Weekly Musings – Macro Quartet for the week ending April 05, 2024

8 Apr 2024 , 02:02 PM

GLOBAL MARKETS PREPARE FOR SLOWER FED RATE CUTS

The previous week saw the dollar index start at above 105 levels but tapered back to the 104 levels after it became increasingly clear that the Fed would go slow on rate cuts. For now, the consensus is that the Fed could commence rate cuts in July, but most of the FOMC members are in favour of waiting when they can afford to. During the week, there were several triggers that pointed towards delayed rate cuts by the Fed.

• After higher PCE inflation and stronger than expected Q4 GDP reported by the US economy in the last week of March, the markets started to reconcile itself to the reality that rate hikes may be more back-ended that originally expected. In addition, the consumer inflation in the coming week is also expected to spike by 20 bps to 3.4%.
• Both the bond yields in the US, which surged to 4.4%, and the tapering of the dollar index after the initial spike indicated that the rate cuts are likely to be much slower than expected. Not surprisingly, even the CME Fedwatch is now pegging a 50% probability of 2 rate cuts in 2024 and 50% probability of 3 rate cuts in this year.
• The real clue came from the Fed speak during the week. Both Christopher Waller and Michelle Bowman were quite explicit that rate cuts cannot be guaranteed and would not happen till the Fed could actually afford to wait. Currently, it can easily afford to wait. Also, during the week, Jerome Powell only spoke about the risks of rate hikes at this juncture, but did not make any mention of rate cuts in 2024.

The markets are preparing for a more sober market scenario where rate cuts may be back-ended this year; or may even not happen if the data did not justify rate cuts.

OIL REMAINED THE X-FACTOR DURING THE WEEK

Even as gold continued to rally, hinting at a sharp move towards safety, the real risk was from oil prices going up. This week, the Brent Crude closed above $91/bbl with the geo-political scenario worsening. After Israel allegedly attacked Iranian assets in Syria, the situation ahs worsened with Iran threatening retaliation. The fear is that if Iran and Israel get involved, then the conflict could spread across the larger Arab Peninsula and could also impact the movement of oil through the Strait of Hormuz. Even otherwise, the demand supply equations also favour higher oil prices with demand for oil robust amidst strong GDP growth numbers from the US and India. Also, the OPEC is likely to keep the supply of oil in the undersupplied zone and the US continues to struggle with persistent drawdown on inventories. Oil analysts are already pencilling in $100/bbl, and that may not really be too far fetched at this point of time; if you add up the economics and geopolitics of oil.

US BOND YIELDS SPIKE; DOLLAR INDEX EDGES LOWER

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 25, 2024	4.317	4.190	4.337	4.188
Mar 26, 2024	4.353	4.305	4.405	4.303
Mar 27, 2024	4.351	4.357	4.429	4.343
Mar 28, 2024	4.307	4.343	4.381	4.299
Mar 29, 2024	4.400	4.309	4.406	4.305

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.317%, but picked up traction to close the week at 4.400%. This bullishness in the bond yields was seen ever since the US PCE inflation and the US GDP for the fourth quarter came in higher than expected. This means that the US may go slow on rate cuts and that has given a boost to bond yields.

Apart from the macro data, even the FOMC member speak has not been too encouraging. Recent speeches by Waller, Powell and Bowman appear to indicate that rate cuts may not be top on the agenda for the Fed. Instead, the Fed would prefer to delay the rate cuts as long as they could afford to wait since CPI inflation was more than 120 bps from the target. Let us turn to how the dollar index panned out during the week.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 01, 2024	105.00	104.48	105.07	104.42
Apr 02, 2024	104.78	105.00	105.10	104.68
Apr 03, 2024	104.22	104.78	104.84	104.22
Apr 04, 2024	104.23	104.22	104.26	103.92
Apr 05, 2024	104.29	104.23	104.69	104.14

Data Source: Bloomberg

The dollar index started the week on a strong note, opening at the 105 levels and closing money at 105. However, this could not be sustained after it became increasingly apparent that the Fed would not hurry through rate cuts. That means the Fed would ideally wait for the inflation to give more clear signals that it was going towards 2%. For the week, the dollar index fell from 105.00 to 104.29. The central banks of EU and UK have indicated that rate hike cycle may be over and they may consider rate cuts soon. However, that appears to have been already factored into the US dollar index.

INDIA BOND YIELDS TREND HIGHER TO 7.117%

During the week, the Indian benchmark 10-year bond yields went up from 7.052% to 7.117%. The Indian bond yields broadly reflected the trend in the US bond yields. That is reflected in the table below.

Date	Price (%)	Open (%)	High (%)	Low (%)
Mar 11, 2024	7.014	7.025	7.025	7.006
Mar 12, 2024	7.026	7.025	7.029	7.015
Mar 13, 2024	7.039	7.043	7.043	7.030
Mar 14, 2024	7.041	7.046	7.048	7.038
Mar 15, 2024	7.062	7.060	7.064	7.051
Mar 18, 2024	7.087	7.080	7.088	7.075
Mar 19, 2024	7.095	7.096	7.100	7.081
Mar 20, 2024	7.097	7.101	7.103	7.089
Mar 21, 2024	7.050	7.080	7.080	7.048
Mar 22, 2024	7.087	7.062	7.096	7.055
Mar 25, 2024	7.087	7.062	7.096	7.055
Mar 26, 2024	7.089	7.091	7.100	7.079
Mar 27, 2024	7.072	7.097	7.097	7.067
Mar 28, 2024	7.052	7.031	7.055	7.031
Mar 29, 2024	7.052	7.031	7.055	7.031
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

Data Source: RBI

During the week, the bond yield opened at 7.052% and closed at 7.117%. In the last 4 weeks, the benchmark Indian bond  yields have spiked from 7.014% to 7.117%. the US markets were disappointed after the Fed pronouncements and the macro data pointed towards a delay in rate cuts. On a similar note, the RBI was also expected to give hints on rate cuts. However, in its monetary policy this week, the RBI was silent. Most likely, the RBI may not look to effect any rate cuts till the presentation of the full budget in July 2024.

RUPEE STAYS ABOVE 83/$ FOR THIRD WEEK IN A ROW

The rupee, during the week, was largely in a stable zone. The dollar index fell from 105.00 levels to 104.29 levels during the week. That allowed the USDINR to be in a range for the week. However, FPI flows into equity were negative, even as FPI flows into debt remain robust. Higher oil prices have also put some pressure on the rupee.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Mar 11, 2024	82.720	82.754	82.782	82.645
Mar 12, 2024	82.786	82.739	82.839	82.720
Mar 13, 2024	82.820	82.830	82.923	82.774
Mar 14, 2024	82.915	82.827	82.952	82.803
Mar 15, 2024	82.883	82.990	82.995	82.817
Mar 18, 2024	82.900	82.891	82.935	82.825
Mar 19, 2024	83.007	82.935	83.063	82.899
Mar 20, 2024	83.173	83.053	83.233	82.990
Mar 21, 2024	83.174	83.117	83.235	83.034
Mar 22, 2024	83.549	83.215	83.714	83.201
Mar 25, 2024	83.405	83.465	83.548	83.384
Mar 26, 2024	83.309	83.415	83.441	83.254
Mar 27, 2024	83.294	83.365	83.480	83.291
Mar 28, 2024	83.352	83.373	83.424	83.310
Mar 29, 2024	83.324	83.393	83.408	83.220
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

Data Source: RBI

The rupee had weakened sharply to weeks back from ₹82.883/$ to ₹83.549/$, which reflects a sharp weakening in a single week. Now, for the third week in succession, the rupee is above 83/$. In the current week, the rupee closed at ₹83.290/$. FPIs were net sellers in the week of $39 Million in equities; and they have net sold equities worth $713 Million in last 3 weeks. However, this was more than offset by the inflows into debt. The dollar came under pressure as other global currencies recovered. Rupee is also seeing pressure in the global NDF markets, which is largely based out of Dubai and Singapore. That is one reason, the RBI is clamping down aggressively on speculation in the ETCD markets.

BRENT CRUDE CLOSES WELL ABOVE THE NERVOUS NINETIES

The latest week saw crude prices spike on demand supply mismatch, which led to Brent Crude spiking to $91.17/bbl at the close of the week.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Mar 11, 2024	82.21	82.00	82.75	81.08
Mar 12, 2024	81.92	82.45	83.01	81.69
Mar 13, 2024	84.03	82.45	84.24	81.96
Mar 14, 2024	85.42	84.04	85.69	83.98
Mar 15, 2024	85.34	85.15	85.55	84.60
Mar 18, 2024	86.89	85.32	87.18	85.25
Mar 19, 2024	87.38	86.94	87.70	86.48
Mar 20, 2024	85.95	87.15	87.35	85.59
Mar 21, 2024	85.60	86.29	86.63	85.06
Mar 22, 2024	85.47	85.64	86.15	85.11
Mar 25, 2024	86.75	85.50	87.17	85.40
Mar 26, 2024	86.25	86.81	87.06	85.80
Mar 27, 2024	86.09	85.86	86.39	85.17
Mar 28, 2024	87.00	85.69	87.07	85.50
Mar 29, 2024	87.00	85.69	87.07	85.50
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

Data Source: Bloomberg

In last 4 weeks, Brent has spiked from $82/bbl to $91/bbl; a spike of over 10% in less than a month. The Brent Crude prices, closed near the high point of the week at $91.17/bbl. The spike this week was on the back of the worsening geopolitical situation as Israel and Iran threaten to expand the scope of the conflict in the West Asia region. Impact on cargo movements through the Straits of Hormuz remains a X-factor.

SPOT GOLD PRICES AT LIFETIME HIGH OF $2,330/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 gold price summary.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Mar 11, 2024	2,182.47	2,177.71	2,189.04	2,174.80
Mar 12, 2024	2,157.99	2,183.00	2,184.86	2,150.59
Mar 13, 2024	2,174.40	2,158.25	2,179.91	2,155.54
Mar 14, 2024	2,161.01	2,174.29	2,177.10	2,152.86
Mar 15, 2024	2,155.54	2,162.40	2,173.25	2,155.19
Mar 18, 2024	2,159.99	2,156.00	2,163.64	2,146.05
Mar 19, 2024	2,157.23	2,160.70	2,162.93	2,146.90
Mar 20, 2024	2,185.96	2,158.29	2,188.90	2,149.60
Mar 21, 2024	2,180.81	2,186.00	2,218.65	2,166.50
Mar 22, 2024	2,159.94	2,181.84	2,186.14	2,157.20
Mar 25, 2024	2,171.45	2,165.79	2,181.30	2,163.50
Mar 26, 2024	2,178.58	2,171.82	2,200.15	2,167.75
Mar 27, 2024	2,194.02	2,179.03	2,197.71	2,173.59
Mar 28, 2024	2,232.38	2,194.19	2,235.90	2,187.33
Mar 29, 2024	2,232.38	2,194.19	2,235.90	2,187.33
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

Data Source: Bloomberg

The price of gold has gained 15% after it crossed the $2,300/oz mark. The uncertainty in the market, high equity valuations and Red Sea crisis combined to give a boost to gold prices. In the latest week to April 05, 2024, gold prices touched lifetime high of $2,330/oz. Ironically, data is indicating that Fed may delay rate cuts, which is negative for gold; as it increases the opportunity cost of holding gold. Above all, central banks and investors are diversifying into gold as a hedge.