Weekly Musings – Macro Quartet for the week ending March 08, 2024

10 Mar 2024 , 07:23 AM

BOND YIELDS TAPER, BUT GOLD WAS THE ASSET OF THE WEEK

It was a week in which the yields tapered across the board. The tapering was not only in the US yields but also in India yields. The tapering of yields was on the hope that the Fed would cut rates in this year, although the quantum and the timing of the rate cuts were not too  clear. However, the bond markets took the cue from the testimony of Jerome Powell before the US House of Representatives. While Powell did not indicate any time line for the rate cuts, he did indicate that rate cuts were likely in this year; a clear indication that inflation would be brought under control before the end of this year. This also led to the dollar index weakening during the week as rate hike hopes were as good as rule out by Jerome Powell.

But the big story of the week was the smart rally in gold, which got very close to $2,200/oz. Gold is at a lifetime high and it is not just about the weakening currencies globally or too much liquidity. It is partially about the growing geopolitical event risk across the world. But, more than anything, it is about the expectation that interest rates would fall meaningfully in the coming months, ideally in the second half of 2024. Now, what do lower interest rates have to do with gold prices. A fall in interest rates reduces the opportunity cost of holding gold, which makes it much easier for asset manages to hoard gold. Also, lower rates in the US means a weaker dollar, which will help gold prices.

US AND INDIA CELEBRATE THE DUAL MANDATE STORY

When the rate hike cycle started in early 2022, there were two mandates before the central banks. Firstly, they had to bring down inflation and that called for raising the interest rates. Secondly, this had to be achieved without either impacting the GDP growth rate or the level of jobs in the economy. The first mandate was easier, but the second mandate was tougher. Two economies; India and the US have managed to achieve this dual mandate. They have brough down inflation appreciably, while keeping the GDP growth rate robust and ensuring that the level of unemployment in these economies remained under control. Apart from the fall in bond yields and spike in gold prices, this week was also the story of two economies managing this rather difficult transition. The job is substantially, if not entirely, done.

US BOND YIELDS TAPER; DOLLAR INDEX CLOSES WEAKER

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 (%)
Mar 04, 2024	4.217	4.193	4.235	4.189
Mar 05, 2024	4.151	4.223	4.223	4.112
Mar 06, 2024	4.108	4.155	4.170	4.079
Mar 07, 2024	4.089	4.104	4.127	4.054
Mar 08, 2024	4.090	4.095	4.136	4.035

Data Source: Bloomberg

US bond yields were volatile during the week with a clear downward bias, and closed below the 4.1% mark. The lower bond yields were triggered by two factors. Firstly, the expectation of rate cuts lowered the US bond yields, especially after the Jerome Powell testimony. Secondly, the hopes of lower rates also resulted in aggressive bond buying, raising bond prices, and dropping yields. For the week, the US bond yields opened at 4.217% and closed the week at 4.090%. In the coming week, it will be about US consumer inflation and the Consumer Inflation Expectations. Let us now turn to the dollar index (DXY).

Date	Price (%)	Open (%)	High (%)	Low (%)
Mar 04, 2024	103.83	103.89	103.96	103.73
Mar 05, 2024	103.80	103.85	103.95	103.58
Mar 06, 2024	103.37	103.81	103.89	103.20
Mar 07, 2024	102.82	103.31	103.35	102.79
Mar 08, 2024	102.76	102.73	102.90	102.36

Data Source: Bloomberg

The dollar index closed lower for the week, and showed a clear downward bias. The dollar index (DXY) opened the week at 103.83 and tapered through the week; eventually closing at 102.76 levels. The dollar saw weakness on the back of rate cut expectations after the Fed testimony. While there was no timetable on rate cuts, Powell almost assured markets that there would be rate cuts in calendar 2024. The dollar index (DXY) measures dollar strength against a basket of hard currencies like Pound, Euro, Yen, Yuan etc.

INDIA BOND YIELDS TAPER SHARPLY TO 7.031%

During the week, the Indian benchmark 10-year bond yields tapered from 7.060% to 7.031%. The yields had been trending lower ever since the CPI inflation in India came in sharply lower at 5.1% for January 2024. In the latest week, the Indian bond yields had another trigger to trend lower, as the Jerome Powell testimony to the US Congress hinted at rate cuts this year and the US bond yields also tapered. The February CPI inflation data is expected this week and is likely to be at 5%, or lower. While the Red Sea crisis raised fears of the spillover impact of longer routes, higher freight costs and higher insurance premiums; Indian bond yields have ignored that for now.

Date	Price (%)	Open (%)	High (%)	Low (%)
Feb 12, 2024	7.097	7.120	7.120	7.090
Feb 13, 2024	7.097	7.105	7.109	7.096
Feb 14, 2024	7.114	7.136	7.140	7.110
Feb 15, 2024	7.085	7.104	7.104	7.079
Feb 16, 2024	7.099	7.097	7.103	7.075
Feb 19, 2024	7.099	7.097	7.103	7.075
Feb 20, 2024	7.062	7.118	7.118	7.060
Feb 21, 2024	7.045	7.065	7.065	7.038
Feb 22, 2024	7.062	7.062	7.076	7.045
Feb 23, 2024	7.077	7.074	7.081	7.062
Feb 26, 2024	7.063	7.055	7.066	7.046
Feb 27, 2024	7.068	7.074	7.074	7.061
Feb 28, 2024	7.065	7.076	7.076	7.060
Feb 29, 2024	7.078	7.059	7.082	7.057
Mar 01, 2024	7.060	7.062	7.082	7.057
Mar 04, 2024	7.060	7.051	7.062	7.047
Mar 05, 2024	7.057	7.066	7.066	7.053
Mar 06, 2024	7.054	7.053	7.057	7.048
Mar 07, 2024	7.031	7.054	7.054	7.026
Mar 08, 2024	7.031	7.054	7.054	7.026

Data Source: RBI

During the week, the bond yield opened at 7.060% but closed lower at 7.031%. The last 3 weeks, the bond yields have been on a see-saw, but over a longer range have tapered from 7.114% to 7.031%. Bond yields had fallen sharply after the Interim Budget had cut the fiscal deficit target for FY25 to 5.1% and given a glide path of below 4.5% for FY26. With the elections coming up and the full budget likely only in July 2024, the RBI looks unlikely to cut rates for now. However, the markets are confident that the RBI would offer guidance on rate cuts in the coming months, although implementation may happen only in H2-2024.

RUPEE STRENGTHENS TO 82.77/$ AT CLOSE

In the week after the Interim Budget, the rupee had shown signs of strength amidst a favourable interim budget but higher crude prices had since weakened the rupee. While crude prices have been in a range, the rupee strength this week was on the back of positive FPI flows into equity and the weakening of the dollar index (DXY). The dollar index weakened this week after the Powell testimony and that gave a fillip to the Indian rupee.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Feb 12, 2024	82.970	83.025	83.057	82.951
Feb 13, 2024	83.098	83.008	83.121	82.963
Feb 14, 2024	83.034	83.104	83.120	83.015
Feb 15, 2024	82.988	83.035	83.075	82.982
Feb 16, 2024	83.013	82.991	83.049	82.983
Feb 19, 2024	83.026	82.987	83.061	82.949
Feb 20, 2024	82.890	83.031	83.043	82.862
Feb 21, 2024	82.930	82.895	82.983	82.835
Feb 22, 2024	82.837	82.933	82.965	82.812
Feb 23, 2024	82.859	82.845	82.965	82.845
Feb 26, 2024	82.846	82.873	82.914	82.851
Feb 27, 2024	82.877	82.901	82.921	82.841
Feb 28, 2024	82.900	82.924	82.967	82.863
Feb 29, 2024	82.900	82.910	82.957	82.864
Mar 01, 2024	82.841	82.926	82.933	82.836
Mar 04, 2024	82.911	82.845	82.935	82.830
Mar 05, 2024	82.891	82.913	82.938	82.863
Mar 06, 2024	82.780	82.896	82.919	82.801
Mar 07, 2024	82.708	82.820	82.850	82.669
Mar 08, 2024	82.770	82.743	82.792	82.660

Data Source: RBI

The rupee ended stronger at ₹82.77/$ compared to the previous weekly close of ₹82.841/$. The market has now spent a full 3 weeks below the ₹83/$ mark, a clear sign of sustained rupee strength. In the last 3 weeks, FPIs have infused $2.01 Billion into Indian equities, even as they have continued to be net buyers in Indian debt, ahead of the JP Morgan index inclusion as well as the Bloomberg Bond Index inclusion. Last week, the UK and Japan officially slipped into recession, raising the hope that weak demand may dent oil prices. However, it must be remembered, that 2 of the largest consumers of global oil; the US and India are still seeing robust growth.

BRENT CRUDE STAYS IN A NARROW RANGE

The latest week saw crude prices fall to $82.12/bbl, from a high of $83.55/bbl at the close of the previous week.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Feb 12, 2024	82.00	81.94	82.19	80.77
Feb 13, 2024	82.77	82.00	83.24	81.96
Feb 14, 2024	81.60	82.60	83.60	81.39
Feb 15, 2024	82.86	81.42	83.25	80.72
Feb 16, 2024	83.47	82.79	83.66	81.89
Feb 19, 2024	83.56	83.28	83.60	82.55
Feb 20, 2024	82.34	83.24	83.63	82.05
Feb 21, 2024	83.03	82.50	83.17	81.66
Feb 22, 2024	83.67	83.20	83.96	82.33
Feb 23, 2024	81.62	83.39	83.48	81.43
Feb 26, 2024	82.53	81.41	83.07	81.00
Feb 27, 2024	83.65	82.64	83.70	82.10
Feb 28, 2024	83.68	83.30	84.31	82.60
Feb 29, 2024	81.91	81.83	82.84	81.51
Mar 01, 2024	83.55	82.07	84.34	81.81
Mar 04, 2024	82.80	83.50	84.08	82.57
Mar 05, 2024	82.04	82.74	83.14	81.72
Mar 06, 2024	82.96	82.01	84.05	81.85
Mar 07, 2024	82.96	82.92	83.53	82.07
Mar 08, 2024	82.12	83.20	83.85	81.72

Data Source: Bloomberg

The OPEC meet this week is likely to sustain supply cuts, but that may not matter too much if there are going to be demand pressures from Japan and the UK. Despite the unrest in the Red Sea, the prices have been under check to strong demand concerns. However, strong GDP data from the US and India could change oil equations in favour of the sellers.

SPOT GOLD PRICES SPIKES TO $2,177/OZ

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

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Feb 12, 2024	2,019.79	2,024.53	2,028.09	2,011.91
Feb 13, 2024	1,992.13	2,019.90	2,030.05	1,990.19
Feb 14, 2024	1,992.39	1,992.55	1,996.14	1,984.30
Feb 15, 2024	2,004.09	1,992.69	2,008.49	1,990.25
Feb 16, 2024	2,013.10	2,004.40	2,015.25	1,995.48
Feb 19, 2024	2,017.63	2,013.16	2,023.34	2,011.57
Feb 20, 2024	2,023.53	2,017.99	2,030.96	2,015.02
Feb 21, 2024	2,024.99	2,023.80	2,032.22	2,020.19
Feb 22, 2024	2,024.11	2,025.24	2,034.84	2,019.70
Feb 23, 2024	2,035.72	2,024.49	2,041.43	2,015.55
Feb 26, 2024	2,030.66	2,034.49	2,037.59	2,025.10
Feb 27, 2024	2,029.64	2,030.99	2,039.99	2,028.78
Feb 28, 2024	2,034.62	2,030.05	2,038.30	2,024.56
Feb 29, 2024	2,043.24	2,034.92	2,050.79	2,027.75
Mar 01, 2024	2,083.39	2,043.44	2,088.40	2,038.55
Mar 04, 2024	2,114.99	2,082.09	2,119.95	2,079.45
Mar 05, 2024	2,127.55	2,115.15	2,142.15	2,110.52
Mar 06, 2024	2,148.29	2,127.95	2,152.29	2,123.65
Mar 07, 2024	2,159.16	2,148.54	2,164.54	2,144.29
Mar 08, 2024	2,176.90	2,162.03	2,195.19	2,154.09

Data Source: Bloomberg

Gold prices rose sharply touch a high of $2,195/oz in the week before tapering and closing the week at in the week to $2,177/bbl. There were broadly two reasons for the sharp spike gold prices this week. Firstly, there is worsening of geopolitical situation, especially in the Middle East and West Asia. However, the more important factor was renewed expectations of Fed rate cuts, especially in the light of the Jerome Powell testimony to the US Congress, affirming rate hikes in 2024. Lower US inflation could add more grist to this argument. In addition, dollar weakness has also pushed up gold prices in the recent week to new highs.