Weekly Musings – Macro Quartet for the week ending August 02, 2024

4 Aug 2024 , 09:48 PM

FED THEME SHOWS DOVISH TINGE AFTER A LONG TIME

In the last few days, the CME Fedwatch has been getting ultra aggressive. It has now put a high probability of 90% that 3 rate cuts could be completed by end of 2024 itself. In fact, the CME Fedwatch is pencilling in one rate cut each in the next 3 Fed meetings scheduled in September, November, and December. That would mean that US Fed rates would be 75 bps lower in the range of 4.50%-4.75% by the end of calendar 2024. For now, let us leave expectations aside and focus on the September Fed meet, where there is almost a consensus that the first rate cut will happen. Here are some key takeaways.

• Jerome Powell captured the sense of the moment with his statement, “a reduction in policy rates could be on the table as early as the next meeting in September.” However, Powell has cautioned that anything beyond that is pure conjecture at this point of time and we have to take the data one point at a time.
• With the US elections coming up later this year, the big question is whether that would influence the rate cut trajectory? Powell has highlighted that the decision to cut rates, if at all, in September 2024 would be an apolitical decision. Therefore, the US presidential elections in November, or the likely candidates, or prospects of each of the candidates, will have little impact on the decision. However, that is easier said than done.
• An important hint of a September rate cut came from Jerome Powell in his post policy statement. The statement said that “while the Fed had embarked on rate hikes as early as March 2022, the full impact of that restrictive policy trickled to the broader economy in full force only in last 6 months.” That explains why Fed had held status quo on rates for a full year, after hiking rates by 550 basis points between March 2022 and July 2023.
• Any rate cut decision has to be weighed between the two extremes of starting too early or starting too late. Fed members were conscious of the risks of starting rate cuts too soon and the risk of being too late. The former could trigger inflation and the latter could escalate the cost of fund and have a spiralling effect on the economy. According to Powell, the US economy is finally at a point where the risks are balanced, such that it was deemed appropriate to begin to dial back rates. It raises hopes of September cut.

However, the bottom line is that the macro data points between now and mid-September will still carry a lot of weight in the final Fed decision to cut rates in September 2024. As we have seen in the past, there is many a slip between the cup and lip.

US BOND YIELDS  FALL; DOLLAR INDEX FALLS SHARPLY

Two macro variables that set the tone 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 (%)
Jul 29, 2024	4.172	4.196	4.196	4.151
Jul 30, 2024	4.141	4.178	4.188	4.130
Jul 31, 2024	4.033	4.151	4.155	4.031
Aug 01, 2024	3.982	4.056	4.066	3.965
Aug 02, 2024	3.792	3.970	3.974	3.787

Data Source: Bloomberg

US bond yields started the week at slightly subdued levels of 4.172%, but gradually edged lower to close the week at 3.792% levels. In fact, the fall in bond yields was rapid after the Fed policy statement on July 31, 2024; which gave the first credible and unequivocal indication of rate cuts in September 2024. One factor that will impact the bond yield is the relative prospects of the presidential candidates. According to a recent Economist report, Kamala Harris is gaining ground against Trump and is now almost at par.

Let us turn from politics to economics. With a 30 bps fall in consumer inflation and a 10 bps fall in the PCE inflation, lower bond yields are indicative of the Fed proceeding with its first rate cut in September. Of course, further rate cuts are not too clear at this point of time; and Jerome Powell has also indicated that much. During the week, the US bond yields touched a weekly high of 4.196% and a low of 3.787%; and the weekly close was just near the low point of the week. Let us turn to US dollar index (DXY), a measure of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 29, 2024	104.56	104.33	104.75	104.14
Jul 30, 2024	104.55	104.56	104.80	104.45
Jul 31, 2024	104.10	104.43	104.53	103.93
Aug 01, 2024	104.42	104.07	104.45	103.86
Aug 02, 2024	103.21	104.31	104.43	103.13

Data Source: Bloomberg

The dovish tone of the Fed also led to a sharp fall in the dollar index during the week. In June, we had seen dollar strength amidst weakness in the Euro and the Yen. That trend is not valid any longer. For the week, the dollar index started on a steady note, opening at the 104.56 levels, and steadily inched lower to close sharply lower at 103.21 levels. During the week, the dollar index (DXY) scaled a high of 104.80 and a low of 103.13.

INDIA BOND YIELDS END THE WEEK BELOW 7% MARK

The India 10-year bond yields were below the 7% mark for nearly 3 weeks in a row, but had spiked to above 7% last week on budget related concerns. Higher allocations to Bihar and Andhra Pradesh and a higher food subsidy bill were expected to spike the fiscal deficit.  However, the budget laid such fears to rest by reducing the fiscal deficit target for FY25 further from 5.1% to 4.9% of GDP.  In the latest week to August 02, 2024, the 10-year benchmark yields never crossed above the 7% mark and yields were further subdued with the Fed hinting at the first rate cut in September.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 08, 2024	6.989	6.989	6.991	6.983
Jul 09, 2024	6.989	7.006	7.006	6.983
Jul 10, 2024	6.976	6.995	6.995	6.975
Jul 11, 2024	6.982	6.982	6.982	6.982
Jul 12, 2024	6.986	6.975	6.988	6.972
Jul 15, 2024	6.981	7.005	7.005	6.977
Jul 16, 2024	6.966	6.977	6.977	6.963
Jul 17, 2024	6.966	6.977	6.977	6.963
Jul 18, 2024	6.966	6.970	6.970	6.959
Jul 19, 2024	6.965	6.976	6.976	6.962
Jul 22, 2024	6.967	6.982	6.982	6.966
Jul 23, 2024	6.970	6.972	6.987	6.952
Jul 24, 2024	6.964	6.977	6.977	6.960
Jul 25, 2024	6.952	6.974	6.974	6.952
Jul 26, 2024	7.055	7.063	7.065	7.047
Jul 29, 2024	6.919	6.942	6.942	6.913
Jul 30, 2024	6.931	6.926	6.934	6.910
Jul 31, 2024	6.924	6.932	6.939	6.918
Aug 01, 2024	6.916	6.912	6.919	6.909
Aug 02, 2024	6.900	6.909	6.909	6.894

Data Source: RBI

During the week, the bond yield opened at 6.919% and closed at 6.900%. The trigger for subdued bond yields came from the dovish tone of the Fed and Jerome Powell almost hinting at the first rate cut materializing in September 2024. During the week, India 10-year bond yields touched a high of 6.942% and a low of 6.894%. The immediate trigger for domestic bond yields will be the Kharif output and its impact on food inflation.

RUPEE CLOSES MARGINALLY WEAKER THIS WEEK

Despite a sharp fall in the dollar index to 103.21 levels; the rupee did not harden, but instead weakened marginally to 83.794/$ mark.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jul 08, 2024	83.500	83.495	83.522	83.434
Jul 09, 2024	83.465	83.479	83.522	83.452
Jul 10, 2024	83.510	83.492	83.545	83.465
Jul 11, 2024	83.507	83.518	83.607	83.472
Jul 12, 2024	83.513	83.507	83.564	83.476
Jul 15, 2024	83.551	83.507	83.628	83.493
Jul 16, 2024	83.524	83.590	83.626	83.530
Jul 17, 2024	83.580	83.532	83.592	83.494
Jul 18, 2024	83.580	83.576	83.682	83.555
Jul 19, 2024	83.724	83.668	83.741	83.596
Jul 22, 2024	83.651	83.741	83.741	83.637
Jul 23, 2024	83.676	83.664	83.731	83.606
Jul 24, 2024	83.710	83.690	83.739	83.675
Jul 25, 2024	83.720	83.769	83.810	83.648
Jul 26, 2024	83.703	83.760	83.770	83.701
Jul 29, 2024	83.748	83.725	83.774	83.700
Jul 30, 2024	83.720	83.746	83.764	83.702
Jul 31, 2024	83.699	83.761	83.770	83.654
Aug 01, 2024	83.710	83.709	83.762	83.651
Aug 02, 2024	83.794	83.753	83.822	83.715

Data Source: RBI

The rupee weakness, despite a weak dollar index, was on account of geopolitical uncertainty and the winding of the Japanese carry trade. In the recent week, the rupee made several attempts to cross above 83.8/$, but despite briefly going about that level, it could not sustain that level. With the Fed demonstrating its intent to cut rates in September 2024, the dollar is likely to remain weak. The question is what will the RBI do?. Volatile oil prices will also have an impact on the USDINR. For the week, the USDINR touched a high of 83.822/$ and a low of 83.651/$.

BRENT CRUDE FALLS SHARPLY TO $76.81/BBL ON CHINA WORRIES

After hovering above $80/bbl for 4 weeks in a row, oil witnessed a sharp fall on the last day of trading on Friday, August 02, 2024 to close at 76.81/$ level. What worked against oil was the sharper than expected slowdown in Chinese demand, and a general view that the Middle East ceasefire hopes will keep oil prices in check.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jul 08, 2024	85.75	86.74	86.92	85.56
Jul 09, 2024	84.66	85.67	85.85	84.53
Jul 10, 2024	85.08	84.92	85.66	84.00
Jul 11, 2024	85.40	85.45	85.89	84.64
Jul 12, 2024	85.03	85.69	86.35	84.95
Jul 15, 2024	84.85	85.10	85.37	84.42
Jul 16, 2024	83.73	84.78	84.86	83.30
Jul 17, 2024	85.08	83.66	85.20	83.43
Jul 18, 2024	85.11	85.23	85.81	84.22
Jul 19, 2024	82.63	84.72	85.35	82.56
Jul 22, 2024	82.40	82.80	83.22	81.60
Jul 23, 2024	81.01	82.25	82.79	80.51
Jul 24, 2024	81.71	81.46	82.23	80.93
Jul 25, 2024	82.37	81.58	82.53	80.09
Jul 26, 2024	81.13	82.40	82.71	80.33
Jul 29, 2024	79.78	81.30	81.74	79.36
Jul 30, 2024	78.63	79.64	79.99	78.43
Jul 31, 2024	80.72	79.02	80.95	79.02
Aug 01, 2024	79.52	81.44	81.80	79.43
Aug 02, 2024	76.81	79.98	80.46	76.42

Data Source: Bloomberg

However, ceasefire hopes have now gone for a toss after Israel recent attacked senior leaders of Hamas and Hezbollah. Despite the tensions, the China slowdown story appears to be dominating. The concerns are centred around weakness in Chinese demand for oil on the back of lower than expected growth rate. China remains the world’s largest importer of crude and has a larger-than-life role in deciding crude prices. If the Chinese growth situation worsens, then the demand supply gap of oil could narrow sharply. For the week, Brent crude touched a high of $81.80/bbl and a low of $76.42/bbl.

SPOT GOLD BOUNCES TO WEEKLY CLOSE OF $2,443/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.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Jul 08, 2024	2,358.80	2,391.77	2,391.85	2,351.16
Jul 09, 2024	2,363.58	2,358.60	2,371.52	2,349.59
Jul 10, 2024	2,371.07	2,363.80	2,386.75	2,362.73
Jul 11, 2024	2,414.78	2,371.58	2,424.62	2,370.83
Jul 12, 2024	2,411.27	2,416.47	2,418.37	2,391.52
Jul 15, 2024	2,422.07	2,409.50	2,439.74	2,401.35
Jul 16, 2024	2,468.57	2,424.80	2,469.91	2,423.54
Jul 17, 2024	2,458.38	2,476.22	2,483.78	2,451.60
Jul 18, 2024	2,444.97	2,460.13	2,475.02	2,440.41
Jul 19, 2024	2,400.79	2,445.34	2,446.29	2,393.92
Jul 22, 2024	2,397.65	2,400.41	2,412.32	2,384.00
Jul 23, 2024	2,409.21	2,396.80	2,412.15	2,388.26
Jul 24, 2024	2,397.59	2,408.94	2,432.05	2,396.50
Jul 25, 2024	2,364.50	2,398.49	2,401.32	2,353.19
Jul 26, 2024	2,385.57	2,364.30	2,390.82	2,355.89
Jul 29, 2024	2,383.54	2,387.20	2,403.23	2,369.77
Jul 30, 2024	2,408.43	2,383.66	2,413.00	2,376.51
Jul 31, 2024	2,448.10	2,410.09	2,451.00	2,403.86
Aug 01, 2024	2,445.42	2,448.10	2,462.40	2,430.25
Aug 02, 2024	2,443.29	2,445.16	2,477.72	2,410.83

Data Source: Bloomberg

Gold closed the week sharply higher at $2,443.29/oz in the spot gold market. The Fed hint at rate cuts in September makes gold more attractive as it reduces the opportunity cost of holding gold. Dollar weakness and central bank buying are also likely to propel gold demand. The worsening crisis in West Asia will keep the safe haven demand for gold robust. Gold traders are betting on 2 Fed rates cuts in 2024, and few more in 2025. During the week, gold touched a high of $2,478/oz and a low of $2,370/oz.