Making Sense

  The MPC is scheduled to announce the interest rate decision on April 5, 2024 Expectations: Interest Decision             No change expected, 6.25% - 6.50% - 6.75% (SDF - Repo - MSF) Policy Stance          With FY25 Inflation estimates at 4.40% and RBI Policy Rate at 6.50%, RBI is well into restrictive territory with Real Rates on a Forward-Looking basis at over 2%. A whole new discussion around higher Neutral Rates has espoused as growth has consistently outpaced expectations.  PMIs have been in expansion territory and credit growth has been robust at an average 15.39% for the calendar 2023. Expectations into FY25 growth are robust with through the year growth seen at 7.40% and FY24 growth seen clocking 8%.  Outlook for inflation is benign with through the year inflation numbers likely in the vicinity of the lower band of the 4% - 6% target. According to RBI Monthly B...

Sharp moves overnight as US Economic data continued to show resilience. US Retail Sales rose 0.60% mom and Retail Sales ex Auto rose 0.40% mom. The Atlanta FED GDPNOW estimate was revised higher to 2.40% from 2.20% earlier. The final estimate for Q4 growth will be made on Jan 19 and the advance US GDP for Q4 will be released on Jan 25. Elsewhere, Hawkish commentary dominated EZ speeches with CBs pushing back excessive rate cuts into 2024, higher UK headline and Core Inflation print plus the disappointing data from China, GDP  grew by 5.2% in 2023 and the country’s population fell by 2m. Post the stronger than exp Retail Sales number following hawkish comments from Christopher Waller, the rates market further paired bets on the rate cuts in 2024. The implied pricing suggests a cumulative rate cut of 143 bps from previous lows of 166 bps seen post the CPI release. US2s10s bear flattened and the USD index spiked higher to 103.69. Yields High Low...

Embrace the "Mujo" philosophy which involves acknowledging the impermanence and transience of all things in life. In trading, the environment is changing constantly and we must endeavor to recognize the changes and quickly adapt to respond better to the changing environment.  In the Oct 6 Policy Statement, Governor mentioned the possibility of OMO Sales and   I wrote in an  earlier article  the expectations for the same. Additionally, OMO Sales were seen as a tool for maintaining the interest rate differential with the U.S. Durable Liquidity (in Inr Crs) as on Dec 15, 2023 215,664 CiC (in Inr Crs) as on Dec 15, 2023 33,67,675 Estimate CiC Increase over the next Quarter (in INR Crs) 150,000 Durable Liquidity est as at end of Mar 31, 2024 (in INR Crs)* 65,000 Estimated CiC Increase in April 2024 (in INR Crs) 65,000 – 75,000 Estimated CiC ...

 UK inflation surprised on the downside with mom print at -0.20% (prior 0%) and yoy print at 3.90% (prior 4.40%).  PBoC Kept the LPR unchanged at 3.45% German PPI -7.9% yoy , prior -11.00% UK Retail Price Index 5.30% yoy , prior 6.10% US Existing Home Sales 3.82mn, Prior 3.79mn USTs rallied as the soft inflation print from the UK catalyzed a rally in bonds. UK Gilts closed sharply lower at 3.526% from prior day high of 3.698%. US 20Y bond auction was weak. High yield of 4.213% tailed the when-issued yield by 1.5 basis points. Dollar demand was soft, evidenced by a 2.55 bid-to-cover ratio that trailed the prior 12-auction average of 2.65.* Philadelphia Fed President Harker (2023 FOMC voter) stated rates should move lower, but not right away, according to Bloomberg. DXY consolidated recent gains with GBP leading losses on the inflation print. A quick look below on the current implied pricing for Central Bank Policy Rate For the day, you have the Initial Jobless Claims data, Fina...

"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...

 "What a wise man does in the beginning, a fool does in the end." RBIs beginning remarks state that Major Central Banks have kept rates on hold while refraining from forward guidance in view of prevailing uncertainties and that's what RBI did too. RBI announced the monetary policy decision on Friday. The Repo rate was kept unchanged and the monetary policy corridor with SDF at 6.25% and MSF at 6.75% retained. The withdrawal of accommodation stance was maintained.  The growth projection for FY 2024 was revised higher by 50 bps to 7% and Dr. Patra suggested that the growth outturn could be higher based on high frequency indicators in Oct and Nov 2023.  Inflation projections for FY 2024 were retained at 5.40%. For next FY, Inflation is seen to average 5.20% in Q1 and decelerate to 4% in Q2 before reaccelerating to 4.70% in Q3. The risks to the inflation outcome come from uncertainty in food prices. Rabi sowing of wheat, pulses and spices need to be closely monitored. The tra...

Rate Decision      RBI policy mentioned the use of OMO sales which is a more durable liquidity absorbing measure and the catalyst for a policy pivot comes from a durable decline in inflation to near about 4% Policy Rate                               Unchanged Stance of Monetary Policy Withdrawal of Accommodation ( 5 - 1) Growth Projections                     Unchanged (2024 FY 6.50%, Q1 25 6.60%) Inflation Projections           Unchanged (2024 FY 5.40%, Q1 25 5.20%) Liquidity                                    May have to consider OMO sales Key takeaways from the earlier meeting 1. Inflation target is 4% and a Pivot in policy from tightening to accommodative will not happen ...

 The MPC is scheduled to announce the interest rate decision on Oct 6, 2023. Expectations: Interest Decision                No change expected, 6.25% - 6.50% - 6.75% (SDF - Repo - MSF) Policy Stance             Withdrawal of Accommodation ( the monetary policy stance hinges on the direction of policy rates)   Liquidity management  After the liquidity tightness in September,  Liquidity deficit continued to improve with LAF injection as on Oct 3 at 40K from Sep 29 at 100K. As the Government expenditure kicks in and amounts impounded under I-CRR are released, liquidity could slowly turn positive. The period starting Oct - Mar will see liquidity tightness on account of increased demand for currency. Diwali, Dussehra, 5 state elections, seasonal increase in demand on Rabi Harvest, marriage season and Hindu Festivals followed by  general elections could see an estimated rise of 4% in ...

“…inexhaustible perseverance and patience… knows no defeat.”  RBI announced the MPC decision today. Key Highlights: Repo Rate stands unchanged at 6.50% (unanimous decision) SDF Rate 6.25% and MSF at 6.75% Stance continues to be "withdrawal of accommodation" (Vote 5 to 1) Inflation projected moved 10 bps lower for full FY 24 to 5.2% from 5.30% on crude oil price assumption of $ 85 per barrel ( last policy $ 95) and a normal monsoon.  Inflation Outlook - The risk to inflation trajectory are evenly balanced with upside risk emanating from adverse climatic conditions, higher and likely to stay elevated milk prices into the summer, rising uncertainty in Intl Financial markets and imported cost pressures GDP is projected to grow marginally higher at 6.50% with 10 bps upward revision in both Q3 and Q4 FY 24.  GDP Outlook - The risks to domestic growth are evenly balanced. High Rabi production, steady growth in services sector, GoI's focus on capital expenditure, higher capacity ...

India CPI inflation for the month of February came in at 6.44% , marginally lower than 6.52% recorded in the month of January and above my estimates of 6.00% - 6.20%.  Let's quickly crunch the data: Mom headline CPI rose 0.21% . Only F&B (w. 45.86%) recorded negative momentum in prices but the rest of the basket saw mom rises. Housing (w. 10%) was up 0.80% mom; pan, tobacco and intoxicants plus clothing and footwear plus miscellaneous (w. 37% ) was up 0.40%, while food and beverages was down a marginal 0.06% (w. 46%). While declines were recorded in most of the F&B sub components, cereals, milk, spices, prepared mails recorded a rise.  Core CPI continues to be elevated at 6.10%. RBI projects Q4 FY 23 inflation at 5.70%. The Jan and Feb outturn at 6.52% and 6.44% was higher. My own estimates for March 23 inflation are at 5.62% which if the data comes in line will take the quarterly average at 6.16% above RBI's Estimates.  Market is pricing in another 25 bps of rate...

Success is a moving target. You have to be constantly aiming for the bull's eye and adjusting your aim as you go!! Bureau of Economic Analysis released the PCE data on Friday. PCE is the preferred inflation gauge of the Federal Reserve. Fed’s 2023 median projection for PCE inflation is at 3.10% ( range 2.9% - 3.5%) while Core PCE inflation is projected at 3.5% ( range 3.20% - 3.70%). PCE price index for January increased 0.6 %. Prices for goods and services both increased 0.6 % as well. Food prices increased 0.4 % and energy prices increased 2.0 %. Excluding food and energy, the PCE price index also increased 0.6 %. The PCE price index for January increased 5.4 % yoy, with increase in goods prices of 4.7 % and services price of 5.7 %. Food prices increased 11.1 % and energy prices increased 9.6 %. Excluding food and energy, the PCE price index increased 4.7 % yoy. PCE data showed no signs of disinflation and the market toed the Fed’s line of higher for longer and accordingly pu...

"Thorough preparation makes its own Luck" - As a trader, I couldn't believe in this more. We are all involved in a game where the outcome is probabilistic and that is the universal truth. But attributing the unknown to chance rather than lack of preparation is a fundamental error and sets us up for failure. Guard against failure through thorough preparation.  Know as much as you can to improve the edge and be thorough as hell. After all the satisfaction of doing it right supersedes the chance success.  Interesting moves overnight with a sharp rally in US Treasury yields on the back of a weak 30Y auction, initial jobless claims data at 196000 still suggesting a strong labor market data and sell off in equities.  US 2Y @ 4.50% ( T-1 low 4.41%) - On the 2Y we see a double bottom with a price objective of 4.48% which has been met. The next areas of support for the bond are at 4.57%, 4.61% and 4.73%. US 10Y @ 3.68% (T-1 low 3.575%) - US 10Y took support at swing low of 3.32% t...

"Accuracy of Observation is the equivalent of accuracy of Thinking" I wrote about the expectations from the MPC yesterday and as expected RBI hiked repo rate by 25 bps to 6.50%. Consequently, SDF rate now stands at 6.25% and MSF rate at 6.75%. MPC voted 4 - 2 for change in policy rate.  On the change in monetary policy stance, MPC voted 4 - 2 to maintain monetary policy stance " withdrawal of accommodation" Key Highlights from the MPC Rate decision 1. Global growth prospects have improved 2. Domestic growth is likely to be supported by higher Rabi acreage, sustained urban demand, improving rural demand, robust credit expansion, gains in consumer and business optimism and the government’s enhanced thrust on capital expenditure and infrastructure in the Union Budget 2023-24 3. While RBI acknowledged the continuing downward momentum in inflation in FY 24, it estimated inflation to rule above 4% (RBI has an inflation target of 4% +/- 2%) and domestic economic growth to...