Making Sense

 AUDUSD Technicals Flag formation, momentum indicators are turning lower, commodity prices are lower on slowdown concerns and it has one of the lowest interest rates in G7 at 3.60%. Take your pick !!

"Don't ask too many WHYs??? Believe that somethings will behave true to its form" A Spate of U.S data released yesterday pointed to continued resilience of the U.S Economy.  The advance estimates of GDP grew 1.10% much below consensus of 2.00% but the market took comfort in the growth in the Personal Consumption Expenditure numbers. PCE component of the GDP rose 3.70% which was driven by a 6.50% growth in expenditure on goods and 2.3% growth in expenditure of services. The growth in PCE was offset by decline in private domestic residential and non residential investments.   The Q1 PCE prices rose 4.2% yoy and core PCE prices rose 4.90% yoy.  The Initial Jobless claims came in a 230K (prev 244.3K)for the w/e 22 April 23 and the continuing claims for the w/e 15 Apr 23 came in at 1.858M (prev 1.8679). The key takeaway from the report is that jobless claims data has not seen a sharp deterioration despite the fears of credit tightening post the banking crisis.  Marke...

 Hi, Just been very caught up with some personal work and hence not had a chance to write. Today's day is lined up with a host of data releases. India - March CPI Inflation consensus estimates call for a reading of 5.80% following previous 6.44%. My own estimates call for a reading of 5.65%. The disinflation is lead by fall in prices of edible oils, cereals and vegetable prices. Core inflation has been sticky and will be keenly watched for direction of monetary policy. The market is currently pricing in 6.50% - 6.75% policy rate through this year followed by 2 rate cuts in 2024. Unless the data materially surprises on the upside, reckon the reaction to be muted as the evolving inflation trajectory is projected to be lower. RBI projects FY 23 - 24 inflation at 5.20%. Based on the inflation projections, real Rates are in positive territory.   March Industrial Output is estimated to grow 5.10% yoy  US - YoY US CPI Inflation (NSA) and YoY Core CPI (NSA) is expected ...

“…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'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...

  "Volatility is a double-edged sword. It can cut you both ways." OPEC+ announced Production cuts of 1.15 mbpd on Sunday thus pushing crude oil prices higher in the Asian session. WTI prices touched a high of USD 86.44 per barrel. The sharp cuts in production follow the previously announced production cuts in Oct 2022 of 2 mbpd and Russia’s 0.50 mbpd voluntary reduction announced in February. The cuts announced will take effect from May and stay until Dec 2023. These actions are in sharp contrast to Global Oil Demand projections of a rise of over 2 mbpd by both the IEA and OPEC. Do the actions by the OPEC+ suggest a worsening oil demand outlook in the second of the year? Or is it just an acknowledge of OPEC+ running behind production quotas and adjusting global demand mildly. The sharp productions cuts only make the inflation fight worse. The Fed Fund Futures markets pushed out rate cuts with July pricing in 4.88% from previous 4.80%. The US yields also moved higher i...

Oil prices climb as OPEC+ members led by Saudi Arabia announced today a series of “voluntary” oil production cuts. Brent crude prices are up 1.60% at 79.73 and USDINR is expected to gap up at open closer to 82.32 levels. The Canadian dollar, beneficiary of higher oil prices gapped down at open at 1.3489 but has since found buyers in the Asian session to trade at 1.3507. The cuts will go into effect in May and remain in place until the end of 2023.   The following output cuts have been announced: 1.       Saudi Arabia 500,000 bpd 2.       The UAE 144,000 bpd 3.       Iraq 211,000 bpd 4.       Kuwait 128,000 bpd 5.       Algeria 48,000 bpd 6.       Oman 40,000 bpd 7.       Kazakhstan 78,000 bpd 8.       Gabon 8,000 bpd 9.       Moscow will extend its previo...

For the week until 29 Mar 2023, liquidity improved from an injection of INR 46K Crore through the LAF window to an absorption of INR 38K Crore as Government month end spending kicked in. Outstanding operations of INR 95K matured this week. RBI had announced a 56K crore fine tuning operation which matured on 28 Mar 2023. Market was expecting an announcement of another fine tuning operation to smoothen the year end volatility but none came. The weighted average call rate (WACR) came in at 7.11%. RBI Governor, Mr. Das, had earlier suggested in the Dec policy that market participants must wean themselves away from the overhang of liquidity surpluses. I think RBI is trying to manage the WACR within the upper bound of the policy corridor (6.75%) and thereby suppling just about enough liquidity to manage the friction.  The durable liquidity surplus which stood at 101,000 Crore as on 10th March 2023 will move either flat or negative in Q1 FY2024. This is driven by an estimated 4% rise in C...

For the week ended 29 March 2023, Federal Reserve released the report on Factors affecting reserve balances. This report has gained particular significance post the collapse of SVB Bank. The report offers insights into the extent of liquidity stress in the system by providing data on facility usage by depository institutions. There is USD 11 bn reduction reduction in loan facility driven by a fall of USD 22 bn through the primary credit discount window and USD 11 bn rise from the Bank Term Funding program, a facility announced in the aftermath of banking crisis to allow institutions to borrow upto a period of 1 year on collateral which will be valued at par.  To just give a sense, on the rates for the facility usage ( as on 31 Mar 2023) Primary Credit 5% Secondary Credit 5.50% Seasonal Credit 4.80%  Bank Term Funding program 4.85% While the borrowing from the discount window / BTFP and other credit extensions is elevated, it has shown signs of stabilization as has other a...

RBI announced a fine tuning liquidity operation to the tune of INR 75000 cr for liquidity infusions on 24th March 2023 on account of maturity of 95K crore of outstanding Repo operations. The uptake was to the tune of 56K Cr, lower than the notified amount of 75K cr. Accordingly, Liquidity injected from O/S operations stands to the tune of INR 92K crore and fine tuning operations stands at 56K crore. Net liquidity absorbed through the corridor facilities (MSF + SDF) stands at 70K crore. LAF injection is at 78K crore . W eighed Average Call Rate has been stable at 6.55%.   Durable Liquidity has been steadily declining and as on 10 March 2023, the number stood at 101K cr declining 58k cr between 24 Feb 23 and 10 Mar 23. As on 16 Dec 2022 durable liquidity was 299K cr and CIC 32.41 Lac cr. CIC for the w/e 10 Mar 23 is 33.73 lac cr, change of 1.3 lac cr. So durable liquidity has seen a change of 198k cr which can be explained through 1.3 lac cr change in CIC and the balance Inr 68k cr ...

  Data released on  reserves held by depository institutions that were borrowed from the Federal Reserve through the Discount Window (DW), Paycheck Protection Program (PPP) Liquidity Facility (PPPLF), Bank Term Funding Program (BTFP) announced on Mar 12 and other lending facilities show a sharp surge in use of Federal Reserve Facilities. Refer to earlier article. In the press conference, Fed Chair Jerome had explained the Credit Extensions as Fed is lending to the bridge bank and it’s a loan that’s 100 percent guaranteed by the FDIC so there’s no risk in it for us which I had highlighted in the earlier note too. There is a + USD 42 bn increment in the BTFP and Other Credit extensions has risen by USD 37 Bn. Also the foreign repo facility saw an uptake of USD 60 bn.

"Volatility is an opportunity in disguise." US yields continue to move lower as markets price in 81 bps of rate cuts beginning July 2023 and by end of Dec 2023 to 4.02%. Market pricing is in significant departure from the Fed interest rate guidance of Fed Fund Rate at 5.10% through 2023. Data released yesterday showed Initial jobless claims for the w/e March 18 decreased by 1,000 to 191,000 and continuing jobless claims w/e March 11 increased by 14,000 to 1.694 million. Initial Jobless claims under 200K still denotes a healthy market and shows no signs of strain post the SVB Collapse. Sales of new single‐family houses in February 2023 were at a seasonally adjusted annual rate of 640,000, 1.1% above the revised January rate of 633,000, but is 19.0% below the February 2022 estimate of 790,000.  In yesterday's price action,  US Yields 2Y High low range 25 bps to close the session at 3.81% near lows of 3.76% US Yields 10Y High low range 15 bps to closed the session at 3.40% n...

RBI announced a 5 day VRR (Variable Rate Repo) auction for an amount of INR 75K Crore. A total of INR 94637 of outstanding Repo operations is due to mature today.   As on 23 March 2023, Liquidity injection through the LAF window was to the tune of INR 45K Crore and weighted average call rates have eased from 6.66% to 6.56%. Cash balances maintained with RBI dipped to INR 790K Crore from previous day INR 818K Crore. 

 The Federal Reserve announced the FOMC Rate decision by hiking rates by 25 bps as was expected.  Fed introduced a line regarding the current banking crisis assuring the markets of the resilience of the US banking sector The U.S. banking system is sound and resilient. Recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring, and inflation. The extent of these effects is uncertain. The Committee remains highly attentive to inflation risks. The Committee anticipates that some additional policy firming may be appropriate in order to attain a stance of monetary policy that is sufficiently restrictive to return inflation to 2 percent over time. Interestingly  , the projected path of monetary policy hasn't changed much  The only significant revision to economic projections is in Year 2024 where GDP growth has been knocked off by 40 bps to 1.20% and the Year 2023 has seen a 20 bps hike...

 While we wait for the Fed Rate decision, let's quickly look at the prior economic projections on Dec 15 2022 . The committee will be announcing the interest rate decision today and also release the Statement of economic projections. Between the Policy on Feb 1, 2023 to now, the financial landscape has materially changed following the collapse of 3 US banks and taker over of a Swiss Bank which complicates the task at hand of managing elevated and sticky inflation on the one side and banking crisis on the other hand. Which way will Fed lean will be clear in 5 mins. This blog is with market consensus and expects a 25 bps hike. Markets are pricing in a 83.40% probability for a 25 bps hike in today's policy. US 2Y and US 10Y yields are trading 4.13% and 3.53% respectively. Euro has continued to appreciate and currently trades at 1.0795 and USDJPY at 132.54. Table 1 Economic projections