Making Sense

Fed Fund Futures implied interest rate pricing closed the week at 32 bps of rate cuts priced into from 43 bps cuts seen at the start of the week. Also making the headline was Goldman Sachs changing it's Fed cut call to September. The street is now divided for the first rate cut between September and December policy meetings. I still think there is more legroom before we start thinking if the FFR pricing is rich . The Us2s10s Curve bear flattened 7.40 bps.  Governor Waller's speech "Some Thoughts on r*" is an interesting one and a recommend reading as he looks at factors affecting  r* from the lens of supply and demand and contributing factors that led to the decline of r*. He then goes on to delve into factors that could have reversed to explain if r* has moved higher in the current environment.  S&P Flash PMIs showed US Global Composite PMI at a 25 month high and Services PMI at 12 month high while the Mfg PMI showed an overall improvement in business conditions....

Liquidity conditions were very market supportive over the last week as equities rallied, Roaring Kitting was back, USD index and bonds yields declined over the week. Gold prices touched fresh all time highs, Bitcoin surged and Copper went parabolic touching all time highs. US2s10s bull flattened. Over the last week, we did not get the much hoped for USD bounce and it was a one way USD decline through the week holding the 105.75 resistance. Any retracement into the 104.80 - 105.00 levels now offers resistance.  Markets continue to price in 43 bps of rate hikes into 2024 and 65 bps of rate hikes through to March 2025.  Markets are pricing in 28 bps of rate cuts by the November policy with 19 bps of rate cuts priced into by the Sep policy. Largely, what this means is markets are pricing the chance of first rate cuts between the Sep - Nov Policy and and another 15 bps of rate cuts into the year end.  Chair Powell's leaned dovish in his comments "We did not expect this to be a...

After the data in the prior week which included the FOMC Rate Decision (Chair Powell said  there’s a high bar right now for the Fed to cut rates and an even higher bar for the Fed to resume rate hikes and announced slow down in BS run off) , soft employment and PMI data numbers, this week was relatively muted in terms of fresh data releases. We had an inside day candle on the US2s and the DXY.  The Jobless claims numbers increased over the prior week but the outright levels only suggest labor market coming into better balance.  The University of Michigan Consumer sentiment, however was quite concerning with consumer sentiment retreating about 13% mom with consumers perceiving negative developments over inflation, employment and interest rates. Year ahead inflation expectations rose over 30 bps to 3.50% and long run inflation expectations rose 10 bps to 3.10%relative to the 2.20-2.60% range in the 2 years pre pandemic.  According to latest estimate released...

  NIFTY - On Friday, we had an outside day candle and a weekly one-day reversal candle which suggests shifting trends but does not suggest an immediate sharp move in the opposite direction of the trend. However, it sets us up on alert to look for signs of reversal in the ensuing weeks that follow. Sellers have stepped in ahead of 22800 level and we observe negative divergence of RSI. Levels on Nifty: Closing Level as on 05 May 2024 - 22423 Index S3 S2 S1 R1 R2 R3 R4 NIFTY 21860 22000 22337 22620 22800 22900 23038   India VIX has risen steadily in the last 8 session from 9.95 to this week’s high of 16.96 as Lok Sabha Elections are underway. Low voter turnout in phase 1 and phase 2, generally considered negative for the incumbent, could possibly translate into a lower margin of victory and that has spurred buying in vols...

The Fed Fund Pricing for cumulative rate cuts into 2024 shifted from last week's high of -34 bps to -46 bps and US2s10s bull steepened 2.50 bps over the week. US10Y yields were down 18 bps over the week with 10Y inflation indexed bonds driving gains of 12 bps and the 10Y break even inflation rate driving gains of 6 bps over the week. DXY found resistance at the 106.50 levels and came tumbling down to end the week at 105.08. JPY rallied on BoJ intervention while crude oil prices declined sharply to a 7 week low on an unexpected rise in U.S Crude Inventories. ___________________________________________________________ This week saw significant gyrations in risk assets. The post looks at data in 2 bits - Employment Data and the PMI Data. The data began the week with the Employment Cost Index rising 1.2% QoQ followed by the ADP Employment Change which showed private payrolls increase by 192K and 3m average at 192K. The Jobless claims data had no surprises with claims at very low lev...

We had yields on US2s close above the recent consolidation range while the US10s did not make fresh lows but tracked losses. Yields on US10s treasury inflation protected securities closed sharply higher at 2.28% compared to 2.20% levels on Monday as the Employment cost Index rose 1.20% qoq following a 0.93% rise in the previous quarter. ECI rose 4.20% yoy. S&P CoreLogic Case-Shiller 20-City Composite Home Price Index for Feb showed prices rose 7.31% yoy. While the consumer confidence plummeted, market had eyes focused on the ECI, as the strength in the ECI followed the sticky prices of the services component of PCE, supporting the higher for longer Fed Fund Rate narrative.  Risk assets took a beating as US Equities closed sharply lower, Bond Yields sharply higher, Brent / Gold / Bitcoin all lower. Today morning risk sentiment in continuation with the US market mood looks fragile. 

As I write this article, I will quote Howard Marks again in the context of the cyclical extreme as I had quoted him earlier in one of my articles on Jan 15, 2024 which was the point of turn of the market pendulum.  "It is important to be aware of the mood swings of the market, the Pendulum as Howard Mark says. When the Pendulum is at the extreme , it is inevitable it will move back towards the mid point sooner or later. The movement towards an extreme itself that supplies the energy for the swing back. Risk management is a challenge purely when one looks at measures of deviation move to the extreme. The timing of the move to the mid point, if captured wrongly, will prompt you to act in ways that will reduce the overall returns. Hence, it is of paramount importance, that we assess if we have reached cycle extremes.  __________________________________________________________________________________ Over the week, US economic calendar had the PMI release wherein the Services and ...

On the headline number, steady disinflation in PCE prices from 7.12% highs in June 2022 has stalled over the last 2 months and the pace of change in prices over a 3 month period has been concerning.  Going Forward, base effects kick in (core PCE Prices fell from 4.25% to 3% over June to Dec 2023), energy prices have been on a rise amid escalation in Geo-political tensions with great uncertainty on the outlook of future prices,  the immaculate disinflation in prices of durable goods seen in second half of 2023 has clearly reversed as prices rose for 3 consecutive months at an average 0.15% and Non Durable Goods are also seeing some price pressures build. Goods have a relative importance of 33% in construction of PCE Price Indices. Services inflation has seen a steady price build up. The U.S PCE Release showed headline PCE Prices rose 0.32% and Core Prices also rose 0.32%.  Over the 3 months, Price of Services rose 5.55% while energy good and services rose 8%. PCE Services ...

The U.S GDP Data released overnight showed Q1 GDP grew at an annualized 1.60% qoq while Core PCE Q1 prices rose an annual 3.70%, sharply higher from consensus expectations of 3.40% and was up 2.90% from a year ago. Nick Timiraos makes an interesting point - The GDP report implies that without upward revisions to Jan (0.45%) or Feb (+0.26%), March would be at 0.48% Massive shift in interest rate pricing with 24 bps of rate cuts implied by the November Policy which is a day after the November Elections and 34 bps of rate cuts in 2024.  The initial jobless claims data showed employment numbers remain firm.  We square our USD shorts ahead of the weekend and release of the US PCE Report.

  The Market Implied Fed Fund pricing for Interest Rate Cuts by the US Federal Reserve is now seen at 40 bps of rate cuts into 2024 from 38 bps of rate cuts seen yesterday morning. We have sideways consolidation across Bonds and USD index though US Equities made a strong come back and Gold Prices posted a big negative day, an outside day candle after the one day reversal candle seen on Friday. I continue to favor USD Shorts into the 106.45 - 106.75 Levels. Yields on IN10s also posted a big outside day reversal candle and if the hypothesis about the a turn in USD index is correct and US Yields start moving lower, we would have timed the reversal in IN10s accurately. I am now looking for a pull back into the 7.20% - 7.22% to go long IN10s.  On the USDINR, the pair held the resistance at the weekly wedge at 83.70 and moved lower supported by FPO flows. I am now looking for a pullback into the 83.50 area for initiating USDINR shorts.

The MPC Minutes show an unwavering commitment to a durable decline in inflation esp. in the backdrop of strong economic growth momentum. The macro economic outlook is subject to considerable uncertainties on weather related factors, geopolitical tensions, monsoon progress and commodity price rise among others. Steady disinflation in Core prices and deflation in energy prices has negated the food price rise on the headline inflation but going forward how much space does monetary policy get when core prices start rising as is indicated in the more frequent PMI readings is to be watched out for. What this means for Monetary Policy ? Status quo to be maintained going forward. The MPC will witness changes in its external members, with Ashima Goyal, Jayanth Varma and Shashikant Bhide completing their non extendable term in Oct 2024. Though Dr.  Ashima Goyal has spoken at length about the elevated real rates in her remarks, as the term draws to a close, both Dr. Goyal and Dr. Bhide's poli...

The Market Implied Fed Fund pricing for Interest Rate Cuts by the US Federal Reserve shifts to 38 bps with 27 bps rate cut implied by the November Policy. 

This was an interesting week, for all the tensions in the ME, crude oil prices closed 3.30% lower. Crude Oil touched a weekly high of $ 90.80 and closed the week at $ 87.15. It appears markets base case is of no escalation to the State Conflict and Iran continues to fight the proxy war across the Middle East through Hezbollah, Hamas, Shi'ite and the Houthis.  Iran's oil exports are surging and Iran would not prefer a situation where the progress is impeded. EU and US are preparing new sanctions on Iran but with Iran's proclivity to circumvent sanctions, it is to be seen if any meaningful progress can be made in bringing Iranian supply lower.  Disruption to crude oil supply either through destruction of Oil production facilities in Iran or supply route through the Strait of Hormuz or maximum pressure sanctions are events that could catalyze a spike higher in crude oil prices. A huge deterrent also comes from the U.S as President Biden tries to contain the situation ahead of ...

  Moves in US2Y stalled ahead of the 78.60% Fibo retracement of the 5.26% to 4.15% and have been congesting around the 4.90% - 5.00% over the last 6 trading days. US10Y found support at the upper end of the trend channel. Interestingly, also look at the TLT chart 20+ Year Treasury Bond ETF which has moved back within the channel. USD index saw a pullback from 106.52 (88.6% of the Fibo move from 107.35 to 100.62. I have been writing about the 106.45 - 106.75 zone as the level to look for to get a potential turn / correction in the USD index. The next crucial resistance on the pair will be previous highs at 107.35. For 107.35 levels to be truly taken out, watch for a strong catalyst - may be tensions in ME blow out crude goes to $ 100 levels etc..  So now we know the levels, we have some evidence of levels holding up, reckon we can play for tactical USD shorts with tight stops.

WSJ carried an article "Powell Dials Back Expectations on rate cuts" and the current Fed Fund Pricing implies 41 bps of rate cuts into 2024 with 23 bps of rate cuts priced into the Sep 2024 Policy as against the Fed SEP of 75 bps of rate cuts.  Chair Powell remarked:  "The recent data have clearly not given us greater confidence and instead indicate that it is likely to take longer than expected to achieve that confidence" Fed would leave rates at their current level “as long as needed” We think policy is well positioned to handle the risks that we face”. “Right now, given the strength of the labor market and progress on inflation so far, it’s appropriate to allow restrictive policy further time to work.” USTs continued to sell off on a 6 bps rise in Real Rates. The Housing data release showed weakness. The Industrial Production data , however, rose 0.40% mom. USD Index continued to make cycle highs at 106.52 and I'm looking out for signs of an intermediate corr...