Making Sense

 On Friday, US equities closed in the red with Dow Jones leading losses of 1.12% while today morning saw Asian equities trade mixed. US equity futures are seen trading in the green. Crude oil prices pulled back from Friday's high thus consolidating the push lower to $ 87.70 levels on Oct 24 for the 4th day between $ 87.70 - $ 91.  US Treasuries are off to a negative weekly start with yields on US2s rising 7 bps to 5.07% (swing high 5.26%) and US10s rising 7 bps to 4.91% (swing high 5.02%) on chatter around BoJ tweaking YCC in tomorrow's meeting. US2s10s steepened with the spread at a high of -12 bps on Monday of last week and traded a low of -30 to close the week at -17 bps. The implied Fed fund pricing shifted lower, I have written in the earlier blogpost the risk reward favors going long the contract as the market pricing for Dec 24 contract finds resistance at the 4.80% - 4.85% level.  Overnight Fed Funds Rate 5.33% Current Pricing Peak terminal rate is priced at 5.41...

 Asia markets are seeing a rebound on risk sentiment after US equities fell with Dow leading losses of 1.89%. ECB kept the rates unchanged and stayed away from calling a peak in rates and focused on a data dependent approach.  Initial Jobless claims (IJC) rose 10K rom the prior week for the w/e 20 Oct to 210K while Continuing Jobless Claims (CJC) rose 63K to 1790K. CJC are seen rising since start of September and are at levels last seen in April end. Strong beat on U.S Durable goods orders, for the month of Sep, orders rose 4.70% yoy following a revised reading of -0.10% in the previous month. Pending home sales rose 1.10% mom following a 7.1% contraction in the previous month. US GDP beat expectations with Q3 growth seen at 4.9% following a 2.1% expansion in the previous quarter. The street took comfort from the core PCE deflator which came in below street estimates of 2.40% and the narrative that Q3 marks a peak in growth. A Research house reported that the PCE deflator impl...

The earlier article covered the MPC decision  and since I had not covered the Minutes released on Oct 20th, I wanted to sum up the highlights as below: 1. Inflation  Inflation spike seen in July and Aug as transitory Spatio-temporal dispersion in the rainfall could cause volatility in food prices Food inflation may not see sustained easing in Q3 but ample buffer stocks and supply side measures from the Govt likely to buttress the impact of rise in vegetable prices MPC draws comfort from deceleration in Core CPI Outlook uncertain 2. Growth Momentum to Sustain Decrease in Household net Financial Savings and an Increase in Financial liabilities support consumption Q3 to be buoyed by festival demand Private Sector investment is gaining pace Drag comes from the external sector 3. Real Rates are positive 4. Liquidity will be actively managed, incl OMO sales We had seen a sharp sell off in bonds following the mention of OMO sales on Oct 6. The system liquidity continues to be in...

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...

Hi, I couldn't write the post the last 2 days since I was in Kolkata celebrating Durga Puja. I was positively surprised at the traffic management and the good road conditions. I remember when I last visited some 15 years back for Durga Puja,  the roads were heavily congested but this time the vehicular movement was smooth. The pandals are beautiful and illustrate the bedrock of creative talent coming out of Bengal. When you move across the narrow alleys, you know the love for Puchkas, Meat Rolls, Biryani and Tea. Interestingly, this time I observed the love for Vests and Lycra as the streets are full of billboards from Lux Cozi, Rupa and VIP. It was a wonderful trip and worth a visit !! Coming back to markets now, The implied Fed Fund Pricing* for peak terminal rates is 5.43% (+10bps) and Dec 24 pricing is at 4.63% (-80bps). The terminal rate pricing has ranged between 5.49% - 5.37% over the last three months and the Dec 2024 pricing has exhibited sharp volatility with lowest pric...

Fed Chair Comments on the Economic Outlook can be summarized through the table below. The comments are in line with Fed Speak from earlier in the week. Nothing new there. WSJ is running a headline "Fed’s Jerome Powell Signals Extended Pause in Interest Rate Rises".  Market leaned on the dovish side following the comments. Fed Fund implied pricing shifted downwards. Jan 31, 2024 5.43% (prior 5.46%) Jun 12, 2024 5.18% (prior 5.25%, 1 cut by mid next year) Dec 18, 2024 4.74% (prior 4.82%, 64 bps of cut from peak terminal rates) US2s10s bear steepened with the spread now tighter at -17 bps from previous -31 bps with the front end of the curve outperforming the back end of the curve. US2s peaked at 5.26% before closing the day at 5.16% thus giving a one day reversal candle and US10s peaked at 4.996% before closing the day at 4.92%.  Crude oil prices and Gold continued to climb closing the session at $ 93.35 and $ 1974. On the data front, Initial Jobless Claims data w/e Oct 14, dec...

US Yields moved higher overnight and equities plummeted over a full percentage point.  US2s high yield of 5.24% US10s high yield of 4.93% US2s10s bear steepened -30.5 bps Fed Fund Futures Jan 31, 2024 5.46% (peak terminal rates) Jun 12, 2024 5.25% (1 cut by mid next year) Dec 18, 2024 4.82% ( 64 bps of cut from peak terminal rates) Fed Fund Futures pricing implied a Fed Fund Rates as low as 3.97% on 08th August 2023 following the last hike of 25 bps on July 26 (Fed Fund rate 5.25% to 5.50%). News of downgrade of small and mid sized banks by Moody's and the Fed speak advocating patience saw significant cuts priced in 2024.  USD index moved higher yesterday after the small reversal seen the day before which was confusing. The Geo - political backdrop also continues to be fluid with the odds of escalation having risen. Fed's Waller said that he expects one more rate hike will be needed while New York Fed President Williams said that he is not yet ready to declare victory over inf...

US Retail Sales surprised to the upside. Sep 2023 Retail sales came in at 0.70% mom and July 2023 to August 2023 % change was revised from up 0.6% to up 0.8%. Excluding autos, sales were up 0.6% mom, above f/c for just 0.2%. Total Industrial production rose 0.30% mom (f/c 0.00%).  Bond market sold off on the release of Retail Sales number. US2Y yields rose to a high of 5.24% , levels last seen in July 2006 and US10Y yields rose to 4.86%. We saw a reversal of the Safe haven buying in bonds (post the Israel-Hamas conflict) and DXY. DXY weakened to 106.02 levels. US equities closed flat.  Today morning, bunch of economic releases from China surprised to the upside. Retail Sales rose 5.5% yoy, Q3 GDP expanded by 4.90% yoy (f/c 4.40%)  and Industrial production rose 4.5% yoy (f/c 4.30%). Crude Oil price and Gold are on a rise. Resilience of the US economic data coupled with today's strong Economic data from China could lift commodity prices higher and support commodity cu...

 US Equities closed in the green with S&P 500 closing the day 1% higher and Nasdaq closing the day 1.20% higher. The USD index pulled back from 106.63 to 106.18 levels as risk sentiment improved on diplomatic efforts. President Biden will visit Israel on Wednesday, Secretary of State Antony Blinken said in Tel Aviv. Yields on US2s rose to 5.10% and US10s rose to 4.73% and US2s10s bear steepened to -40 bps from last week's close of -45 bps.   NY Empire State Mfg index gauges business conditions for NY manufacturers. The index came in at -4.60 f/c -7.  Fed's Harker comments: the Central Bank should not create new pressures in the economy by increasing the cost of borrowing. "We should not at this point be thinking about any increases" Earnings Results from Bank of America, Goldman Sachs and Bank of New York Mellon are on Tuesday's Calendar. Economic releases scheduled on the day - U.S. retail sales, industrial production and business inventories data.  India W...

Recapping the last week's price action,  Risk sentiment deteriorated in the immediate aftermath of the Israel-Hamas Conflict at the start of the week but improved on Fed Speak. Higher UST yields and as a consequence tighter financial conditions were seen by Fed Members as having done the job for Federal Reserve and the suggestion that the narrative should shift from how high to how long supported the risk sentiment before the strong US CPI data and resumption in crude oil price rally dented the sentiment again. The extremely fluid geo-political situation and how the war escalates and embroils other nations will continue to weigh on the market sentiment.  The week ahead is light on data. India only releases the WPI data today while US releases Retail Sales / Industrial production / Building Permits / Jobless Claims / Home Sales data coupled with Fed Speak. Keep a close watch on the Fed Chair Jerome Powell's Speech on Thursday before the start of the blackout period ahead of the...

India CPI came in below consensus estimates of 5.5%. Headline number came in at 5.02% yoy and Core CPI number (excl F&B + Fuel and Light) came in at 4.53%.  Headline number has decelerated from a peak of 7.44% in July to 5.02% in Sep 2023. The Q2 inflation averaged 6.43% in line with RBI estimates. Under the food category, cereals, pulses and spices continue to be sticky. The core print has been steadily decelerating from the 6.00% peak seen in Feb 2023 to 4.53%.  With the current deceleration, my estimates for Q3 average 5.36% (RBI estimates 5.60%) and for Q4 average 4.80% (RBI estimates 5.20%). Next Financial Year Q1 will be sticky around 5.07% and Q2 will be closer to 4.2% average.  Fed Fund rates will also be an important determinant of domestic rate policy. Fed Fund Futures Market are pricing in a full rate cut by June. Assuming the current interest rate trajectory plays out in the US as per market pricing and domestic inflation averages 4.80% by Q4 of this FY, R...

Markets flipped overnight on the hot US CPI report with DXY taking support at the 105.50 level. I mentioned about the risk reward in favor of USD longs in yesterday's post ahead of the DXY support and to play the divergence between the Fed's guided path and market pricing.  US CPI for the month of Sep rose 0.40% mom and 3.70% yoy. The largest contributor to the monthly increase  was the shelter index. Another major component was the gasoline index. Core CPI rose 0.30% mom and 4.10% yoy. Core services excluding rent rose 0.60% mom. The Initial jobless claims came in at 209K and continuing jobless claims rose 30K to 1702K , highest in 6 weeks. Fed Fund Futures implied market pricing for Dec 24 shifted higher to 4.70% from 4.54% we saw yesterday. Yields on USTs rose sharply higher with US2s marking a high of 5.09% and US10s marking a high of 4.73%. The move in US yields was also driven by a poor $ 20 bn 30Y auction  This morning China CPI came in at 0.20% mom below cons...

 Overnight we had the release of the US FOMC meeting minutes.  Members are divided on future rate rises Run up in treasury yields could substitute for a final increase Focus should shift from how high to raise the policy rate to how long to hold the policy rate at restrictive levels.  Comments from Fed's Waller echoed earlier comments from Fed officials that the recent tightening in financial conditions will do some work for the Fed.  US PPI came in above consensus expectations but the market focused on the core PPI print which came in line with expectations at 0.20% mom with a downward revision to the prior month.  All eyes will be on today's CPI data where consensus is for a headline reading of 3.60% yoy and Core CPI reading of 4.10%. Keep a watch on the initial jobless claims data too which has been holding surprisingly well.  The market impact of the Israel - Hamas conflict appears to be well contained with crude now trading at USD 85.55 a barrel , down...

System Liquidity turned negative as the LAF numbers released by RBI show a deficit of inr 42K crore from a surplus of 2K crore yesterday. This deficit in liquidity is being attributed to short tenor S/B FX Swaps conducted by RBI.  Yields on the IN10s surged following the announcement of likely OMO sales in the RBI policy on Oct 6. Despite the sharp fall in US yields yesterday on dovish Fed speak and safe haven buying, Yields on the 10Y closed (at 7.35%) near the day's high of 7.37%. Reckon OMO announcement will only come once there is a decisive turn in system liquidity to surplus and a durable decline in weighted average call rate (WACR) in the overnight segment. The WACR yesterday was 6.72%. Today the Gsec yields are trading lower at 7.3150%. Keeping a close watch on evolving liquidity conditions while forecasting the liquidity requirement on a weekly basis will be important to judge the timing of the OMO sales. 

"Daily habits forge your identity" US stocks made broad gains and USD downside momentum held into yesterday's close on Fed speak. Market sentiment was also lifted on reports that China is considering fresh stimulus measures to the tune of CNY 1 trn ( USD 137 bn). Comments from Federal Reserve member Logan "If long-term interest rates remain elevated because of higher term premiums, there may be less need to raise the fed-funds rate". The same message was echoed from other Fed speakers - Bostic, Kashkari and Waller. Crude oil prices and Gold prices closed the day at the highs on the Israel - Hamas conflict. The markets continued to push the Dec 24 FFR pricing lower to 4.51% from 4.55% the prior day. There is significant divergence between the Fed's guided path (5.10%) and the current implied market pricing.  For the day, we have the US PPI release and FOMC meeting minutes and the more important CPI data tomorrow. On the domestic front, USDINR continued to be ...