Weekly Musings – Macro Quartet for the week ending August 09, 2024

12 Aug 2024 , 01:49 PM

CONSUMER CONFIDENCE LOWER; INFLATION EXPECTATIONS HIGHER

The bi-monthly RBI forward looking survey presented two interesting shifts from the previous months. We are covering these two aspects because they could have larger and long term implications for India bond yields, India inflation and the Indian rupee value. In the first 3 points, we focus on waning consumer confidence and in the next 3 points on the rising inflation expectations. We start with Consumer Confidence index of the RBI.

• In July, the current consumer confidence index fell sharply from 97.1 to 93.9 compared to the May 2024 survey. This can be attributed to a combination of political uncertainty in May and June and the global geopolitical risks, in the West Asia region.
• The waning of consumer confidence is also visible in the 1-year forward expectations data of the RBI. It moved down sharply to 120.7 in July 2024, compared to 124.8 in May 2024. Just 2 months back, the consumer confidence had crossed the pre-COVID levels.
• How does the break-up of the current perception look like, compared to the year-ago period? At 93.9 versus 97.1, consumer confidence sentiments in July 2024 are negative, and also deteriorating. In terms of consumer confidence triggers, the deterioration was across economic situation, jobs, income, and inflation; but spending outlook improved.
• How does this sort of break-up analysis for the one-year ahead period? We noted that the one-year ahead consumer confidence index fell sharply from 124.8 to 120.7. Once again, only spending showed an improved trend with deterioration across other triggers like economic situation, jobs, income, and inflation.

In a nutshell, consumer confidence has waned this year, as people generally get more cautious about the economic situation.

Let us now turn to the inflation expectations.

• Indians are preparing themselves to combat higher inflation. Inflation expectations are higher in terms of current inflation, 3-month ahead inflation and 1-year ahead inflation. In fact, the perception of current household inflation is up 20 bps at 8.2%, compared to the May 2024. This is the household inflation experienced by people at the grassroots.
• What are the key takeaways from the 3-month ahead survey of inflation expectations. In May 2024, the 3-month ahead inflation expectations had inched up 20 bps to 9.2%. In July 2024, that has gone up further by another 20 bps to 9.4%. Effectively, the consumer expectations of 3-month forward inflation has gone up 40-bps over last two surveys. This is due to factors like elections, oil prices and higher mobile tariffs being charged.
• Finally, let us turn to the 1-year ahead survey of inflation expectations. That is also higher, so in short people are expecting higher inflation to sustain and even deepen. In fact, it is a sign that the inflation that people are experience at a household level, is substantially higher than what is reported at the CPI level. Compared to the last May survey, the 1-year ahead inflation expectations have gone up by another 20 bps from 9.9% to 10.1%. That is a fairly inflationary expectation.

People are genuinely concerned about how inflation will evolve in the near and the distant future. This has larger macro implications for India. Remember, RBI not only works on managing actual inflation but also inflation expectations as that is what influences consumer preferences and eventually translates into actual consumer inflation.

US BOND YIELDS  AND THE DOLLAR INDEX RECOVER IN THE WEEK

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 (%)
Aug 05, 2024	3.779	3.789	3.832	3.667
Aug 06, 2024	3.886	3.829	3.909	3.802
Aug 07, 2024	3.926	3.880	3.977	3.870
Aug 08, 2024	3.990	3.922	4.022	3.894
Aug 09, 2024	3.940	3.989	3.989	3.922

Data Source: Bloomberg

The US bond yields had cracked sharply in the previous week after hints of a likely US slowdown forcing rapid rate cuts by the Fed. In the previous week, the US 10 year bond yields fell from 4.172% to 3.792% levels. However, in the current week, the US bond yields showed a meaningful recovery to close at 3.940%. It was not just the economic uncertainty, but even the political uncertainty of elections in the US is having an impact. However, the broad story is that the Fed move quicker on rate cuts than previous thought.

Last month had seen a 30 bps fall in consumer inflation and a 10 bps fall in the PCE inflation. That was a trigger for bond yields to taper. After the US growth scare of the previous week, this week, the bond yields stabilized. The Fed has already hinted that rate cuts would not be anything as aggressive as what the CME Fedwatch was suggesting. In fact, the Fed is still sticking to “not more than 1 rate cut of 25 bps” stand for 2024. During the week, the US bond yields touched a weekly high of 4.022% and a low of 3.667%. Hopefully, greater clarity should emerge from the July CPI inflation data. Let us turn to US dollar index (DXY), a measure of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Aug 05, 2024	102.69	103.22	103.28	102.16
Aug 06, 2024	102.97	102.78	103.22	102.70
Aug 07, 2024	103.20	102.95	103.37	102.92
Aug 08, 2024	103.29	103.11	103.54	102.92
Aug 09, 2024	103.15	103.29	103.30	103.03

Data Source: Bloomberg

The dovish tone of the Fed and the fears of a US slowdown had led to a sharp fall in the dollar index in the previous week. For the week, the dollar index started lower at 102.69 levels, but gradually inched up through the week to close at 103.15 levels. During the week, the dollar index (DXY) scaled a high of 103.54 and a low of 102.16.

INDIA BOND YIELDS STAY BELOW 7% MARK

After the 10-year India bond yields had spiked in the budget week to above 7%, there was a quick retreat and that is where it has stayed. This week, the 10 year bond yields in India tapered further, especially as a lag effect of the RBI curbing the fiscal deficit target to 4.9% of GDP for FY25.  In the latest week to August 09, 2024, the 10-year benchmark yields never crossed above the 7% mark and actually, the yields stayed under 6.9% for better part of the full week. The Indian bond yields are still am ambivalent about the RBI rate cut strategy.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Aug 05, 2024	6.860	6.862	6.865	6.844
Aug 06, 2024	6.872	6.870	6.880	6.867
Aug 07, 2024	6.862	6.885	6.885	6.859
Aug 08, 2024	6.877	6.862	6.885	6.859
Aug 09, 2024	6.880	6.887	6.889	6.878

Data Source: RBI

During the week, the bond yield opened at 6.860% and closed marginally higher at 6.880%. 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 6.889% and a low of 6.844%. The immediate trigger for domestic bond yields will be the Kharif output and its impact on food inflation, which will be evident in the July 2024 CPI inflation data to be announced late on 12-August.

RUPEE EDGES CLOSER TO THE 84/$ MARK

The strength in the dollar index during the week, led to the rupee weakening. For the week, the Indian rupee weakened to 83.951/$, after starting the week above 84/$.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Aug 05, 2024	84.018	83.793	84.182	83.757
Aug 06, 2024	83.930	83.996	84.000	83.833
Aug 07, 2024	83.885	83.955	83.994	83.878
Aug 08, 2024	83.990	83.942	84.011	83.924
Aug 09, 2024	83.951	83.989	83.994	83.885

Data Source: RBI

The rupee weakness, was triggered by a combination of a strong dollar, concerns over US growth and geopolitical uncertainty. Also, the oil prices are threatening to go higher and the Japanese yen carry trade activity is under stress. To add to the woes of the rupee, FPIs sold $1.48 Billion in Indian equities in the latest week and that only dampened sentiments further. For the week, the USDINR touched a high of 83.757/$ and a low of 84.182/$.

BRENT CRUDE FALLS BOUNCES TO $79.66/BBL ON GEOPOLITICAL RISK

After hovering above $80/bbl for 4 weeks in a row, oil fell below $80 decisively in the first week of August. The trigger for the sharp fall in oil prices was the prospect of the US economy slowing, combined with a slowdown in the Chinese economy. That is not great news for oil, especially considering its dependence on robust demand in recent years.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Aug 05, 2024	76.30	77.61	77.74	75.05
Aug 06, 2024	76.48	77.45	77.85	75.58
Aug 07, 2024	78.33	76.16	78.87	75.95
Aug 08, 2024	79.16	78.55	79.37	77.63
Aug 09, 2024	79.66	79.03	79.83	78.77

Data Source: Bloomberg

Things have just gone from bad to worse in the Middle East and West Asia. Israel and Iran look to be close to an all-out war and this could force most of the major countries in the world to take sides. Despite the tensions, the China slowdown story appears to be dominating and that has got burnished by the US slowdown story that has been added to it. China remains the world’s largest importer of crude and has a larger-than-life role in deciding crude prices. Also, weak demand in the US would mean a glut of US supply. For the week, Brent crude touched a high of $79.83/bbl and a low of $75.05/bbl.

SPOT GOLD HOLDS ITS LUSTRE ABOVE THE $2,400/OZ MARK

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 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
Aug 05, 2024	2,407.65	2,443.27	2,458.80	2,364.40
Aug 06, 2024	2,389.37	2,410.01	2,418.35	2,381.79
Aug 07, 2024	2,381.53	2,389.67	2,407.05	2,379.05
Aug 08, 2024	2,426.75	2,382.43	2,427.80	2,380.70
Aug 09, 2024	2,431.14	2,424.55	2,437.10	2,416.98

Data Source: Bloomberg

Gold opened the week lower at $2,407.65/oz but eventually closed the week at a higher level at $2,431.14/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. In addition, the worsening crisis in West Asia will make gold the preferred commodity for safety hunters. Gold traders are betting on 2-3 Fed rates cuts in 2024, and few more in 2025. During the week, gold touched a high of $2,459/oz and a low of $2,364/oz.