed's sticky Price CPI which excludes Food, Energy and Housing rose 5% yoy.  Last week's curve steepening flattened out this week with US2s10s back to -43 bps from highs of -33 bps at the start of the week.  Fed Fund pricing materially pared back rate cut bets into 2024 from 66 bps before the CPI release to 42 bps after with 22 bps now priced until the Sep policy.  JPY bears finally had a catalyst in rising bond treasury yields and broke above the 152.00 handle after consolidating for over 14 trading days. Markets are talking about 155 and 160 levels on USDJPY. The yield spread on German - US 10Y bonds worsened to -210 bps , a level last seen in Oct 20...

I am presently learning air rifle shooting and the first principle taught was "Do Nothing". You do nothing till the posture, the stance, the focus , the breath all align and then you slowly squeeze the trigger.... Even after squeezing the trigger you hold tight  and follow up your action to see the errors and then use that as a feedback to improve next time. Tomorrow's CPI data release is a bit like I don't know, could be this way or that way and look at the price, I don't know. The risk reward does not feel right and yada yada. A lot in trading is about "price" and the current levels are expensive for a break out trade in yields but neat for a bond rally. For me , the CPI release has a lot riding on it and a significant amount of bearishness is built into the price.  Overnight, the sell off in bonds continued unabated with the yield on US2s up 4 bps. US2s10s bear flattened 2.20 bps. US10s ended the session + 1.80 bps and US30s -0.60 bps. We saw strength...

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...

 Overnight we had the release of the US FOMC meeting minutes.  Members are divided on future rate rises Run up in treasury yields could substitute for a final increase Focus should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels.  Comments from Fed's Waller echoed earlier comments from Fed officials that the recent tightening in financial conditions will do some work for the Fed.  US PPI came in above consensus expectations but the market focused on the core PPI print which came in line with expectations at 0.20% mom with a downward revision to the prior month.  All eyes will be on today's CPI data where consensus is for a headline reading of 3.60% yoy and Core CPI reading of 4.10%. Keep a watch on the initial jobless claims data too which has been holding surprisingly well.  The market impact of the Israel - Hamas conflict appears to be well contained with crude now trading at USD 85.55 a barrel , down...

 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 ...

 India released the Merchandise + Services Trade data on 15th Feb 2023.  The trade data showed a welcome moderation. The merchandise trade deficit came in at $ 17.75 bn, lowest since Jan 2022 and the services surplus posted a record surplus of $ 16.48 bn. Overall trade balance recorded a net outflow of $ 1.27 bn.  It appears the worst is behind and the services sector outperformance has helped bridge the merchandise trade gap. On a FYTD basis, we are running a Merchandise + Services Trade deficit of $ 112 bn. Broad USD strength on the back of strong NFP print / CPI print and Retail Sales data (released today showed headline Retail Sales rose 3% mom following a 1.10% mom contraction in dec) is likely to weigh on the INR.  Positive surprise on trade data and stable FPI flows so far in Feb along side INR at the top of the support zone of 83.00 have me biased to short USDINR with stops above 83.20. But I'd wait for the USD to turn before establishing any meaningful short...

"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...