Weekly Musings – Macro Quartet for the week ending April 12, 2024

14 Apr 2024 , 07:23 PM

DID THE FED JUST DISAPPOINT FINANCIAL MARKETS?

During the week ended April 12, 2024, there were 3 data points that disappointed the markets. The global markets were expecting the Fed to provide a timetable for cuts in interest rates, but that was not to happen. Here are the major data points that disappointed the markets during the week.

• The US consumer inflation for March 2024 came in 30 bps higher at 3.5%. That was much higher than the consensus expectations. In the last 2 months, the inflation is up by 40 bps and that is largely on the back of higher crude oil prices. That looks unlikely to change for now, hinting that even July rate cuts by the Fed may be off the table for now.
• The Fed minutes were also published this week. As usual the Fed stayed ambivalent on the rates front. The only clarity coming from the Fed members was that the Fed would be able to give a timetable on rate cuts only after there was decisive indication that the inflation was moving towards the 2% mark. The CME Fedwatch has already pushed back expectations of the first rate cut from July to September.
• What really spooked the markets during the week was Fed governor, Neil Kashkari, also giving a hawkish view and even hinting at the possibility that there may not be any rate cuts in 2024. That did not go down well with the markets as Kashkari, being a former Goldman Sachs banker, is know to be a pro-market member of the FOMC and a strong votary of keeping rates at growth-accretive levels.

Clearly, the combination of higher inflation, strong GDP growth and robust labour data is pushing the Fed to play watchfully on the rates front.

THE ANOMALOUS RALLY IN GOLD PRICES?

If many analysts and investors found the Fed ambivalence on rate cuts surprising, the other big surprise has been the phenomenal rally in gold prices. Gold has rallied nearly 20% from the start of 2024 and has now travelled from under $2,000/oz to close to $2,400/oz. That rally has come in just 3 months, which is makes the rally all the more surprising. Now Goldman Sachs has pegged its gold price target for this year at $2,700/oz, which is another 12.5% rally from current levels. So, what is leading this phenomenal rally in gold.

The academic argument is that the Fed is delaying rate cuts, which should be negative for gold. That is because, lower interest rates would reduce the opportunity cost of holding gold and make gold as an asset class more attractive. Then, what explains this anomalous rally in gold? It is a mix of robust central bank demand for gold, a rise in demand for gold as a portfolio hedge and also the rising geopolitical tensions in the Middle East and West Asia.

US BOND YIELDS EDGE HIGHER; DOLLAR INDEX SURGES TO 106

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 08, 2024	4.422	4.414	4.464	4.406
Apr 09, 2024	4.362	4.426	4.432	4.354
Apr 10, 2024	4.546	4.366	4.568	4.342
Apr 11, 2024	4.584	4.548	4.593	4.513
Apr 12, 2024	4.517	4.582	4.584	4.483

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.422%, but picked up traction to close the week at 4.517%. 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 week, the higher than expected US CPI inflation and the Fed minutes gave ample indication that rate cuts by the Fed were apparently off the table till September 2024.

Apart from the macro data, even the FOMC minutes and member speak tilted towards a delay in rate cuts. The Fed minutes published this week gave a clear indication that rate cuts would not happen till inflation clearly showed hints of moving towards 2%. That is not happening today and that pushed up the bond yields. Also, with the likes of Neil Kashkari making hawkish noises, the impact on the US bond yields has been rather vivid. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 08, 2024	104.11	104.36	104.44	104.10
Apr 09, 2024	104.10	104.11	104.20	103.88
Apr 10, 2024	105.20	104.10	105.30	104.03
Apr 11, 2024	105.28	105.20	105.53	105.03
Apr 12, 2024	106.01	105.28	106.11	105.24

Data Source: Bloomberg

The dollar index started the week on a steady note, opening at the 104 levels but closed with a rally above 106.01 levels. This spike came after indications that rate cuts were off the table for now, and possibly till September 2024. 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 closed at the highest point of the day, with the bond yield rally making the dollar index stronger against most of the global hard currencies. Dollar index closed very near to its recent high of 107 levels.

INDIA BOND YIELDS TREND HIGHER TO 7.179%

For the second week in a row, Indian benchmark 10-year bond yields went up from 7.154% to 7.179%. In last 2 weeks, bond yields rallied from 7.052% to 7.179%. That is reflected in the table below.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
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

Data Source: RBI

During the week, the bond yield opened at 7.157% and closed at 7.179%. In the last five weeks, the benchmark Indian bond  yields have spiked from 7.014% to 7.179%. The India bond yields are roughly 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. One has to await the minutes of the MPC this week, where more clarity is expected on the possibility of rate cuts. That looks unlikely for now.

RUPEE WEAKENS TO 83.54/$ ON DOLLAR STRENGTH

With the dollar index crossing the 106 mark in the US, it was only obvious that the Indian Rupee also came under pressure. The only reason, the Indian rupee did not fall too sharply was because FPIs infused $1.46 Billion into equities in the week and the foreign currency reserves stood at a record level of $648 Billion.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
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

Data Source: RBI

The rupee has weakened sharply in the last 4 weeks from ₹82.900/$ to ₹83.540/$, which reflects a sharp weakening in a month. Now, for four weeks in succession, the rupee never dipped below the 83/$ mark, showing consistent pressure on the Indian rupee. With the dollar index (DXY) crossing above 106 levels, the pressure on the Indian rupee was inevitable. Also, the Indian rupee is facing pressure in the NDF market, which is why the RBI is moving on a war footing to nip any prospects of speculative pressure of rupee selling, either in the NDF markets in Dubai and Singapore or in the exchange traded currency derivatives market in India.

BRENT CRUDE HOVERS AROUND THE NERVOUS NINETIES

The latest week saw crude prices remain uncertain in a range, as the price of Brent Crude closed at around the $90/bbl mark. Record non-OPEC output is finally having its impact.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
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

Data Source: Bloomberg

In last 4 weeks, Brent has spiked from $85/bbl to $90/bbl; and there was some stability this week as Israel and Hamas appeared to move towards a ceasefire. The Brent Crude prices, closed at $90.21/bbl. There has been some unwinding of long crude oil futures as supplies from non-OPEC countries like the US and Canada continue to remain at higher levels. There have been some expectations that delayed rate cuts by the Fed may pull down the crude oil prices in the global markets.

SPOT GOLD CLOSES AT $2,343/OZ AFTER LATE CORRECTION

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 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
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

Data Source: Bloomberg

The price of gold has gained 20% in the last 2 months, touching a high of $2,378/oz during the week. Gold demand has been robust on the back of rising central bank demand and the worsening geopolitical uncertainty. Investment hedges via gold are also increasing by the day. In the latest week to April 12, 2024, gold prices touched lifetime high of $2,378/oz. Ironically, Fed may delay rate cuts, which should be negative for gold; as it increases the opportunity cost of holding gold. Year 2024 has surely belonged to Gold.