Making Sense

Meditate. Visualize !! Yet another strong US economic release -  Initial jobless claims for the week ending February 25 came in at 190,000 (Prior 192K) with 4w moving average at 193K.  Initial claims for unemployment insurance is a leading economic indicator because it is an indication of emerging labor market conditions in the country.  Weekly Continuing Claims came in at 1.655 mln; Prior was revised to 1.660 mln from 1.654 mln. While continued claims are not a leading indicator, they provide confirming evidence of the direction of the U.S. economy. Low levels of Initial claims show tightness in the labor market and therefore sticky wage-based inflation pressures. Unit labor costs in the nonfarm business sector increased 3.2% in the fourth quarter of 2022, reflecting a 4.9% increase in hourly compensation and a 1.7% increase in productivity. Unit labor costs increased 6.3% over the last four quarters. Q4 productivity increased 1.7%, a 130 bps revision below the prelimina...

 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...

 "The difference between try and triumph is just a little umph!" Q3FY23 Real GDP grew 4.40% yoy lower than consensus estimates of 4.60% following an upward revision of 80 bps to FY 21 to -5.80% (previous est -6.60%) and 40 bps to FY 22 to 9.10% (previous est 8.70%). India's GDP during 2022-23 is estimated to grow at 7.0 %. RBI had projected the real GDP growth for 2022-23 at 6.8 %, with the third quarter and fourth quarter growth at 4.4 % and 4.2 %, respectively. S&P Global Manufacturing PMI expanded for the 20 th straight month with the February reading coming in at 55.3. Input cost inflation accelerated to a four-month high but there was a softer upturn in selling charges. Recent data shows waning momentum after the Dec peak of 57.20. The Conference Board Consumer Confidence Index decreased in February for the second consecutive month to 102.9 down from 106.0 in January. The Present Situation Index—based on consumers’ assessment of current business and labor ...

"Details create the big picture"  US Durable goods orders fell 4.50% to $ 272.3 bn from a downwardly revised $ 285.2 bn. 13.30% fall was reported in new orders for transportation equipment driven by sharp fall in New orders for nondefense aircraft and parts which declined a whopping 54.60%. The core durable goods order which excludes transportation increased 0.7 %. Non defense capital goods order excl aircraft orders , a proxy for business investment, rose 0.80% mom.  Pending home sales data, a  monthly measure of homes under contract but not yet closed, rose 8.10% following a revision to Dec number to 1.10%. The data did not change the Fed fund pricing. Bond yields came off highs which appears more on positioning and month end flows rather than any catalysts.  In the week ahead, there are no meaningful catalysts to drive USD price action higher barring the US PMI numbers this week. Hence this week, could see consolidation or a minor pull back across USD index and Ra...

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...

"The best way to finish an unpleasant task is to get started." If forecasts of El Nino conditions develop then inflation and growth could turn for the worse.The finance ministry on Thursday raised concerns over the possible impact of El Niño conditions on India this year, saying if recent forecasts came true, the country could see lower agricultural output and higher inflation. Yesterday, we had the external MPC member Shashikant Bhide interview published in Business Standard . In his interview, he emphasises the need to see inflation within the tolerance band in 2023-24. Despite the decline in global commodity prices, pass through of decline is not clear. The areas of concern are core inflation and to some extent the fuel and light inflation, which is in double digits. Real GDP increased 2.7% in Q4 (adv est 2.9%) of 2022 following a third quarter real GDP rise of 3.2%. The updated estimates primarily reflected a downward revision to consumer spending that was partly offset b...

"The details are not the details. They make the design" RBI MPC Meeting minutes: Dr. Ashima Goyal and Prof. Jayanth R. Varma voted for no change in policy rates and favored a change of monetary policy stance to neutral while the other 4 members voted to increase the policy rate by 25 bps and maintained stance to withdrawal of accommodation. Dr. Bhide / Dr. Ranjan / Dr. Patra and the Governor expressed concerns on the sticky core inflation and maintained durable disinflation in prices is a necessary condition to necessitate a pause in hikes.  Fed Meeting minutes: The Federal Reserves also released the minutes of the monetary policy meet on Feb 1, 2023. The committee acknowledged that while significant progress had been made towards a sufficiently restrictive policy stance and inflation pressures have moderated, inflation continues to be elevated and labor markets continue to be tight contributing to wage price pressures. The consensus was for a 25 bps rate hike as a slower p...

Thoroughness is a guarantee that the conscience is not in default" Geopolitical temperature got a notch warmer ahead of the anniversary of Russia's attempted invasion of Ukraine.   In state of the Union address, President Putin suspended participation from the New Start Treaty though he did not withdraw. Nuclear START Treaty is a nuclear arms reduction treaty between Russia and USA that limits the number of deployed strategic nuclear warheads to 1550 and ICBM, SLBM and heavy bombers to 800 and allows for inspection. Secretary of State Antony Blinken called Russia’s decision “unfortunate and very irresponsible.” He added: “We’ll be watching carefully to see what Russia actually does.” Meanwhile on a surprise visit, President Biden said "Ukraine will never be a victory for Russia. Never." and committed $460 million in additional military aid to Ukraine. Acc. to WSJ the administration intends to impose sanctions this week on as many as 200 Russian individuals and entiti...

 The concluding remarks of the Monthly Bulletin are beautiful. It says, "In mythologies across civilisations, the sun is depicted as riding a chariot typically drawn by four horses. In Indian mythology, the sun's chariot is drawn by seven horses. The seventh horse represents dreams, aspirations and the future. It is said that even if the other six horses are injured or exhausted, the seventh horse can take the sun's chariot to it's destination" So dare to dream big and reach your destination whatever that may be. US markets were closed yesterday. Today the activity is muted with strength seen in USD index, higher US Treasury yields and domestic rates higher.  Yesterday, LAF injection stood at inr 41k crore with SDF at 105K crore and O/S Repo operations at 146K crore. WACR traded at 6.56% as liquidity tightens on GST outflows. OIS rates are about 1 - 2 bps higher / India 10Y Gsec is trading at 7.38% / Modified Mifor is 3 odd basis higher while forwards are trading ...

 "Employ every economy consistent with thoroughness, accuracy and reliability" Month of Feb has been a cleansing month for the financial markets characterised by sharp reversal in the USD index and massive paying across Rates. On Friday, we touched a high of 104.70 on the USD index as yields spiked higher to 4.72% on 2Y and 3.93% on 10Y. As markets pared back the position ahead of the long holiday, markets pulled back to close the session at lows of 103.86 / 4.62% and 3.83% respectively. Today is a US holiday in observance of President's day.  On the domestic side, USDINR continues to trade in the 82.40 - 83.00 zone. MTD (upto 17 Feb) FPI flows stand at USD 500 mn. On friday, yields spiked higher after the 7.26% GS 2033 paper was devolved on PDs to the extent of 8255 crs. After the sharp spike on Friday, OIS Rates are down 2 - 3 bps beyond 3 months and 10Y Gsec trades at 7.37%. Forwards is seeing paying pressure as we draw closer to the end of financial year and liquidity...

 "Much of the stress that people feel doesn't come from having too much to do. It comes from not finishing what they've started." Goodmorning!! We had a stronger than expected US producer price inflation report on the heels of a strong US CPI data (6.40% yoy) , strong labor market data - under 200K weekly initial jobless claims data and lower housing starts and building permits data reflecting the weakness in the housing sector on higher interest rates. The data comes on the back of a strong NFP print / Retail Sales / CPI data. Labor market strength and economic resilience has market reprice the terminal rate and second half pivot in Fed policy . The market now prices in a peak terminal rate of 5.30% and Dec 23 rate at 5.10%. Remember as early as start of January, market was pricing a peak terminal rate of 4.855%. Dec 2023 rate at 4.40%. The peak terminal rate is now priced higher than Fed guided policy path of 5.10%. The Fed SEP central tendency shows the range for F...

Prospective Flows for the USDINR Trade Air India closed a 470 aircraft deal with Airbus and Boeing for an estimated value of $ 75 bn. Aircraft deals have earlier been concluded by Indigo in 2015 / 2017 / 2019. “Make in India” is at the heart of Airbus’ strategy in India, Airbus' CEO said. While the Air India planes will finally be assembled in France and Germany, many of their components will come from Indian companies.  So at this point , we don't know the exact deal value and net USD outflow but let's keep a close eye on the flow as it. MSCI will postpone implementation of updates to weightings for two Adani Group companies, Adani Total Gas and Adani Transmission, to the May benchmark review. https://www.business-standard.com/article/companies/three-adani-stocks-could-face-msci-axe-in-may-as-sell-off-tops-400-mn-123021501494_1.html

 US Retail Sales rebounded 3% mom following a 1.1% contraction in December. Retail Sales excluding autos and gas climbed 2.60% mom vs a 0.40% contraction.

 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...