Making Sense

"We may never know where we're going, but we'd better have a good idea where we are" Existing home sales fell to a 13-year low in October with sales dropping a surprising 4.1% mom. Minutes from the Fed’s most recent Nov 1 meeting did not offer any new information and echoed the comments from the Policy meeting and Press Conference. Read the prior decision takeaways here. Minutes Recap 1. Financial Market Conditions tightened - Higher Yields / Lower Equity Prices / Stronger USD  FOMC Meeting US10Y USD INDEX S&P 01-Nov-23           4.93% 106.72 4186 22-Nov-23           4.42% 103.73 4536 Change           -51 bps -2.80% 8.36% Since the last policy, financial conditions have loosened. Does it mean that in the days ahead, Fed starts to sound more hawkish but looking at the data over the last week, there is less reason to do so? 2. Labor - Better alignment of labor...

Too much to catch up on after the long hiatus.. A lot of travel and a lot of celebration as I attended a Close Relatives wedding and celebrated my 40th Birthday. My personal life over the last week mirrored the Risk on moves in Financial Markets. Loved every bit of it and felt overwhelmed by all the family love. Coming back to markets now.... "It's only when the tide goes out that you find out who's been swimming naked" ~ Warren Buffett U.S Economic data for Oct pointed to a soft landing narrative. U.S CPI came in at 0.0%, prior 0.4%; Core CPI 0.2%, Prior 0.3%; PPI -0.5% , prior revised lower to 0.4%; Core  PPI 0.0%, prior was revised to 0.2%. Retail Sales came in at -0.1% , prior was revised higher to 0.9% from 0.7%; ex-auto came in 0.1% , prior was revised to 0.8% from 0.6%. Initial Jobless Claims came in at 231K and Weekly Continuing Claims came in at 1.865 mln.   Recap of moves in UST over the last week below:  USTs High Low      Close WoW...

Hi, I am travelling for a family wedding and though I have tried to write the blog , it's a challenge in the crunch time.. so I plan to catch up on the lost time and cover it when I'm back..  US Yields have collapsed dragging the USD down. Domestic inflation surprised lower and India trade deficit widened.. so much to catch up on... Can't wait to write !! 

The discipline that is most important is not accounting or economics, but psychology. USD 24 bn of US 30Y bond auction saw weak demand with Bid-to-Cover Ratio of 2.24 which reflects poor demand in comparison to the 2.39 ratio seen over the prior 12 auctions. Along side a poor auction, comments from Fed Chair Powell accelerated the sell off in the bonds. The Key takeaway from the speech was that FOMC is not yet confident that the stance of monetary policy is sufficiently restrictive as strong growth could undermine progress on inflation and restoring balance to the labor market.  US2s +8 bps, 5.02% , High 5.04% - Low 4.92% (Swing High 5.26%) US10s +13.50 bps, 4.63%%, High 4.65% - Low 4.47% (Swing High 5.02%) US30s +15.00 bps, 4.768%, High 4.83% - Low 4.61% (Swing High 5.18%) US2s10s -39 bps (+ 6 bps) DXY 105.90 (+0.35%)  On the India macro front, On Nov 9, liquidity deficit widened to INR 46K crore and Overnight WACR was anchored around the upper corridor band at 6.79% The OIS ...

 There is no such thing as a good or bad idea regardless of price! Goodmorning!! The US equity markets and the USD index were placid. Crude Oil prices moved decisively lower below the $81.60 support to trade a low of $79.13 following less than encouraging China data, API inventories, weak demand outlook by EIA and US2s10s bull flattened. The much awaited Fed Chair Powell's speech focused on the need for greater adaptability in forecasting techniques and refrained from any discussions around Monetary Policy. Today again he will be part of a panel discussion so be tuned to the wires.  US2s +2 bps, 4.94% , High 4.955% - Low 4.91% US10s - 7.50 bps, 4.495%%, High 4.61% - Low 4.49% US2s10s -45 bps (- 10 bps) DXY 105.53 Flat on the day  Fed Fund pricing Peak Terminal Pricing 5.37% Jun 24 Pricing 5.06% ~ market is pricing in one full 25 bps rate cut by mid next year Dec 24 Pricing 4.45% On the India macro front, On Nov 7, liquidity deficit widened to INR 21K crore possible o...

"No matter how good fundamentals may be, humans exercising their greed and propensity to err have the ability to screw things up"    We clearly saw some consolidation in the markets yesterday.  US2s - 2 bps, 4.92% , High 4.957% - Low 4.89% US10s - 8 bps, 4.57%, High 4.66% - Low 4.57% US2s10s -35 bps (-5 bps) DXY 105.50 +0.23%  Fed Fund pricing Peak Terminal Pricing 5.37% Jun 24 Pricing 5.045% ~ market is pricing in one full 25 bps rate cut by mid next year Dec 24 Pricing 4.457% Brent Crude Oil prices dropped below $81.60 support to trade a low of $ 81.27 as US crude oil inventories saw a major build up and less than encouraging trade data from China failed to support demand outlook . Crude oil stocks rose by a 11.9 mn barrels w/e Nov 3 following a 1.347 mn barrel rise in the prior week (API). API data shows net build up in crude oil inventories of 10.568 mn barrels so far this year.  Of Note, German Industrial Production contracted 1.40% mom , est -0.10% Da...

 Risk means more things can happen than will happen.                                               ~ Elroy Dimson After the sharp gains yesterday, markets consolidated overnight. I am a better seller of USD on rallies in a data light week. US2s +10 bps, 4.94% US10s + 8 bps, 4.65% US2s10s -30 bps (-3 bps) DXY 105.26 +0.20%  FOMC Voter Lisa Cook said the Fed is determined to reach 2% inflation target; hopes that current policy settings are restrictive enough to return inflation to target. While Kashkari commented "we need to let the data keep coming to us to see if we really have got the inflation genie back in the bottle". The SLOOS survey showed a net tightening of  standards on loans for businesses and commercial real estate coupled with falling demand. Standards on loans to households, including credit card and auto loans, also tigh...

Consistency trumps drama - Howard Marks Today, USDINR traded within the familiar 83.00 - 83.30 range with Nifty trading in green with gains of close to 1% following the move higher in US equities post the welcome NFP print.  Yield on IN10s trade ~ 2 bps lower at 7.30% as the specter of OMO looms large (swing high 7.39%).  Domestic Liquidity turned surplus on Nov 3 as Government Spending kicked in with system surplus seen at 13,500 crs. As the system turns surplus, the OMO estimates become crucial.  Facts - FY24 OMO sales are at INR 18K Crore. Government's Budgeted G-Sec gross borrowing is INR 15.43 trn and Net borrowing is budgeted at INR 11.81 trn. We can anticipate OMOs basis the turn in liquidity into surplus. (Refer to earlier article on the same) Durable liquidity arises from permanent or long term changes in liabilities of RBI , viz., expansion / contraction of CiC and increase/decrease of banking system reserves due to unsterilized FX interventions.  As on Oct...

 It is not supposed to be easy. Anyone who finds it easy is stupid.         ~ Charlie Munger The week was all about a very heavy Economic calendar and the USD sell off. What a phenomenal repricing in Fed Fund Rates. The Peak Terminal Rate pricing shifted from highs of 5.40% to lows of 5.34%, 6 bps move, to close the week at 5.34%. Over the last month, peak pricing was seen at 5.48%. The June policy was pricing in 8 bps of rate cuts (5.245%) which moved to 31 bps of rate cut by end of the week to 5.02% and closed the week at 5.04%. For the June 2024 meeting, since Oct, market pricing has moved from peak 5.315% to 5.02% The Dec 2024 Implied FFR pricing shifted from highs of 4.745% to lows of 4.385%, 36 bps move, to close the week at 4.42%.  The risk reward favored a move lower in the implied pricing as has been highlighted in previous posts. The meat of the move lay in the timing of rate cuts and far end pricing. The long end of the US Treasury Curv...

NFP numbers came in at 150K ,  below consensus estimates of 180K and following a downward revision to last month's number to 297K from 336K  U/R inched slightly to 3.9%  Mom Average earnings came in lower at 0.20%  After the gains in labor productivity yesterday,  Markets will cheer this number.   On the Usd index , 105.50 if cleared signals a swing top in place with more likely downside momentum possible. Im watching-  US2s 4.90% resistance and US10s 4.50% resistance.  Basis the current implied pricing , peak terminal FFR is seen at 5.36% and Dec 2024 is seen at 4.43%.

"Everything should be made as simple as possible but not simpler" - Albert Einstein The HKMA, BoE and Norges Bank kept the interest rate unchanged yesterday following the Fed Reserve. Global Equities surged higher. S&P 500 closed at 4318 (+1.89%). Of the more than 375 S&P 500 companies that have reported earnings to date, about 80% turned in results that beat analyst expectations, according to LSEG. That compares with 67% in a typical quarter.(source WSJ). Long end of the US curve outperformed with yield on US10s dipping to as low as 4.63% , 31 bps lower in 2 days.  Yields on US2s initially dipped to 4.92% but closed near session highs at 4.99%. US2s have been fairly anchored between the 4.90% - 5.25% yields since Sep and break below the 4.90% handle could see further gains accrue. US2s10s spread widened to -34 bps USD index continues the consolidation from October to trade in the 105.50 - 107.00 handle. On the Implied Fed Fund Pricing, Peak Terminal Rates 5.41% Dec 2...

Risk sentiment is off to a perky start with Equities in the green and Bond yields lower after the FOMC Rate decision.  USD Index closed near the opening levels of 106.67 after peaking at 107.11. We have a Gravestone Doji on the USD Index charts.  On US Yields, US10s broke below the 4.80% - 5.00% consolidation and treasuries closed at the best levels on the day. US2s closed near the best levels on the day at 4.94% (-14 bps) with resistance seen at 4.92%. US2s10s spread closed at -23 bps. FOMC kept the interest rate unchanged at 5.25%-5.50% and the stance restrictive while noting the resilience of the US economy (Q3 GDP 4.9% yoy), rebalancing of the labor market(+266K 3m average), encouraging inflation prints (PCE 3.40% , Core PCE 3.70%) and tightening of financial conditions. The outlook is beset with uncertainties as the lagged effects of monetary policy work through the system and the recent tightening in financial conditions weighs on economic activity. The Fed will be in a ...

I posted the Trade Idea to pay forwards  on Oct 25. Simply put, Forwards are the interest rate differential between U.S rates and India Rates and if forward expectations for US rates were to move lower, the spread would widen and hence paying on the long end of the curve made sense.  The hypothesis was that Dec 24 implied Fed Fund pricing is finding resistance at 4.80% - 4.85% level and the bar for market pricing to converge towards guided Fed Path of 5.10% is higher. Hence, Risk reward favors a move lower on the market pricing of FFR, esp in light of lower inflation prints in the US.  Markets have a way of surprising as interest rate differentials are not the only determinants of the forward curve. Global Economic Policy uncertainty, Banking system liquidity and intervention in forwards also drives forward premia.  We have seen a sharp move lower in forwards driven by the front end of the curve as Cash Tom (C/T), Tom Spot (T/S) and Cash Spot (C/S) points collapse. C...

"The first principle is that you must not fool yourself — and you are the easiest person to fool.” - Richard Feyman US equities closed in the green with S&P closing 0.65% higher, having risen 2.30% off Oct 27 lows. The U.S. Treasury quarterly refunding statement announced earlier plans to borrow $776 billion in Q4, $76 billion lower than July estimates assuming an end of Dec cash balance of $ 750 bn. During Jan - Mar 24 Treasury expects to borrow $ 816 bn assuming an end of Dec cash balance of $ 750 bn. The news was in line with expectations. Today, Treasury will announce the borrowing calendar.  Asian equities are off to a better start. Expect range bound moves ahead of the FOMC Rate Decision. Sell of in 10Y JGBs persisted after yesterday's monetary policy decision with yields at 0.976% at the time of writing. BoJ increased the flexibility in the conduct of YCC while retaining the target of 10Y JGBs at 0.00% with upper bound at 1% as reference which implies that 1% is no ...

 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...