Weekly Musings – Macro Quartet for the week ending April 26, 2024

29 Apr 2024 , 12:36 PM

KEEP AN EYE ON THE INDIA GDP DEFLATOR

The GDP deflator is an index based inflation calculator, which is used to deflate the nominal GDP to arrive at the real GDP. Now, the GDP deflator is a combination of WPI inflation and CPI inflation. In fact, GDP deflator assigns a weightage of 65% to WPI inflation and 35% to the CPI inflation. Based on these 2 data points, the full year GDP deflator is calculated by weighting the index numbers of WPI and CPI inflation in the ratio of 65:35. Now comes the real story. For FY24, WPI inflation was -0.70% due to WPI being in negative zone for 7 out of 12 months. Hence, GDP deflator could range between 1.2%-1.5% and that could actually get the real GDP growth closer to the 8% mark.

That is the cascading argument. Negative WPI inflation means lower average GDP deflator, which effectively means higher real GDP growth, even if nominal GDP growth is not too attractive. For FY24, the India GDP story is likely to get a leg-up from a sharply lower GDP deflator. The million dollar question is whether such a low GDP deflator is sustainable? The answer would be an emphatic “No” since WPI inflation has already bounced back into positive since November 2023. Effectively, the best of low GDP deflator benefits are now done and dusted. In the months to come, the gains have to come from higher nominal GDP growth, which has its own limitations. That is likely to temper GDP growth estimates.

US BOND YIELDS FLAT; DOLLAR INDEX EDGES HIGHER

Two macro variables that set the trend for the global macros are the US bond yields and the US dollar index (DXY). Let us first look at the US 10-year bond yields.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 22, 2024	4.610	4.631	4.668	4.609
Apr 23, 2024	4.607	4.613	4.654	4.568
Apr 24, 2024	4.648	4.600	4.671	4.600
Apr 25, 2024	4.704	4.646	4.739	4.619
Apr 26, 2024	4.663	4.714	4.716	4.640

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.61%, but picked up traction to touch a high of 4.739% during the week before closing the week at 4.663%. This bullishness in the bond yields was already there, but it only get accentuated by the higher than expected PCE inflation and the lower than expected real GDP growth in this week. This week, the PCE inflation data and the lower real GDP almost limited the number of rate cuts in 2024 to just one rate cut and that impact was evident in robust bond yields at close to 4.70% mark.

In previous weeks, the CPI inflation reading and the Fed minutes had given clear indication that rate cuts would not happen till inflation convincingly showed hints of moving towards 2%. With the latest GDP data for Q1 and the PCE inflation for March 2024, that ambivalence has almost changed to a degree of assurance that rate cuts would be limited to one rate cut in 2024. One can await cues from the Fed policy statement next week, but it is unlikely to offer any new clues into what the Fed is thinking on the rates front. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 22, 2024	106.13	106.11	106.39	105.98
Apr 23, 2024	105.68	106.13	106.24	105.61
Apr 24, 2024	105.81	105.68	105.95	105.59
Apr 25, 2024	105.60	105.81	106.00	105.53
Apr 26, 2024	106.09	105.60	106.19	105.42

Data Source: Bloomberg

The dollar index had a relatively flat week, but edged higher on Friday. It started the week on a steady note, opening at the 106.13 levels but closed almost flat at 106.09 levels. However, the GDP data and the PCE inflation data led to a spike in the dollar index (DXY) on Friday. For the week, the dollar index closed with a sharp rally on Friday. Dollar index is currently just trading short of the psychological 107 levels. This is the level, the dollar index has crossed only three times in the last 40 years, which is why that level is significant.

INDIA BOND YIELDS EDGE LOWER TO 7.199%

After 3 weeks of yield rally, the Indian benchmark 10-year bond yields closed slightly lower. This week, bond yields fell from 7.225% to 7.199%.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 01, 2024	7.052	7.031	7.055	7.031
Apr 02, 2024	7.108	7.085	7.116	7.075
Apr 03, 2024	7.104	7.118	7.118	7.100
Apr 04, 2024	7.094	7.119	7.119	7.090
Apr 05, 2024	7.117	7.088	7.121	7.088
Apr 08, 2024	7.154	7.141	7.162	7.135
Apr 09, 2024	7.154	7.141	7.162	7.135
Apr 10, 2024	7.116	7.133	7.133	7.113
Apr 11, 2024	7.116	7.133	7.133	7.113
Apr 12, 2024	7.179	7.178	7.187	7.169
Apr 15, 2024	7.175	7.193	7.193	7.160
Apr 16, 2024	7.193	7.193	7.200	7.185
Apr 17, 2024	7.193	7.193	7.200	7.185
Apr 18, 2024	7.180	7.170	7.187	7.155
Apr 19, 2024	7.225	7.206	7.233	7.197
Apr 22, 2024	7.192	7.241	7.242	7.188
Apr 23, 2024	7.167	7.184	7.184	7.163
Apr 24, 2024	7.186	7.175	7.190	7.160
Apr 25, 2024	7.204	7.193	7.206	7.188
Apr 26, 2024	7.199	7.238	7.238	7.188

Data Source: RBI

During the week, the bond yield opened at 7.192% and closed at 7.199%. In the last six weeks, the benchmark Indian bond  yields had spiked from 7.014% to 7.225%. The India bond yields are approximately reflecting the spike in the US bond yield and the possibility that a stronger dollar, combined with the geopolitical risk in the Middle East, could lead to a spike in imported inflation into India. Like the Fed, even the RBI MPC has ruled out any chances of a rate cut. However, markets are still optimistic that rate cuts could happen once the new government is in place. In addition, the lower than expected fiscal deficit and the subdued borrowing program in FY25 is also keeping the 10-year bond yields under pressure. That has precluded a runaway rally in the bond yields in India.

RUPEE CLOSES AT 83.40/$ AMIDST LATE RALLY IN CRUDE OIL

With the dollar index above 106, it was obvious that the Indian Rupee came under pressure. FPIs sold $2.23 Billion in equities last week and $126 Million this week. However, record forex reserves and the prospects of inclusion in the JPM global bond indices are keeping the rupee from a free fall.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Apr 01, 2024	83.360	83.343	83.408	83.310
Apr 02, 2024	83.322	83.374	83.448	83.330
Apr 03, 2024	83.504	83.375	83.585	83.330
Apr 04, 2024	83.340	83.478	83.513	83.350
Apr 05, 2024	83.293	83.417	83.471	83.241
Apr 08, 2024	83.270	83.344	83.352	83.225
Apr 09, 2024	83.182	83.271	83.291	83.166
Apr 10, 2024	83.389	83.227	83.426	83.147
Apr 11, 2024	83.324	83.413	83.438	83.295
Apr 12, 2024	83.540	83.368	83.622	83.316
Apr 15, 2024	83.484	83.481	83.544	83.413
Apr 16, 2024	83.637	83.534	83.700	83.469
Apr 17, 2024	83.650	83.673	83.747	83.589
Apr 18, 2024	83.530	83.590	83.605	83.487
Apr 19, 2024	83.358	83.548	83.721	83.362
Apr 22, 2024	83.360	83.423	83.457	83.306
Apr 23, 2024	83.269	83.384	83.407	83.260
Apr 24, 2024	83.319	83.280	83.362	83.257
Apr 25, 2024	83.310	83.338	83.402	83.255
Apr 26, 2024	83.400	83.268	83.422	83.267

Data Source: RBI

In the last 5 weeks, the rupee weakened from ₹82.900/$ to ₹83.590/$, which reflects sharp weakening in a month. This week, the USDINR closed at ₹83.40/$. The Indian rupee has now been above 83/$ for 6 weeks in a row. India rupee could face pressure from any dollar index spike. What should worry markets is if FPI selling in bonds picks up in the coming weeks.

BRENT CRUDE SPIKES TO $89.37/BBL

The latest week saw crude prices correct sharply in the last 2 days to $89.37/bbl on worsening geopolitical risks and sharply lower US inventories.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Apr 01, 2024	87.42	86.98	87.98	86.40
Apr 02, 2024	88.92	87.62	89.32	87.62
Apr 03, 2024	89.35	89.22	89.99	88.67
Apr 04, 2024	90.65	89.48	91.30	88.72
Apr 05, 2024	91.17	91.21	91.91	90.57
Apr 08, 2024	90.38	90.09	91.10	88.78
Apr 09, 2024	89.42	90.63	90.94	89.25
Apr 10, 2024	90.48	89.55	90.71	88.83
Apr 11, 2024	89.74	90.52	90.92	89.38
Apr 12, 2024	90.21	90.14	92.18	90.05
Apr 15, 2024	90.10	90.95	91.05	88.73
Apr 16, 2024	90.02	90.43	90.84	89.41
Apr 17, 2024	87.29	90.11	90.17	87.13
Apr 18, 2024	87.11	87.42	87.80	86.09
Apr 19, 2024	87.21	87.07	90.75	86.20
Apr 22, 2024	87.00	87.07	87.26	85.79
Apr 23, 2024	88.42	87.20	88.51	86.03
Apr 24, 2024	88.02	88.45	88.86	87.65
Apr 25, 2024	89.01	87.89	89.31	87.31
Apr 26, 2024	89.37	89.24	89.85	88.81

Data Source: Bloomberg

After hovering around $90/bbl, Brent closed the previous week at $87.21/bbl on ceasefire hopes in the Gulf region and hopes that OPEC would boost output to capitalize on higher prices. However, this week, Brent Crude weakened to $89.37/bbl as the US inventories led to a draw down of over 3.4 Million barrels, against expectations of accretion to reserves amidst record oil output in the US and Canada.

SPOT GOLD CLOSES AT $2,339/OZ FOR THE WEEK

The table below captures the international spot prices of gold in dollars per troy ounce (oz). A troy ounce is approximately 31.1035 grams.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Apr 01, 2024	2,250.36	2,239.59	2,265.86	2,228.54
Apr 02, 2024	2,280.10	2,250.88	2,281.17	2,246.79
Apr 03, 2024	2,299.17	2,279.57	2,301.22	2,265.50
Apr 04, 2024	2,289.43	2,299.62	2,305.31	2,280.15
Apr 05, 2024	2,329.50	2,289.88	2,330.34	2,267.85
Apr 08, 2024	2,338.89	2,322.00	2,354.09	2,302.86
Apr 09, 2024	2,352.58	2,339.24	2,365.34	2,336.94
Apr 10, 2024	2,332.79	2,352.91	2,360.15	2,319.54
Apr 11, 2024	2,373.24	2,333.17	2,377.80	2,325.84
Apr 12, 2024	2,343.43	2,373.59	2,431.53	2,333.90
Apr 15, 2024	2,382.51	2,343.86	2,387.59	2,324.59
Apr 16, 2024	2,382.83	2,382.86	2,398.34	2,362.95
Apr 17, 2024	2,360.81	2,383.20	2,395.63	2,354.84
Apr 18, 2024	2,378.25	2,360.74	2,392.84	2,360.70
Apr 19, 2024	2,390.45	2,378.60	2,417.79	2,372.96
Apr 22, 2024	2,326.29	2,388.20	2,388.72	2,325.29
Apr 23, 2024	2,321.81	2,326.62	2,334.48	2,291.40
Apr 24, 2024	2,315.82	2,322.19	2,337.16	2,311.90
Apr 25, 2024	2,331.78	2,316.20	2,344.86	2,305.28
Apr 26, 2024	2,338.72	2,332.16	2,352.62	2,326.30

Data Source: Bloomberg

The price of gold has already gained 16.2% since the start of 2024. The gold prices fell sharply in opening trades on Monday in line with the surge in equities. However, during the week, the gold prices picked up from $2,326/oz to $2,338/oz. Gold demand has been boosted by central bank demand and geopolitical uncertainty. Ironically, Fed may delay rate cuts, which should be negative for gold; as it increases the opportunity cost of holding gold. However, robust central bank demand and safe haven buying may be the real story!