Making Sense

"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...

Snapshot Overnight Long end of the curve rose ~ 3.50 bps on 30Y. Comments from Fed Members following Friday's comments from President Williams tried to push back on the market pricing of Interest Rate Cuts. Chicago Fed President Goolsbee told CNBC he was a bit confused by the market's reaction to the latest FOMC meeting/comments. Fed's Mester said markets are a "little bit ahead" of the Fed on rate cuts, says the next phase is not when to reduce rates, even though that's where markets are at, it is about how long policy should remain restrictive (source FT). San Francisco Fed President Daly (FOMC voter), however, said she thinks it's appropriate for the Fed to begin looking ahead to lowering rates in 2024,because of how inflation has improved this year, mindful not to over tighten (WSJ). The Market is pricing in 140 bps of rate cuts by Dec 2024.  DXY consolidated overnight. On the EU side, IFO Expectations, Current Assessment and Business Climate for Germa...

In this Central Bank Heavy week, Fed was the first to blink. The other Central Banks rate decision were hawkish despite growth faltering and that supported their currencies against the USD.  U.S Retail Sales rose 0.30% mom ag consensus estimates of -0.10% and the prior month reading was revised lower by 10 bps to -0.20%. Meanwhile, Intitial Jobless Claims (IJC) for the w/e Dec 9 fell to 202K and CJC for the w/e 02 Dec came in lower at 1.876 mn. The market was oblivious to the strong Retail Sales print as Bonds continued their rally. US2s dipped to as low as 4.28% before closing the day at 4.39%. 4.35% is resistance zone and we have a one day reversal candle. We will wait for price action to develop here to see if the level holds. The long end of the UST curve outperformed as US10s closed at an yield of 3.92% (-10 bps) and US30s closed the day at an yield of 4.04% (-14 bps). US2s10s bull flattened 5.40 bps to a closing spread of -46.70 bps.  The Dec 24 FFR imply 148 bps of rate...

"Money may not be everyone's goal for it's own sake, but it's everyone's unit of account" The Fed announced the monetary policy decision overnight and the kept the interest rates unchanged at 5.25% - 5.50%. The key takeaways from the decision, SEP and Post Policy Conference are: SEP Projections: All participants saw the peak Fed Fund Rate at the current levels of 5.25% - 5.50%. For 2023, Real GDP was revised 50 bps higher and Inflation projections were lowered by 50 bps. As per Fed median projections, median estimates are for 75 bps of rate cuts in 2024 and 100 bps of rate cuts in 2025. While cumulative rate cuts over the 2 years stay at 175 bps over the two statements (sep and dec), 25 bps of rate cut has been brought forward in 2024.  In 2024, Fed sees positive but below trend growth ( Fed sees 2024 as the year of below trend growth at 1.40%) , U/R holding steady, Inflation closer to the 2% handle.  The message from the post policy conference was  Economic A...

Data today out of U.S showed Labor Productivity* rose for Q3 beating consensus estimates by 30 bps and increasing sharply from Q2 reading of 4.7%. Q3 Unit Labor costs were down 1.20%, beating consensus estimates of -0.90% and prior month reading of -0.80%. The ADP employment numbers showed private payrolls added 103,000 jobs in November, -27K from consensus est and below prior reading of 113K. Acc to the press release, the post pandemic boost that saw strong job creation in Restaurants and Hotels, is behind us and the return to trend in Leisure and Hospitality suggests the economy as a whole will see more moderate hiring and wage growth in 2024. Today's data comes after the surprisingly lower JOLTS data yesterday and elevated continuing claims data. The data shows better demand and supply balance occurring in the labor market coupled with labor productivity gains bodes well for a soft landing narrative. US2s are trading at 4.585% from session highs of 4.6250% and US10s keep pushing...

"Everything that was good for the markets yesterday is no good for it today" Yields on US Treasuries moved sharply lower and the US2s10s bull steepened by 14 bps. The moves were driven by soft PCE readings with headline number at 0.00% mom and Core PCE prices rose 0.20% mom, soft spending and income growth, upward revision to Q3 GDP to 5.20% and an Initial Jobless Claims data which showed job market holding relatively well. Dovish Speech from Chair Powell at the end of the week pushed the momentum into the close. The economic release supported a soft landing scenario where in unemployment rate does not go drastically up and growth does not go in negative. The data along side a softening inflation print from EZ 2.40% yoy Nov, Germany 2.30% yoy and lower crude oil prices saw a marked downward shift in Fed Fund pricing. The market is now pricing in 122 bps of cuts in 2024 which is the lowest in the last 3 months. Far out into the last 1 year, events around SVB Collapse, Stress i...

"I think a life properly lived is just learn, learn, learn all the time" US Treasury Curve bull steepened overnight on dovish comments from an otherwise hawkish FOMC member Christopher J. Waller, DXY plummeted and Gold prices after being capped at $ 2000 since October finally broke out higher to trade a high of $ 2043. In his speech titled "something appears to be giving, and it's the pace of the economy", Mr. Waller commented that economic growth has moderated and that is more in keeping with progress on lowering inflation. Fed Reserve Board Member Waller said " I am increasingly confident that policy is currently well positioned to slow the economy and get inflation back to 2 percent. That said, there is still significant uncertainty about the pace of future activity, and so I cannot say for sure whether the FOMC has done enough to achieve price stability. But the recent loosening of financial conditions is a reminder that many factors can affect these co...

Too much to catch up on after the long hiatus.. A lot of travel and a lot of celebration as I attended a Close Relatives wedding and celebrated my 40th Birthday. My personal life over the last week mirrored the Risk on moves in Financial Markets. Loved every bit of it and felt overwhelmed by all the family love. Coming back to markets now.... "It's only when the tide goes out that you find out who's been swimming naked" ~ Warren Buffett U.S Economic data for Oct pointed to a soft landing narrative. U.S CPI came in at 0.0%, prior 0.4%; Core CPI 0.2%, Prior 0.3%; PPI -0.5% , prior revised lower to 0.4%; Core  PPI 0.0%, prior was revised to 0.2%. Retail Sales came in at -0.1% , prior was revised higher to 0.9% from 0.7%; ex-auto came in 0.1% , prior was revised to 0.8% from 0.6%. Initial Jobless Claims came in at 231K and Weekly Continuing Claims came in at 1.865 mln.   Recap of moves in UST over the last week below:  USTs High Low      Close WoW...

The discipline that is most important is not accounting or economics, but psychology. USD 24 bn of US 30Y bond auction saw weak demand with Bid-to-Cover Ratio of 2.24 which reflects poor demand in comparison to the 2.39 ratio seen over the prior 12 auctions. Along side a poor auction, comments from Fed Chair Powell accelerated the sell off in the bonds. The Key takeaway from the speech was that FOMC is not yet confident that the stance of monetary policy is sufficiently restrictive as strong growth could undermine progress on inflation and restoring balance to the labor market.  US2s +8 bps, 5.02% , High 5.04% - Low 4.92% (Swing High 5.26%) US10s +13.50 bps, 4.63%%, High 4.65% - Low 4.47% (Swing High 5.02%) US30s +15.00 bps, 4.768%, High 4.83% - Low 4.61% (Swing High 5.18%) US2s10s -39 bps (+ 6 bps) DXY 105.90 (+0.35%)  On the India macro front, On Nov 9, liquidity deficit widened to INR 46K crore and Overnight WACR was anchored around the upper corridor band at 6.79% The OIS ...

"No matter how good fundamentals may be, humans exercising their greed and propensity to err have the ability to screw things up"    We clearly saw some consolidation in the markets yesterday.  US2s - 2 bps, 4.92% , High 4.957% - Low 4.89% US10s - 8 bps, 4.57%, High 4.66% - Low 4.57% US2s10s -35 bps (-5 bps) DXY 105.50 +0.23%  Fed Fund pricing Peak Terminal Pricing 5.37% Jun 24 Pricing 5.045% ~ market is pricing in one full 25 bps rate cut by mid next year Dec 24 Pricing 4.457% Brent Crude Oil prices dropped below $81.60 support to trade a low of $ 81.27 as US crude oil inventories saw a major build up and less than encouraging trade data from China failed to support demand outlook . Crude oil stocks rose by a 11.9 mn barrels w/e Nov 3 following a 1.347 mn barrel rise in the prior week (API). API data shows net build up in crude oil inventories of 10.568 mn barrels so far this year.  Of Note, German Industrial Production contracted 1.40% mom , est -0.10% Da...

 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...

 It is not supposed to be easy. Anyone who finds it easy is stupid.         ~ Charlie Munger The week was all about a very heavy Economic calendar and the USD sell off. What a phenomenal repricing in Fed Fund Rates. The Peak Terminal Rate pricing shifted from highs of 5.40% to lows of 5.34%, 6 bps move, to close the week at 5.34%. Over the last month, peak pricing was seen at 5.48%. The June policy was pricing in 8 bps of rate cuts (5.245%) which moved to 31 bps of rate cut by end of the week to 5.02% and closed the week at 5.04%. For the June 2024 meeting, since Oct, market pricing has moved from peak 5.315% to 5.02% The Dec 2024 Implied FFR pricing shifted from highs of 4.745% to lows of 4.385%, 36 bps move, to close the week at 4.42%.  The risk reward favored a move lower in the implied pricing as has been highlighted in previous posts. The meat of the move lay in the timing of rate cuts and far end pricing. The long end of the US Treasury Curv...

"Everything should be made as simple as possible but not simpler" - Albert Einstein The HKMA, BoE and Norges Bank kept the interest rate unchanged yesterday following the Fed Reserve. Global Equities surged higher. S&P 500 closed at 4318 (+1.89%). Of the more than 375 S&P 500 companies that have reported earnings to date, about 80% turned in results that beat analyst expectations, according to LSEG. That compares with 67% in a typical quarter.(source WSJ). Long end of the US curve outperformed with yield on US10s dipping to as low as 4.63% , 31 bps lower in 2 days.  Yields on US2s initially dipped to 4.92% but closed near session highs at 4.99%. US2s have been fairly anchored between the 4.90% - 5.25% yields since Sep and break below the 4.90% handle could see further gains accrue. US2s10s spread widened to -34 bps USD index continues the consolidation from October to trade in the 105.50 - 107.00 handle. On the Implied Fed Fund Pricing, Peak Terminal Rates 5.41% Dec 2...

Risk sentiment is off to a perky start with Equities in the green and Bond yields lower after the FOMC Rate decision.  USD Index closed near the opening levels of 106.67 after peaking at 107.11. We have a Gravestone Doji on the USD Index charts.  On US Yields, US10s broke below the 4.80% - 5.00% consolidation and treasuries closed at the best levels on the day. US2s closed near the best levels on the day at 4.94% (-14 bps) with resistance seen at 4.92%. US2s10s spread closed at -23 bps. FOMC kept the interest rate unchanged at 5.25%-5.50% and the stance restrictive while noting the resilience of the US economy (Q3 GDP 4.9% yoy), rebalancing of the labor market(+266K 3m average), encouraging inflation prints (PCE 3.40% , Core PCE 3.70%) and tightening of financial conditions. The outlook is beset with uncertainties as the lagged effects of monetary policy work through the system and the recent tightening in financial conditions weighs on economic activity. The Fed will be in a ...

"The first principle is that you must not fool yourself — and you are the easiest person to fool.” - Richard Feyman US equities closed in the green with S&P closing 0.65% higher, having risen 2.30% off Oct 27 lows. The U.S. Treasury quarterly refunding statement announced earlier plans to borrow $776 billion in Q4, $76 billion lower than July estimates assuming an end of Dec cash balance of $ 750 bn. During Jan - Mar 24 Treasury expects to borrow $ 816 bn assuming an end of Dec cash balance of $ 750 bn. The news was in line with expectations. Today, Treasury will announce the borrowing calendar.  Asian equities are off to a better start. Expect range bound moves ahead of the FOMC Rate Decision. Sell of in 10Y JGBs persisted after yesterday's monetary policy decision with yields at 0.976% at the time of writing. BoJ increased the flexibility in the conduct of YCC while retaining the target of 10Y JGBs at 0.00% with upper bound at 1% as reference which implies that 1% is no ...

 On Friday, US equities closed in the red with Dow Jones leading losses of 1.12% while today morning saw Asian equities trade mixed. US equity futures are seen trading in the green. Crude oil prices pulled back from Friday's high thus consolidating the push lower to $ 87.70 levels on Oct 24 for the 4th day between $ 87.70 - $ 91.  US Treasuries are off to a negative weekly start with yields on US2s rising 7 bps to 5.07% (swing high 5.26%) and US10s rising 7 bps to 4.91% (swing high 5.02%) on chatter around BoJ tweaking YCC in tomorrow's meeting. US2s10s steepened with the spread at a high of -12 bps on Monday of last week and traded a low of -30 to close the week at -17 bps. The implied Fed fund pricing shifted lower, I have written in the earlier blogpost the risk reward favors going long the contract as the market pricing for Dec 24 contract finds resistance at the 4.80% - 4.85% level.  Overnight Fed Funds Rate 5.33% Current Pricing Peak terminal rate is priced at 5.41...

 Asia markets are seeing a rebound on risk sentiment after US equities fell with Dow leading losses of 1.89%. ECB kept the rates unchanged and stayed away from calling a peak in rates and focused on a data dependent approach.  Initial Jobless claims (IJC) rose 10K rom the prior week for the w/e 20 Oct to 210K while Continuing Jobless Claims (CJC) rose 63K to 1790K. CJC are seen rising since start of September and are at levels last seen in April end. Strong beat on U.S Durable goods orders, for the month of Sep, orders rose 4.70% yoy following a revised reading of -0.10% in the previous month. Pending home sales rose 1.10% mom following a 7.1% contraction in the previous month. US GDP beat expectations with Q3 growth seen at 4.9% following a 2.1% expansion in the previous quarter. The street took comfort from the core PCE deflator which came in below street estimates of 2.40% and the narrative that Q3 marks a peak in growth. A Research house reported that the PCE deflator impl...

Nasdaq led losses closing 2.47% lower on the day and S&P 500 closed 1.43% lower on the day. Yields on US2s rose 8 bps off lows to days high of 5.13%, the moves on US10s were dramatic , rising as much as 16 bps off lows to trade a high of 4.97%. US2s10s curve steepened with highs seen at -17 bps. On Tuesday, the spread had widened to as much as -30 bps. US Equities and Bonds tanked while Crude Oil, Bitcoin and USD index gained strength. 759,000 New Homes were sold in the US far more than consensus estimates of 680,000. After the strong PMI data release, the new home sales number only supports the Fed's case for higher for longer. Mike Johnson was elected as House speaker and WSJ writes "The quick take on Wall Street seems to be that this makes the possibility of a government shutdown a little less likely". On the implied Fed Fund Pricing, Dec 2024 pricing shifted 5 bps higher to 4.68% while the pricing for peak terminal rates was unchanged at 5.43%. The Geo-political s...

Hi, I couldn't write the post the last 2 days since I was in Kolkata celebrating Durga Puja. I was positively surprised at the traffic management and the good road conditions. I remember when I last visited some 15 years back for Durga Puja,  the roads were heavily congested but this time the vehicular movement was smooth. The pandals are beautiful and illustrate the bedrock of creative talent coming out of Bengal. When you move across the narrow alleys, you know the love for Puchkas, Meat Rolls, Biryani and Tea. Interestingly, this time I observed the love for Vests and Lycra as the streets are full of billboards from Lux Cozi, Rupa and VIP. It was a wonderful trip and worth a visit !! Coming back to markets now, The implied Fed Fund Pricing* for peak terminal rates is 5.43% (+10bps) and Dec 24 pricing is at 4.63% (-80bps). The terminal rate pricing has ranged between 5.49% - 5.37% over the last three months and the Dec 2024 pricing has exhibited sharp volatility with lowest pric...

Fed Chair Comments on the Economic Outlook can be summarized through the table below. The comments are in line with Fed Speak from earlier in the week. Nothing new there. WSJ is running a headline "Fed’s Jerome Powell Signals Extended Pause in Interest Rate Rises".  Market leaned on the dovish side following the comments. Fed Fund implied pricing shifted downwards. Jan 31, 2024 5.43% (prior 5.46%) Jun 12, 2024 5.18% (prior 5.25%, 1 cut by mid next year) Dec 18, 2024 4.74% (prior 4.82%, 64 bps of cut from peak terminal rates) US2s10s bear steepened with the spread now tighter at -17 bps from previous -31 bps with the front end of the curve outperforming the back end of the curve. US2s peaked at 5.26% before closing the day at 5.16% thus giving a one day reversal candle and US10s peaked at 4.996% before closing the day at 4.92%.  Crude oil prices and Gold continued to climb closing the session at $ 93.35 and $ 1974. On the data front, Initial Jobless Claims data w/e Oct 14, dec...