Weekly Musings – Macro Quartet for the week ending August 16, 2024

21 Aug 2024 , 09:20 AM

KEY SIGNALS FROM THE FY25 TRADE DATA

Year FY24 was a great year for the current account deficit. Indian not ended with a current account surplus in the fourth quarter of FY24, but the full year current account deficit (CAD) was also just about 0.7% of the GDP. That showed a tremendous recovery from how it had started. However, FY25 could be a different ball game. Trade deficit has been consistently higher and the services surplus is not able to make up for the gap. Last year had also seen a smart inflow of remittances. If that is not repeated in FY25, then the CAD could pose a challenge in FY25. That is something that has kept the INR under pressure, and the only reason the USDINR has not gone past 84/$ is because the RBI has been supporting the rupee at that level by selling dollars. But first, some interesting statistics.

Macro Variables (Year-to-Date)	FY25 (Apr-Jul)	FY25 (Apr-Jun)	FY24 (Apr-Jul)	Change YOY (%)
Merchandise Exports	144.12	109.96	138.39	4.14%
Merchandise Imports	229.70	172.23	213.53	7.57%
Total Merchandise Trade	373.82	282.19	351.92	6.22%
Merchandise Trade Deficit	-85.58	-62.27	-75.14	13.89%
Services Exports	117.35	90.37	106.79	9.89%
Services Imports	62.95	50.67	59.19	6.35%
Total Services Trade	180.30	141.04	165.98	8.63%
Services Trade Surplus	54.40	39.70	47.60	14.29%
Combined Exports	261.47	200.33	245.18	6.64%
Combined  Imports	292.65	222.90	272.72	7.31%
Overall Trade Volume	554.12	423.23	517.90	6.99%
Overall Trade Deficit	-31.18	-22.57	-27.54	13.22%

Data Source: DGFT and RBI (Trade data in Billion $)

Here are some key takeaways from the table above. We will focus on the merchandise trade deficit, services surplus, and the overall trade deficit for the first 4 months of FY25.

• Merchandise trade deficit (physical goods) is up 13.9% on a yoy basis at $85.6 Billion. The goods deficit is seeing exports slow down due to supply constraints and imports cost rising due to a combination of higher freight and insurance costs.
• Let us turn to the story of services surplus. To be fair, the services surplus is up 14.3% yoy at $54.4 Billion. However, this space is likely to see some pressure as the recent US labour data has been showing signs of slowdown in growth, which could hit IT spending.
• What is the net outcome. For the first 4 moths of FY25, the overall trade deficit is up 13.2% at $31.2 Billion. However, the big question is whether this figure can show a recovery in the latter half of the year, like it did in FY24. That is debatable.

Obviously, the net overall deficit after adjusting the merchandise deficit for the services surplus, is a key determinant of the current account deficit (CAD). Here is how it could look.

CAD OUTLOOK WEAKENS FOR FY25

Four months of trade data is a sufficient approximation of the full fiscal, although we still need to factor in if there would be any shift in the second half of FY25. However, it must be remembered that the FY24 CAD came in at just $23.2 Billion, or 0.7% of GDP; largely helped by a current account surplus in the fourth quarter. Of course, some of the year end deficit got shifted to FY25 due to delays on account of the Red Sea crisis. However, if the current momentum was to continue, we could see current account deficit in the region of $60 Billion to $70 Billion in FY25. That would still be about 1.8% to 2.0% of GDP; which is sharply higher than FY24. Even as we await the outlook for the Red Sea crisis, the worsening geopolitical situation in West Asia is not helping. Now, let us shift to the key macros.

US BOND YIELDS  AND DOLLAR TAPER 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 12, 2024	3.907	3.942	3.967	3.896
Aug 13, 2024	3.846	3.902	3.924	3.845
Aug 14, 2024	3.839	3.846	3.886	3.811
Aug 15, 2024	3.919	3.839	3.953	3.828
Aug 16, 2024	3.883	3.924	3.924	3.864

Data Source: Bloomberg

The US bond yields had shown a small bounce in the previous week. It was more of a dead cat bounce after the week before that had seen bond yields falling from 4.172% to 3.792% on aggressive rate cut hopes. After the bounce of last week, the current week saw the US bond yields again tapering lower to 3.883%. 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 could move quicker on rate cuts than previously envisaged.

The data continues to support rate cuts with the consumer inflation in the US for July 2024 coming in 10 bps lower at 2.9%. This trend is likely to extend to the PCE inflation also, taking it one step closer to the 2% mark. How much that move would convince the Fed, remains to be seen. Incidentally, the Fed has already hinted that rate cuts would not be anything as aggressive as what the CME Fedwatch is suggesting. During the week, the US bond yields touched a weekly high of 3.967% and a low of 3.811%, in a rangebound week. Let us turn to US dollar index (DXY), a measure of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Aug 12, 2024	103.08	103.22	103.31	103.07
Aug 13, 2024	102.61	103.08	103.27	102.55
Aug 14, 2024	102.60	102.61	102.72	102.27
Aug 15, 2024	103.04	102.61	103.23	102.54
Aug 16, 2024	102.40	103.04	103.05	102.39

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. The weakness continued in the current week. For the week, the dollar index started at 103.08 levels, but gradually inched lower through the week to close at 102.40 levels. The dollar index scaled a weekly high of 103.31 and low of 102.39.

INDIA BOND YIELDS TAPER TO CLOSE AT 6.87%

In the recent week, the 10 year bond yields in India tapered further, on hopes that the RBI would also cut rates this year to reduce the burden on corporates. The Q1FY25 results showed that the while the operating margins were up, the net profits were down 4% in the quarter. The reason was higher interest costs. Clearly, cost of funds is pinching corporates and the RBI is likely to take cognisance of that, sooner rather than later.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Aug 12, 2024	6.879	6.881	6.881	6.870
Aug 13, 2024	6.880	6.869	6.887	6.869
Aug 14, 2024	6.858	6.871	6.874	6.857
Aug 15, 2024	6.858	6.871	6.874	6.857
Aug 16, 2024	6.867	6.880	6.880	6.864

Data Source: RBI

During the week, the bond yield opened at 6.879% and closed marginally lower at 6.867%. The trigger for subdued bond yields came from Jerome Powell hinting at the first rate cut materializing in September 2024 and the consumer inflation for July falling to 2.9% in the US. During the week, India 10-year bond yields touched a high of 6.887% and a low of 6.857%. The immediate trigger for domestic bond yields will be the Kharif output and its impact on food inflation. July India inflation came in sharply lower at 3.54%, but markets would like to see the sustainable inflation rate, shorn of the base effect.

RBI INTERVENTION DEFENDS RUPEE AT 84/$

The triggers were all set for a weak rupee. The only saving grace was the RBI intervening to defence the rupee at around 84/$ by selling dollars in the market.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Aug 12, 2024	83.930	83.915	83.985	83.899
Aug 13, 2024	83.910	83.949	83.983	83.911
Aug 14, 2024	83.960	83.920	83.985	83.896
Aug 15, 2024	83.940	83.963	84.007	83.936
Aug 16, 2024	83.880	83.945	83.979	83.887

Data Source: RBI

The rupee weakness, in recent weeks, was triggered by a strong dollar and concerns over oil prices. This week, saw the RBI aggressively defending the USDINR at 84/$ by selling spot dollars. We will get to see that impact on the dollar reserves. FPIs sold $926 Million in Indian equities in the latest week, dampening sentiments further. For the week, the USDINR touched a high of 83.87/$ and a low of 84.007/$.

BRENT CRUDE FACES STIFF RESISTANCE AT $80/BBL

After hovering above $80/bbl for 4 weeks in a row, oil fell below $80 decisively in the first week of August. Since then, the price of Brent Crude has consistently struggled to break above the $80/bbl mark. This week also Brent Crude closed the week at $79.68/bbl.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Aug 12, 2024	82.30	79.56	82.40	79.46
Aug 13, 2024	80.69	81.88	82.30	80.55
Aug 14, 2024	79.76	81.00	81.44	79.60
Aug 15, 2024	81.04	79.96	81.43	79.61
Aug 16, 2024	79.68	80.86	81.02	78.62

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 major countries in the world to take sides. Despite the tensions, oil is not going up due to fears of a China slowdown and the recent US slowdown story. Weak demand in the US would mean a glut of US supply. For the week, Brent crude touched a high of $82.40/bbl and a low of $78.62/bbl.

SPOT GOLD SHINES ABOVE THE $2,500/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 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
Aug 12, 2024	2,472.25	2,431.21	2,473.48	2,423.84
Aug 13, 2024	2,465.03	2,472.64	2,477.02	2,458.50
Aug 14, 2024	2,447.64	2,467.40	2,478.49	2,438.12
Aug 15, 2024	2,456.10	2,448.15	2,470.25	2,432.19
Aug 16, 2024	2,507.28	2,456.57	2,509.89	2,450.76

Data Source: Bloomberg

Gold opened the week strong at $2,472.25/oz but eventually closed the week at a higher level at $2,507.28/oz in the spot gold market. This is the first time that gold has closed above the $2.500/oz mark. The expectations of rate cuts in September are making 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 crisis in West Asia and the Middle East is also driving safe-haven demand for gold. Gold traders are betting on 2-3 Fed rates cuts in 2024, and few more in 2025; although the Federal Reserve begs to differ. During the week, gold touched a high of $2,509.89/oz and a low of $2,423.84/oz.