Making Sense

I have two basic rules about winning in trading as well as in life:  1. If you don't bet, you can't win. 2. If you lose all your chips, you can't bet.   ~ Larry Hite Over the last 3 weeks, after the Aug 5 lows, yields on US2s have consolidated in the 3.90% - 4.10% price range and US10s have progressively made lower lows to close the week at 3.92% and 3.80% respectively. US2s10s bull steepened to close the week at -11.90 bps. USD index closed the week at 100.68, 5% off highs of 106.13 June highs and within close proximity to the established range of 100.50 - 106.50 since last year.  There is a 76% probability of a 25 bps rate cut in the Sep Policy. The market is broadly equally divided between a 25 bps and a 50 bps in the November Policy and holds a 87% probability of FFR in the 4.25% - 4.50% range by end of 2024. By next year September Policy, the market assigns a 90% probability of FFR at 3.25% - 3.50%, i.e. 200 bps of cuts in next 1 year.  The Atlanta Fed GDP Now ...

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....

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...

US2s10s further flattened 3.70 bps as the front end of the curve lead the losses while US10s were broadly unchanged. The market implied cumulative pricing for rate cuts was further pared down with market now pricing in 78 bps of rate cuts and with the first cut fully priced in for July policy meeting .  Yields High Low Close DoD ▲ US 2Y          4.73          4.65          4.71                 4.40 US10Y          4.35          4.30          4.33             ...

US equities posted a fresh high of 4908 which is the AB=CD completion target ( refer to post from yesterday ) as the Magnificent Seven (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla) continue to pull S&P to fresh record highs and Netflix added 13.10 net new paid subscribers. After the PBoC CRR cut , Risk sentiment improved and U.S Yields were broadly lower. However, post the release of the U.S PMI numbers , US yields surged. The Fed fund pricing moved by 2 bp s with cumulative December rate cuts seen at 135 bps from 137 bps yesterday.  Flash US PMI Composite Output Index at 52.3 prior 50.9 -  7-month high Flash US Services Business Activity Index at 52.9, prior 51.4 -  7-month high Flash US Manufacturing Output Index at 48.7 prior 48.1 -  2-month high Flash US Manufacturing PMI at 50.3 Prior 47.9 -  15-month high Yields High Low Close DoD ▲ US 2Y      ...

We established a tactical short here as discussed in the morning post  with SL at 1.0945 as the PMIs point to improving prospects for the EZ but Germany and France (two of the largest economies in EZ) weigh on the EZ recovery. Eurozone PMIs painted a mixed picture EZ Mfg PMI 46.6 prior 44.4 German Mfg PMI 45.40 prior 43.70 France Mfg PMI 43.2 prior 42.21 EZ Services PMI 48.40 prior 48.80 German Services PMI 47.60 Prior 49.30 France Services PMI 45.00 prior 45.70 Key Takeaways Recession persists into 2024 though the Jan decline was the smallest since July 2023 The downturn continued to be led by France , where output fell for an eighth successive month and at the sharpest rate since last September thanks to steepening contractions in both manufacturing and services. Output also fell at a steep and accelerating rate in Germany , albeit a moderating downturn in manufacturing helping offset a worsening service sector situation. In contrast, the rest of the eurozone as a whole returned...

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...

  India's manufacturing sector posted a remarkable performance at the end of the final fiscal quarter, as growth of factory orders and production quickened to the strongest in three months. With pressure on supply chains subsiding and raw material availability improving, input cost inflation retreated to its second-lowest mark in two-and-a-half years . Subsequently, goods producers concentrated on rebuilding their stocks. Robust increases in buying levels in recent months supported a near-record accumulation of input inventories in March. The seasonally adjusted S&P Global India Manufacturing Purchasing Managers’ Index rose from 55.3 in February to 56.4 in March , signalling the strongest improvement in operating conditions in 2023 so far. That said, the PMI average for the final fiscal quarter (55.7) came in below that recorded in the prior period (56.3 in Q3). March GST collections rose 13% yoy to INR 160,000 crs, second highest since July 2017. The Services PMI will be rele...

 Meditate!!  The February ISM Manufacturing Index came in at 47.70 (prev 47.4). The reading reflected contraction in manufacturing activity for the 4 th straight month. However, what stood out in the report was the sharp increase in the Prices Index which jumped to 51.3 from 44.5 and the new orders index rose to 47.0 (prev 42.50). The activity contracted at a slower pace amid a backdrop of rising prices which adds to fears around Fed tightening. Comments from FOMC voting member   Neel Kashkari also pushed rates higher. “We’re not yet seeing much of a sign of our interest-rate increases slowing down the services sector of the economy and that is concerning to me,” he said. “Wage growth is at a level that it actually is too high to be consistent with our” 2% inflation target. He also said that if the Fed declares "victory too soon, there will be a flood of exuberance" and it will need to do even more work that if the Fed declares "victory too soon, there will be a flood...