Making Sense

The US Treasury curve bear steepened with 2x10 spread now at -64 bps. Yield curve is considered an important predictor of recession. The FOMC forward projections outlined a case of strong economic growth with estimates of growth in 2024, 30 bps lower than the trend growth of 1.80%, lower inflation which falls to 2.00% by 2026, U/R of 4% in 2026 but higher interest rates of 2.90% against longer run FFR of 2.50%. Economic resellience of the US economy may have pushed the neutral rate higher in the short term. The point on neutral rates was raised in the press conference following the FOMC meeting and Fed Chair acknowledged that short term neutral rates may have moved higher.  Bond market 2x10 inversion touched a peak of -111 bps. The recent steepening could simply be explained as a consequence of US economy being on a path of soft landing , when a situation of sharp cuts to policy as priced by the bond market earlier may not fructify.  The data also supported further rise in yie...

The FOMC kept the interest rate unchanged at 5.25% - 5.50% and retained the dot plot for 2023 at 5.60%. Market is now pricing in 14.50 bps of rate hikes into 2023 from pre FOMC 11.50 bps. The median projections were revised higher by 50 bps for 2024 and 2025 to 5.10% ( June 4.60%) and 3.60% ( June 3.10%) while retaining longer run projections for Fed Fund Rates at 2.50%.  Markets repriced the 2024 FFR from 4.62% pre FOMC to 4.76%. Market pricing is now in divergence from Fed's guided path by 34 bps. This makes the data on inflation, employment, consumer spending extremely critical and could add to choppiness going forward. On rate cuts, markets are pricing in 25 bps of rate cuts by June of 2024 and another 50 bps of rate cuts by Dec 2024. Interestingly, the estimates of GDP were revised higher by 110 bps for 2023 and 40 bps for 2024 with long run estimates for GDP retained at 1.80%. Unemployment (U/R) was revised lower by 30 bps for 2023 and 40 bps for 2024 and 2025. Headline PCE i...

 I have been mentioning in my earlier posts on the Inverted H&S pattern on the US2Y and US10Y Treasury yields.  I like to say to myself  "Don't ask too many WHYs??? Believe that somethings will behave true to its form" because sometimes it is difficult to paint an accurate picture on fundamentals alone and your bias comes into play.  Over the course of last week, Fed commentary has been pretty hawkish. For that matter, yesterday's speech by Governor Waller makes it clear that he will be data dependant in determining whether the Fed should hike or pause in the June policy and he does not support stopping rate hikes unless he has evidence that inflation is moving towards the 2% goal.  Key takeaways from The FOMC minutes released earlier: Core PCE price inflation estimates for FY 23 were revised higher to 3.80% and a mild recession to start later this year. The committee judged the economic activity to have expanded at a moderate pace while employment was resil...

AUDUSD has been consolidating in a wide range of 0.6625 - 0.6800. Break below 0.6625 on 26 April to lows of 0.6574 saw strong buying interest come in. Full time 27100 jobs lost;U/R 3.70%,part time jobs added 22800, estimates were for a net addition of 25000; wage price index rose 0.80% qoq (Previous 0.90%qoq);  3.7% Est 3.6% Prior 3.40%. Markets are pricing in peak terminal rate of 4.10%, 25 bps hike from current level of 3.85%. AUDUSD faces crosswinds from CNH depreciation while sharp up move in Copper prices, Iron ore and natural gas prices make the outlook a bit cloudy. I would prefer to stay away from the pair till either a more conclusive technical picture present itself or there is a fundamental catalyst.  Important Resistance - 0.6708 / 0.6748 / 0.6793 Important Support - 0.6625 / 0.6575 / 0.6525

In yesterday's trade, headline US retail sales grew 0.40% mom following a downwardly revised -0.70% mom for the month of March. The number was below market consensus for a 0.80% mom increase. Retail sales number after contracting in the month of Feb and Mar 23 turned positive in April. The core retails number or the control group numbers which show non discretionary spending rose 0.70% mom following a downwardly revised March figure of -0.40%. This number was sharply higher than consensus estimates of 0.30% increase. Despite the headline surprising to the downside, resilience of the core retail sales saw US treasury yields move higher as despite the negative shock and tightening credit conditions, consumer spending strength held. 2Y US Treasuries moved higher a full 16 bps to 4.12% before closing the session at 4.09% and 10Y US Treasuries moved 12 bps higher to 3.57% before closing the session at 3.54%. Remember, we are watching the formation of a H&S pattern on US Treasury yie...

 You can find the link to the previous numbers here  Trade deficit for the month of April 2023 came in at $ 15.24 bn  much lower at than consensus expectations of $ 19.50 bn. Services sector performance continues to be robust with services surplus at $ 13.38 bn.  April Merchandise exports $ 34.66 bn ( -10% mom) & Services Exports $ 30.36 bn ( +9% mom) Exports were driven by sharp rise in oil meals , electronic goods and rice while gems and jewellery, jute, textiles etc showed sharp contraction.  April Merchandise Imports $ 49.99 bn (-14% mom) & Services Imports $ 16.50 bn ( +17% mom) Import contraction was driven by sharp fall in fertilisers, gold and vegetable oil while pulses, machinery, electrical goods rose. Overall Trade deficit came in sharply lower at $ 1.38 bn. If the services sector continues to show robust performance like has been the trend over the last year with per month trade deficit averaging $ 2 bn and Income plus transfers averagin...

As I have been writing in the past few posts, the trajectory of inflation is lower.  If you think about it, Inflation is nothing but percentage change in prices paid over the prior period. With the disruption caused in prices of energy and other commodities post Russia - Ukraine War and subsequent sharp declines, the base effect helps bring the headline print lower. For the month of April, the headline CPI rose 4.76% yoy while the core CPI which had been sticky around the 6% declined to 5.20% yoy. Both the numbers bring much needed comfort to the RBI. Sequentially, fuel and lighting declined mom while all other categories showed mom increases. With the April month's release, CPI inflation is projected to come in at 3.93% for March 2024 and remain closer to the 4% level for FY 25. My own estimates are lower than RBI projections of 5.20% by Q4 FY 24. My estimates call for a average inflation reading of 4.42% for FY 24.  If RBI inflation numbers evolve as per guidance, then ...

 The FOMC increased the Fed funds rate by 25 bps to 5.00 - 5.25%. The March FOMC statement  had mentioned: "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." The May FOMC statement has been revised to say "In determining the extent to which additional policy firming may be appropriate to return inflation to 2 percent over time"..... Which essentially points to a "pause". The Fed fund pricing is pretty much stable with Dec 13, 2023 FFR being priced at 4.39%. USD index is a tad bit lower and 2Y USTs are trading at 3.92% and 10Y at 3.40%. The meltdown in commodities continues. Brent crude prices down further 3.65% to 72.55 USD per barrel. The sharp drop in crude oil prices is a big tailwind for INR. 81.60 continues to be a very important level for the pair. Let's watch tomorrow's opening. Looks lik...

 The AUDUSD Trade got stopped out as RBA (Reserve Bank of Australia) hiked the policy rate by 25 bps against market consensus of no hike. The target rate now stands at 3.85%. AUDUSD spiked up sharply after the hike to touch a high of 0.6717. The AUDUSD exchange rate has come off since on broad USD strength and lower commodity prices to 0.6655.  Today's policy rate decision by the Federal Reserve will be crucial in giving USD direction. The market is currently pricing in a 25 bps rate hike in today's policy and a pivot in the second half of the year with 65 bps of rate cuts priced in by Dec 2023. At this point, I would like to highlight the Fed guidance per the last policy Meeting as on 22 March 2023.  Projections for Fed Fund Rate: 2023     5.10% ;  2024    4.30% ; 2025     3.10% ; Long-term 2.50% In the previous policy, Fed had highlighted that tighter credit conditions as a consequence of the collapse of the SVB and Signature Bank...

 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...