Making Sense

 U.S Yields moved higher and USD index consolidated overnight. A Ukrainian drone strike caused a fire at the Ryazan oil refinery near Moscow, one of Russia’s biggest crude-processing facilities. A site in the southern Rostov region was also hit. Both halted operations. Ukraine has stepped up its attacks on critical infrastructure in recent months. On Tuesday it launched strikes targeting energy sites in at least seven Russian regions [Source: Economist].  Brent Crude prices have been consolidating in a 81.00 - 84.00 zone since early part of February 2024. From a technical standpoint, there is a H&S formation plus and ascending triangle and a decisive breakout above $ 84.50 could turnout to be potent with 2023 highs of $ 96 per barrel in potential targets. Fed Fund Futures are now implying 78 bps of rate cuts into 2024 from 84 bps yesterday. We have the all important PPI [consensus 0.30%] / Retail Sales [ consensus 0.40%] and the Initial and Final Jobless Claims data. ...

The median forecast for CPI Headline U.S CPI 3.10% yoy and 0.43% mom Core CPI 3.70% yoy and 0.32% mom The details of the CPI release are tabled below. Core CPI mom at 0.40% is actually unwounded at 0.358%. Fed Fund pricing shifted from 91 bps to 86 bps at the time of writing and US2Y is 4.616% (10 bps off lows) and US10Y is trading at 4.157% (7.60 bps off lows). USD index trades at 103.17. Post NFP, DXY had traded a low of 102.36. Core Services inflation rose 0.46% mom following a 0.66% mom rise the prior month. Last 12 months core services inflation has been up at an average pace of 0.43% mom and Core goods inflation rose 0.11% mom.  The data does not change expectations much but ofcourse supports the case of a cautious Fed.   We now wait for the PPI data on thursday for estimates of PCE and more importantly the Fed projections for PCE numbers and FFR.

India CPI came in at 5.09% and Core CPI at 3.34%. Eggs / Vegetables /Pulses / Spices rose in double digit Yoy while oil and fat fell (-14% yoy). Concerning component was the meat and fish basket which grew 2.30% mom and Housing which grew at 0.50% mom.  Spices though up 13.50% yoy were down 2% mom and likewise for pulses and products , down 0.83% mom.  RBIs Q4 projections for CPI are at 5.00% which translates into Mar reading of 4.80%. The number does not change anything meaningfully for the Central Bank. According to my own estimates, CPI is likely to average 5.20% in Q1 FY25 as against RBIs estimate of 5.00% which leaves very little wiggle room for any rate action.  RBIs repeated stance has been to guard against generalization of food price pressures and with weather uncertainty and low reservoir levels, rate action window open in Q2 FY2025. 

India CPI is likely to come in at 4.90% with Reuters Poll showing consensus estimates at 5.02%. My Estimates for Trade Deficit are at $ 16 bn much below street estimates of a reading of $18.30 bn.   It's not the absolute number which is important but you have to understand where will the delta come from. It is important to understand that if Merchandize trade + services number comes in line with previous numbers, averaging $ 6.60 bn combined deficit we will end the year with a current account deficit of $ 29 bn. However, if the trade data (gds& services) exhibits last month's trend of $ 1.3 bn deficit for the next 2 months, then the Current account deficit will be well under $ 20 bn. 

Today's blog is very late in the day. My mother recommended "Lessons in Chemistry" by Bonnie Gamus and boy , I have not been able to put down that book. I am really tempted to write about the book but may be later. I strongly recommend everyone to read the book.  On that note, back to markets: Just attaching a snapshot below since it's too late... Fed Fund Futures are pricing in 22 bps of rate cut by June and 91 bps of rate cut by Dec 2024. 

We had string of fresh highs on S&P 500, Gold and Bitcoin. U.S Yields had a wide move lower post the benign NFP numbers. USD Index dropped right into the 0.618% Fibo support level of 102.28 of the move from 100.62 to 104.96 and closed the week at 102.80.  On the NFP data, NFP employment rose 275K for the month of Feb. The prior month numbers were revised significantly lower to 229K for Jan and 290K for Dec, a cumulative downward revision of 167K. The Labor Force Participation rate stayed at 62.5% and the U/R inched higher to 3.90% from prior 3.70%. The Unemployment level increased by 334K as Labor Force rose by 150K and Employment reduced by 184K. The Average Hourly Earnings (AHE) rose 0.14% mom and the Average Weekly Hours rose rose by 0.10 hrs to 34.30 hrs.  After bottoming at 165K in Oct, NFP employment has steadily increased and averages at 231K over the 6 month period. Over a 3 month horizon, AHE have risen at an average 0.33% mom and over a 12 month horizon have rise...

 Refer to the link earlier 

  ECB monetary policy announcement - The implied rates for 2024 see a full 25 bps rate cut priced by June Policy and 97 bps of rate cut into 2024.  Key interest rates were maintained unchanged as of the end of February 2024, amidst a backdrop of declining inflation rates, subdued economic growth, and low unemployment. Inflation edged down to 2.6% by February 2024, following a decline from 2.8% in January. Despite downward revisions in inflation projections, mainly attributed to decreases in energy prices, domestic price pressures remain elevated, fueled by robust wage growth. Economic activity remains weak as of the end of 2023, with consumers holding back on spending and moderated investment. GDP growth was projected to be 0.6% for 2024, indicating a sluggish recovery. Unemployment stands at its lowest since the euro's inception, as of the end of 2023, but output per person has continued to decline, indicating challenges in productivity. Risks to economic growth remai...

S&P 500, NIFTY, SENSEX, Gold made fresh all time highs while Bitcoin recovered Tuesday's drop to 59313 to close at 66941.  U.S. Market Wrap US2s10s bull steepened / Fed Funds are now pricing in 1 full 25 bps rate cut by June 2024 / USD index declined further / Key Employment figures due today Michelle Bowman (voting member)   speech yesterday’s acknowledged continued progress in inflation, the challenge in achieving last mile of inflation,  labor market coming into better balance, strength in consumer spending and recent data shows rebound in jobs market. Her base case is further decline in inflation but there are upside risks to inflation that emanate from Geopolitical developments , loosening of financial conditions and strong labor market could lead to persistently high core services inflation. Uncertainty in economic outlook warrants a data dependent cautious approach and it will be appropriate to reduce rates when there is more confidence that inflation...

USDJPY / EURUSD / AUDUSD broadly performed in line with expectations as highlighted in the view earlier  with strong gains in JPY and w e hit our  SL on the GBPUSD  trade.  USDINR is seeing a rounded top technical formation and we may be breaking out lower. Today's close will be important and then the next immediate support is seen as 82.66.  Fed Chair Powell's testimony offered nothing new - Fed believes that they are peak of the tightening cycle.  T he statement reflected a cautious approach to monetary policy, with a recognition of the uncertainty surrounding the economic outlook and a focus on achieving the central bank's inflation target while supporting economic growth and employment and the delicate balance that policymakers must strike. The statement acknowledged that if the economy continues to develop as expected, there may be a need to start easing the current policy stance at some point during the year. The Central Bank would follow a data driv...

LAF surplus as on Mar 5 moved to 64K crore from 41K crore while system liquidity surplus (adj for CRR balances) was seen at 28K cr (+20K cr day on day).  The WACR traded lower at 6.33%. Net liquidity absorbed through O/N V. Reverse Repo and SDF was at 167K crore.  RBI conducted an O/N VRRR for 100K cr which was fully taken up by market participants and RBI also announced a 15 day Variable Rate Repo auction of 50K cr for 07 Mar / 22 Mar to inject liquidity in lieu of the 100K cr VRR maturing on 7th Mar.  Advance Tax payment by Mar 15 followed by GST payments by Mar 20 will see liquidity worsen over the month. I am estimating advance tax payments at inr 200K crore. C/T points have been gradually easing ahead of the $ 5bn  S/B swap due to mature on  11 Mar 2024  with weighted average rate seen at 0.15 ps (0.64%) and having traded as low as 0.05 ps (0.22%)

Yesterday was an interesting day with profit taking seen across U.S Equities and Bitcoin and U.S Yields lower across the curve with US2s10s flattening 2 bps. The US ISM Non - mfg PMI came in at 52.60 with internals showing  Business Activity Index at 57.2% (prior 55.80) ,  New Orders Index at 56.1% (prior 55.00),  Employment Index at 48% (prior 50.50) and Prices paid at 58.60% (prior 64.00).  Cumulative Fed Fund pricing for 2024 saw 89 bps of rate cuts priced from prior 84 bps as the data gave comfort that Fed may stick to 75 bps rate cut guidance in light of soft employment and prices paid component. 

 

System turned Liquidity surplus with daily absorption seen at 41K cr and system liquidity ( adjusted for excess CRR balances) at inr 7400 crs. RBI announced 1 day VRRR auction of Inr 100K crore for which the amount accepted was ~ 73K crore and announced a second 1 day VRRR auction of Inr 100K crore today.  Reckon RBIs intention is to maintain the WACR at the Repo Rate and today's WACR ( Call / Treps and Repo) of 6.34% is not in sync and hence a second operation was announced as such.

Risk Sentiment up in the sky as U.S. Equities made all time fresh highs  as did the Stoxx 50 & 600 index, Nikkei 225 and our loved Domestic Equities. Gold came within a whisker of ATH of 2145 and similarly for Bitcoin within a whisker of ATH of 69000. However, USD continues to languish around the 103.60 level which makes sense if one theorizes about it from a standpoint of USD Smile Theory. The USD smile theory says that “ US dollar tends to rally when the US economy is ripping and the Fed is hiking. And the dollar also rallies during US recessions. On the other hand, the dollar tends to sell off in periods of moderate US growth as long as global growth is decent.” NYCB fell sharply lower but the Markets shrugged off the decline possibly because they see no contagion risks at the moment. The Fed Fund pricing shifted from 92 bps in 2024 to 84 bps and US2s10s bear flattened. Yields High Low Close DoD ▲ US 2Y ...