Making Sense

Yields on 10JGBs continued the march higher towards 1.10% as Services Sector inflation came in higher than expectations. The next BoJ meeting is scheduled for 13 - 14 June. BoJ intervened to the tune of $ 62.20 bn over two days of intervention. JPY weakened past the 160 handle when BoJ first intervened and dropped to lows of 154.50.  We have the Bank of Canada and the ECB Monetary policy meeting where expectations are for 25 bps of rate cuts.   The implied Fed Fund Futures priced in 29 bps of rate cuts for 2024 from 32 bps last week. The Fed Fund Futures are pricing in first complete rate cut by the November policy.  The PCE release was on expected lines. Prices of Energy and Non Durable goods rose at an uncomfortable mom momentum while prices of durable goods showed mom contraction. The Services component of the PCE release showed mom price rise of 0.27% which was lower than the average 0.37% mom pace over the last 6 months.  The Market reaction to the PCE rele...

Fed Fund Futures implied interest rate pricing closed the week at 32 bps of rate cuts priced into from 43 bps cuts seen at the start of the week. Also making the headline was Goldman Sachs changing it's Fed cut call to September. The street is now divided for the first rate cut between September and December policy meetings. I still think there is more legroom before we start thinking if the FFR pricing is rich . The Us2s10s Curve bear flattened 7.40 bps.  Governor Waller's speech "Some Thoughts on r*" is an interesting one and a recommend reading as he looks at factors affecting  r* from the lens of supply and demand and contributing factors that led to the decline of r*. He then goes on to delve into factors that could have reversed to explain if r* has moved higher in the current environment.  S&P Flash PMIs showed US Global Composite PMI at a 25 month high and Services PMI at 12 month high while the Mfg PMI showed an overall improvement in business conditions....

After the data in the prior week which included the FOMC Rate Decision (Chair Powell said  there’s a high bar right now for the Fed to cut rates and an even higher bar for the Fed to resume rate hikes and announced slow down in BS run off) , soft employment and PMI data numbers, this week was relatively muted in terms of fresh data releases. We had an inside day candle on the US2s and the DXY.  The Jobless claims numbers increased over the prior week but the outright levels only suggest labor market coming into better balance.  The University of Michigan Consumer sentiment, however was quite concerning with consumer sentiment retreating about 13% mom with consumers perceiving negative developments over inflation, employment and interest rates. Year ahead inflation expectations rose over 30 bps to 3.50% and long run inflation expectations rose 10 bps to 3.10%relative to the 2.20-2.60% range in the 2 years pre pandemic.  According to latest estimate released...

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...

As I write this article, I will quote Howard Marks again in the context of the cyclical extreme as I had quoted him earlier in one of my articles on Jan 15, 2024 which was the point of turn of the market pendulum.  "It is important to be aware of the mood swings of the market, the Pendulum as Howard Mark says. When the Pendulum is at the extreme , it is inevitable it will move back towards the mid point sooner or later. The movement towards an extreme itself that supplies the energy for the swing back. Risk management is a challenge purely when one looks at measures of deviation move to the extreme. The timing of the move to the mid point, if captured wrongly, will prompt you to act in ways that will reduce the overall returns. Hence, it is of paramount importance, that we assess if we have reached cycle extremes.  __________________________________________________________________________________ Over the week, US economic calendar had the PMI release wherein the Services and ...

The Market Implied Fed Fund pricing for Interest Rate Cuts by the US Federal Reserve shifts to 38 bps with 27 bps rate cut implied by the November Policy.