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

5 Feb 2024 , 06:47 AM

INTERIM BUDGET SOBERS BOND YIELDS

It is not often that an interim budget has a sobering effect on the bond yields. But this week, the bond yields fell sharply after the interim  budget announcement. The reason was the aggression and commitment that the government showed on the fiscal prudence front. Even as the markets were wondering if the government would be able to meet its 5.9% fiscal deficit target for FY24, the interim budget cut it further to 5.8% on the back of buoyant revenues. Even the fiscal deficit target for FY25 was set at an aggressive 5.1% of GDP, sharply lower than what the markets had anticipated. But, what exactly does that imply?

The sharply lower fiscal deficit had two important implications. Firstly, it meant that the government borrowings would be under control in FY25. High government borrowings are anathema for the private sector as it crowds out the private fund raising programs. Also, when the borrowings are high, the general cost of funds tends to be high as the government borrowing rate is normally the benchmark for the overall markets. This time around, not only are borrowings low, but the actual borrowing figure could be still lower as the government has factored in very conservative levels of tax buoyancy. The moral of the story is that bond yields will trend lower and that was reflected in bond yields post-budget.

BIGGER STORY THIS WEEK WAS ABOUT OIL PRICE FALL

If falling bond yields, post the budget, was one of the defining features of the week, the other defining feature was the sharp fall in oil prices. For the week, the Brent crude prices fell from above $82/bbl to around $77/bbl. That is a sharp fall in just one week. The trigger came after there were report that there could be a ceasefire between the Hamas and Israel. Over the last few weeks, Israel has been aggressively hitting targets in Palestine and the civilian casualties are rising. That is a situation neither Israel, nor Hamas, want. Rising civilian hostilities results in reduced public sympathy for the cause and that is leading to the rethink. If the truce comes through, the attacks on Red Sea vessels by Houthi rebels are likely to taper and that would bring global trade back to the pre-crisis levels. That led to oil prices sobering during the week, and the export hopes also buoyed the rupee.

The other factor impacting oil prices was the Fed decision to keep rates static at the current levels. Markets were expecting the Fed to announce a time table for rate cuts, but that was not forthcoming. To add to the discomfiture of markets, Fed went to the extent of hinting that rate cuts were ruled out in March; pashing back hopes to May or June. Delayed rate cuts mean; rates stay high for longer and that is not good news for GDP growth or for consumer demand. Oil prices are very demand sensitive, especially demand from the big oil consumes like the US, China, and India. That was another factor pushing oil prices lower.

US BOND YIELDS TAPER; BUT STAY ABOVE 4%

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 (%)
Jan 29, 2024	4.076	4.139	4.145	4.059
Jan 30, 2024	4.036	4.078	4.103	4.034
Jan 31, 2024	3.918	4.040	4.043	3.912
Feb 01, 2024	3.882	3.931	3.958	3.816
Feb 02, 2024	4.024	3.876	4.057	3.869

Data Source: Bloomberg

US bond yields tapered during the week, but managed to just hold above the 4% mark. The bond yield had fallen briefly below the 4% mark, but bounced back after the Fed had hinted that rate cuts, if at all, would be back-ended in 2024. The latest Fed statement has been ambivalent about the timing of rate cuts; although it has ruled out rate cuts in March. During the week, the US bond yields fell from 4.076% to 4.024% and the fall in yields was led more by bond in the hope that rate cuts should eventually start post March. The CME Fedwatch is now reconciled to overall rate cuts of just 125 bps, against the original expectation of 175 bps before the end of calendar year 2025. However, even that is not something the Fed has fully ratified. Let us not turn to the dollar index (DXY).

Date	Price (%)	Open (%)	High (%)	Low (%)
Jan 29, 2024	103.61	103.47	103.82	103.40
Jan 30, 2024	103.40	103.44	103.61	103.31
Jan 31, 2024	103.27	103.42	103.74	102.94
Feb 01, 2024	103.05	103.51	103.81	103.02
Feb 02, 2024	103.92	102.99	104.04	102.90

Data Source: Bloomberg

The week was flat to positive for the dollar index (DXY) as it opened the week at 103.61 and stayed in the range of 103 to 104 for the week; closing at 103.92 levels. The DXY indicates that dollar hardening may be tougher, but if US bond yields are going to harden, then it was just a matter of time before the dollar index also started rallying. For now, rate hikes are almost ruled out. The dollar index (DXY) is an index of dollar strength against a basket of hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. Indian rupee is not part of the basket of hard currencies, but DXY value still has a deep imprint on the USDINR equation.

INDIA BOND YIELDS FALL SHARPLY TO 7.050%

During the week, the Indian bond yields fell sharply from 7.171% to 7.050%. Most of the fall in yields happened after the interim budget day. The budget had lowered the fiscal deficit to 5.8% from 5.9% for FY24 and sharply lowered the estimates to 5.1% for FY25. This is likely to mean lower borrowings and reduced pressure on the bond markets. Normally, lower fiscal deficit is a signal for the interest rates to taper and that was evident in falling bond yields.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jan 08, 2024	7.203	7.233	7.233	7.201
Jan 09, 2024	7.189	7.183	7.197	7.182
Jan 10, 2024	7.178	7.192	7.192	7.176
Jan 11, 2024	7.165	7.192	7.192	7.162
Jan 12, 2024	7.178	7.168	7.181	7.158
Jan 15, 2024	7.148	7.153	7.153	7.134
Jan 16, 2024	7.146	7.161	7.161	7.140
Jan 17, 2024	7.163	7.161	7.165	7.151
Jan 18, 2024	7.178	7.177	7.180	7.169
Jan 19, 2024	7.184	7.194	7.196	7.177
Jan 22, 2024	7.184	7.194	7.196	7.177
Jan 23, 2024	7.174	7.172	7.177	7.166
Jan 24, 2024	7.181	7.186	7.186	7.170
Jan 25, 2024	7.171	7.195	7.195	7.169
Jan 26, 2024	7.171	7.195	7.195	7.169
Jan 29, 2024	7.171	7.182	7.182	7.165
Jan 30, 2024	7.155	7.164	7.164	7.147
Jan 31, 2024	7.144	7.152	7.152	7.139
Feb 01, 2024	7.064	7.129	7.135	7.039
Feb 02, 2024	7.050	7.054	7.058	7.021

Data Source: RBI

During the week, the bond yield opened at 7.171% but tapered sharply to 7.050%. In the previous week, the bond yield shad tapered on hopes that the government would be able to keep fiscal deficit in check. However, this week, it was the aggression of fiscal deficit estimates that led to the sobering of bond yields. After all, even as the markets were pencilling fiscal deficit of 5.3% to 5.5% for FY25, the interim budget pegged it at just 5.1%.

RUPEE STRENGHENS BELOW 83/$ ONCE AGAIN

After the weakening of the rupee in the previous week amidst the worsening Red Sea crisis, the latest week saw rupee strengthen once again. After opening at 83.134/$, the rupee strengthened and closed below the psychological 83/$ mark.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jan 08, 2024	83.045	83.124	83.178	83.026
Jan 09, 2024	83.109	83.053	83.149	83.029
Jan 10, 2024	83.023	83.113	83.185	82.959
Jan 11, 2024	83.063	83.004	83.121	82.930
Jan 12, 2024	82.857	83.068	83.104	82.779
Jan 15, 2024	82.827	82.835	82.929	82.775
Jan 16, 2024	83.084	82.832	83.150	82.829
Jan 17, 2024	83.182	83.085	83.217	83.035
Jan 18, 2024	83.165	83.197	83.205	83.098
Jan 19, 2024	83.086	83.187	83.192	83.036
Jan 22, 2024	83.100	83.077	83.185	83.059
Jan 23, 2024	83.150	83.096	83.188	83.061
Jan 24, 2024	83.130	83.164	83.184	83.067
Jan 25, 2024	83.144	83.141	83.177	83.077
Jan 26, 2024	83.115	83.170	83.173	83.079
Jan 29, 2024	83.134	83.149	83.173	83.118
Jan 30, 2024	83.120	83.136	83.177	83.087
Jan 31, 2024	83.095	83.100	83.132	82.998
Feb 01, 2024	82.947	83.083	83.091	82.915
Feb 02, 2024	82.999	82.952	83.027	82.826

Data Source: RBI

The rally in the rupee was led by two factors this week. Firstly, the lower crude oil prices amidst reports of a likely truce between the Hamas and Israel sobered oil prices sharply. Normalcy in West Asia was always welcome. Secondly, the sharply lower fiscal deficit is also likely to put less pressure on the rupee and that was evident in the rupee strength.

BRENT CRUDE FALLS SHARPLY ON DUAL TRIGGERS

The latest week saw crude prices fall sharply from $83.55/bbl to $77.33/bbl, a very sharp fall after staying above $80/bbl for the best part of the last two weeks.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jan 08, 2024	76.12	78.70	78.95	75.26
Jan 09, 2024	77.59	76.30	78.19	75.95
Jan 10, 2024	76.80	77.48	78.73	76.38
Jan 11, 2024	77.41	76.70	79.10	76.66
Jan 12, 2024	78.29	78.75	80.75	77.96
Jan 15, 2024	78.15	78.14	78.90	76.85
Jan 16, 2024	78.29	78.43	79.40	77.60
Jan 17, 2024	77.88	77.77	78.19	76.50
Jan 18, 2024	79.10	78.15	79.30	77.33
Jan 19, 2024	78.56	79.10	79.73	78.32
Jan 22, 2024	80.06	78.89	80.55	77.81
Jan 23, 2024	79.55	79.92	80.43	78.70
Jan 24, 2024	80.04	79.56	80.73	79.05
Jan 25, 2024	82.43	80.31	82.57	80.06
Jan 26, 2024	83.55	82.44	83.81	81.31
Jan 29, 2024	82.40	84.13	84.80	82.03
Jan 30, 2024	82.87	82.62	83.30	81.34
Jan 31, 2024	81.71	82.94	82.94	81.59
Feb 01, 2024	78.70	80.57	81.55	78.57
Feb 02, 2024	77.33	79.15	79.44	76.85

Data Source: Bloomberg

There were two triggers that led to sobering of oil prices during the week. Firstly, the reports of a likely truce between the Hamas and Israel raised hopes that the Red Sea crisis would take backseat, if not end completely. Also, the Fed stance on rates means that higher rates for now, would mean that oil demand would remain under pressure. That also triggered the sharp fall in oil prices.

SPOT GOLD PRICES HARDEN TO $2,037/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. Here is a gist of gold prices in the week.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Jan 08, 2024	2,027.84	2,044.08	2,046.71	2,016.84
Jan 09, 2024	2,029.59	2,028.40	2,042.09	2,026.11
Jan 10, 2024	2,023.40	2,029.94	2,040.44	2,020.45
Jan 11, 2024	2,028.09	2,023.74	2,039.69	2,013.32
Jan 12, 2024	2,048.72	2,028.30	2,062.35	2,027.99
Jan 15, 2024	2,054.49	2,048.09	2,059.25	2,045.80
Jan 16, 2024	2,027.59	2,054.91	2,055.65	2,024.29
Jan 17, 2024	2,005.72	2,027.90	2,033.05	2,001.91
Jan 18, 2024	2,022.67	2,006.09	2,023.45	2,005.43
Jan 19, 2024	2,029.09	2,023.05	2,039.49	2,020.37
Jan 22, 2024	2,020.09	2,029.90	2,032.28	2,016.74
Jan 23, 2024	2,027.68	2,021.24	2,037.92	2,019.59
Jan 24, 2024	2,012.59	2,028.94	2,036.74	2,011.28
Jan 25, 2024	2,019.75	2,012.84	2,025.27	2,010.15
Jan 26, 2024	2,018.63	2,019.94	2,026.80	2,015.97
Jan 29, 2024	2,031.75	2,019.40	2,037.75	2,017.38
Jan 30, 2024	2,036.12	2,031.97	2,048.48	2,029.19
Jan 31, 2024	2,037.19	2,036.58	2,056.08	2,031.00
Feb 01, 2024	2,054.09	2,037.59	2,065.42	2,029.55
Feb 02, 2024	2,036.59	2,055.09	2,058.20	2,027.45

Data Source: Bloomberg

Gold prices rallied this week from $2,019/oz to $2,037/oz. That raises an interesting question. Geopolitical tensions are falling and US interest rates are not coming down in a hurry. That should be negative. According to the latest Google Search report, the search or “How to Buy Gold” peaked in Google Search this week. That has normally been followed by a sharp fall in gold prices as retail tends to buy near the tops. That is an interesting observation and we have to wait and watch how gold prices pan out!