Weekly Musings – Macro Quartet for the week ending August 23, 2024

25 Aug 2024 , 08:48 AM

US INTEREST OUTLOOK AT JACKSON HOLE

Not surprisingly, the most awaited speech at the Jackson Hole Symposium was the one delivered by Fed chair, Jerome Powell. Almost like the markets wanted to hear, Powell underlined that the time was ripe for a rate cut. That led to a sharp fall in treasury yields and a rally in equities. The 25 bps rate cut in September Fed meet, almost looks like a formality now. Here is who Powell said at the Jackson Hole Symposium, and here is why it matters.

• One of the key considerations for the Fed to cut rates was inflation showing signs of moving inexorably towards the 2% mark. Powell underscored that for the first time in more than 3 years; the rate of inflation in the US had been consistently showing the tendency to trend towards the 2% mark. Currently, the consumer inflation is about 90 bps away from the target while the PCE inflation is just about 50 bps away. In fact, the kind of inflation that the US experienced in the aftermath of the pandemic was last seen in the US economy more than 40 years ago in the early 1980s. In fact, the single-minded focus on inflation by the Fed was triggered by the observation that price instability hits the most vulnerable sections of the economy hardest. You really cannot dispute that!
• On allegations of being too restrictive at times; Jerome Powell underlined that the restrictive (at times ultra-restrictive) monetary policy had helped restore balance between aggregate supply and demand. Globally, inflation had spiked post the COVID pandemic, since governments had infused trillions of dollars to keep demand robust. The problem was that; when normalcy was restored, demand surged sharply but supply could not keep pace due to supply chain constraints. The entire supply chain mess was also exacerbated by a longer than expected shutdown in China. Despite being a supply side phenomenon, the inflation trigger was still the demand-supply gap. Hence, the only option was to cut rates. Only now, there is confidence of inflation moving to 2%.
• In his Jackson Hole speech, Powell also dwelt at length on the labour market, the second key consideration for the Fed to cut rates. Running up to the pandemic in 2018-19; the US economy had seen strong labour market conditions like low unemployment, high participation, combined with low inflation and healthy real wage gains. In the aftermath of COVID, the unemployment level touched a low of 3.3% (due to low participation), which is technically better than full employment. However, such a situation was not supportive of rate cuts. That situation had changed with the July 2024 unemployment rising to 4.3% and jobless claims also sharply higher.
• What tipped the scales in favour of rate cuts was the cooling job market conditions. Despite job gains staying solid, job vacancies had fallen. The hiring and quits rates are now below the levels that prevailed in 2018 and 2019, while the nominal wage gains had also moderated. To sum up the story, the conditions were finally ripe for the Fed to embark on its first rate cut in September. Despite cooling labour market conditions, there are no signs of hard landing, with GDP growth recovering from 1.4% in Q1 to 2.8% in Q2 of 2024.
• What does this imply for near-term monetary policy? In the FOMC minutes earlier this week and later in his Jackson Hole speech; Powell was categorical that the time had come for policy to adjust. Powell emphasized that the timing and pace of rate cuts would be contingent on incoming data and the evolving outlook; almost refusing to provide any futuristic rate guidance.

Jerome Powell’s speech at Jackson Hole was the second unambiguous indication that the US economy was poised for its first rate cut in this cycle in September 2024. The CME Fedwatch is pencilling 3-4 rate cuts in 2024 and a total of 200 bps of rate cuts by December 2025. However, Powell is unwilling to commit anything beyond the first rate cut of 25 bps.

US BOND YIELDS  AND DOLLAR INDEX 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 19, 2024	3.875	3.907	3.907	3.852
Aug 20, 2024	3.810	3.871	3.886	3.809
Aug 21, 2024	3.799	3.799	3.833	3.761
Aug 22, 2024	3.858	3.803	3.877	3.788
Aug 23, 2024	3.795	3.845	3.860	3.791

Data Source: Bloomberg

The US bond yields had tapered in the previous week. Bond yields in the US have been heading down, ever since the jobs data for July came in worse than expected. In the previous week, the US bond yields had tapered lower to 3.883%. In the latest week to August 23, 2024, the bond yields edged still lower to below 3.8%, largely on the back of very clear and unambiguous indications coming from the FOMC minutes and from Jerome Powell’s Jackson Hole speech hinting at the first rate official rate cut in September 2024.

The data is still supportive of rate cuts with consumer inflation for July 2024 being 10 bps lower at 2.9% and PCE inflation expected to follow suit. However, the one factor that tipped the scales in favour of a rate cut was the sharp spike in unemployment to 4.3% in July. The Fed minutes and the Jackson Hole speech have made a 25 bps rate cut almost fait accompli. During the week, the US bond yields touched a high of 3.907% and a low of 3.761%. Let us turn to US dollar index (DXY), a measure of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Aug 19, 2024	101.87	102.46	102.47	101.85
Aug 20, 2024	101.39	101.87	102.01	101.35
Aug 21, 2024	101.13	101.39	101.63	100.92
Aug 22, 2024	101.47	101.13	101.62	101.09
Aug 23, 2024	100.68	101.47	101.55	100.60

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 last 2 weeks. The weakness continued in the current week; with the dollar index now at the lowest level since July 2023, when it had last touched the 100 levels. For the week to August 23, 2024, the dollar index started at 101.87 levels, but gradually inched lower through the week to close at 100.68 levels. The dollar index scaled a weekly high of 102.47 and low of 100.60.

INDIA BOND YIELDS ALSO TAPER TO CLOSE AT 6.859%

In the recent week, the 10 year bond yields in India tapered further, on hopes that the RBI would follow suit once the Fed cuts rates in September 2024. The Q1FY25 corporate results showed the net profits falling by 4%; despite the operating margins inching higher. That was an indicator of higher interest costs, since cost of funds is pinching corporates. It is expected that the RBI will take cognisance of that to prevent distorting the growth engine.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Aug 19, 2024	6.864	6.871	6.871	6.860
Aug 20, 2024	6.856	6.874	6.874	6.850
Aug 21, 2024	6.853	6.849	6.859	6.846
Aug 22, 2024	6.852	6.861	6.861	6.843
Aug 23, 2024	6.859	6.855	6.862	6.849

Data Source: RBI

During the week, the bond yield opened at 6.864% and closed lower at 6.859%. The trigger for subdued bond yields came from an almost unambiguous hint from the US Fed chair that the first 25 bps rate cut would happen in September 2024. During the week, India 10-year bond yields touched a high of 6.874% and a low of 6.849%. The immediate trigger for domestic bond yields will be the Kharif output and the outlook for food inflation. July India inflation came in sharply lower at 3.54%, although that looks more like a base effect distortion. The real inflation signals will depend on cereals, pulses, and vegetables.

DOLLAR WEAKNESS HELPS RUPEE FIND STRENGTH

In the last 2 weeks, the RBI had been consistently intervening to defend the rupee from weakening beyond ₹84.$. This week, the weak dollar also helped along the way.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Aug 19, 2024	83.850	83.865	83.952	83.826
Aug 20, 2024	83.780	83.877	83.927	83.406
Aug 21, 2024	83.892	83.780	83.970	83.628
Aug 22, 2024	83.941	83.892	84.007	83.889
Aug 23, 2024	83.814	83.941	83.942	83.800

Data Source: RBI

After a long time, it looks like the dollar strength concerns had been overcome. The dollar index has fallen from almost 106 levels and is inching to the 100 levels. With Fed minutes and the Jackson Hole speech of Powell hinting at near-certain rate cuts in September, the dollar index has come under a lot of pressure. The rupee is seeing the spill-off gains now. FPIs also turned net buyers to the tune of $584 Million in Indian equities in the latest week, boosting the INR further. For the week, the USDINR touched a high of 83.406/$ and a low of 83.970/$. Higher Brent crude prices prevented further appreciation in the rupee.

BRENT CRUDE STILL SHORT OF $80/BBL

The level of $80/bbl remains a resistance for crude, but the late rally in crude oil this week came more due to dollar weakness. Brent Crude closed the week at $79.10/bbl.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Aug 19, 2024	77.66	79.60	79.81	77.48
Aug 20, 2024	77.20	77.66	78.35	76.55
Aug 21, 2024	76.05	77.13	78.21	75.65
Aug 22, 2024	77.22	75.96	77.70	75.77
Aug 23, 2024	79.10	77.24	79.27	77.03

Data Source: Bloomberg

Despite the sabre rattling by Iran and Turkey, there has not been any aggressive action against Israel. The tense semblance of normalcy continues in the Middle East and West Asia. Despite the tensions, oil is not rallying hard due to fears of a China slowdown and the weak US jobs data. The late oil rally this week was more due to dollar weakness. For the week, Brent crude touched a high of $79.81/bbl and a low of $75.77/bbl.

SPOT GOLD HOLDS ABOVE $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 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
Aug 19, 2024	2,503.92	2,508.40	2,510.45	2,485.83
Aug 20, 2024	2,513.74	2,501.55	2,532.05	2,497.33
Aug 21, 2024	2,511.95	2,512.82	2,520.09	2,494.15
Aug 22, 2024	2,487.66	2,512.94	2,514.69	2,470.91
Aug 23, 2024	2,512.41	2,487.60	2,518.36	2,486.56

Data Source: Bloomberg

Spot Gold opened the week strong at $2,503.92/oz but eventually closed the week higher at $2,512.41/oz. This week, gold stayed above $2.500/oz. The near confirmation of a rate cut in September is making gold more attractive as it reduces the opportunity cost of holding gold. Dollar weakness and central bank buying are also boosting gold. Meanwhile, the geopolitical strife is creating safe-haven demand for gold. During the week, gold touched a high of $2,532.05/oz and a low of $2,470.91/oz.