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

11 Feb 2024 , 09:05 AM

INDIA BOND YIELDS SPIKE AFTER RBI POLICY

The week saw bond yields in the Indian market edging higher in the aftermath of the RBI policy presentation. The Union Budget in the previous week had given some clear hints of tapering bond yields. The fiscal deficit for FY24 had been eased to 5.8% while the fiscal deficit estimate for FY25 was pegged sharply lower at 5.1%. That is not only in sync with the glide path, but it also means that in FY26 the fiscal deficit could be lower than the committed level of 4.5%. Lower fiscal deficit meant that the borrowing target for the year was also lowered and that put less pressure on the bond yields. Something changed in the latest week as the bond yields rallied sharply after the RBI policy announcement.

When the RBI announced its policy statement on February 08, 2024, there was already a consensus that the repo rates would stay put at 6.5%. However, the RBI was expected to give some indication on when it would start cutting rates. After all, the real rates are already at 1.5% and the repo rates are a full 135 basis points above the pre-COVID rate. However, there was no indication coming from the RBI; not even a shift in stance. Secondly, the inflation projection has been held at 5.4% for FY24 and at 4.5% for FY25. Markets were expecting the FY25 inflation projections at close to the target rate of 4.00%. Both these factors resulted in a sharp spike in the bond yields during the week.

GEOPOLITICAL RISK SPIKES CRUDE OIL PRICES

If oil prices fell in the previous week on hopes of a truce between Israel and Gaza, that hope was belied in this week. In the previous week, the price of Brent crude fell from $82/bbl to $77/bbl. In the current week, the oil prices bounced back from $77/bbl to $82.50/bbl. Once the truce fell, the firing by Houthi rebels has also become more aggressive. Recently, the Houthi rebels also hit a vessel carrying oil to India and this would drive more of India cargo through the Horn of Africa. That means higher freight costs, higher insurance costs and more time to delivery, overall. That is anyways likely to make oil dearer. In addition, post the ceasefire failing, it is expected that Israel will also intensify its attacks on Rafah. The net result would be more intense geopolitical risk emanating from the West Asia region.

The other trigger for crude oil prices came from the GDP growth estimates. The lates update of the World Economic Outlook by the IMF has upgraded world GDP growth for 2024 by 20 bps. More importantly, the biggest upgrades are coming from the key consumers of oil like China, the US and India. That is likely to put pressure on oil prices. We could have a situation where supply will struggle to keep pace with demand due to high prices and also due to delays in delivering the oil on account of longer routes taken. Overall, the price of crude oil in this week reflected the current economics of oil, which is increasingly favouring suppliers.

US BOND YIELDS EDGE UP; DOLLAR INDEX IN A RANGE

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 (%)
Feb 05, 2024	4.162	4.054	4.177	4.049
Feb 06, 2024	4.090	4.146	4.171	4.079
Feb 07, 2024	4.115	4.102	4.135	4.065
Feb 08, 2024	4.158	4.106	4.173	4.088
Feb 09, 2024	4.177	4.154	4.195	4.125

Data Source: Bloomberg

US bond yields were largely flat during the week, but managed to hold above the 4.15% mark. The bond yield had fallen briefly below the 4% mark post the Fed statement on January 31, 2024 putting off rate cuts to June. In the absence of fresh inputs, the bond yields were in a narrow range this week, almost closing the week where it started off. The Fed statement was ambivalent on timing of rate cuts; but ruled out rate cuts in March. That means; May or June 2024 could see the first rate cut. The CME Fedwatch is acknowledging this too as it converges towards the Fed stance. CME Fedwatch is now reconciled to overall rate cuts of just 100-125 bps in 2024. Let us now turn to the dollar index (DXY).

Date	Price (%)	Open (%)	High (%)	Low (%)
Feb 05, 2024	104.45	103.96	104.60	103.96
Feb 06, 2024	104.21	104.44	104.59	104.14
Feb 07, 2024	104.06	104.15	104.17	103.94
Feb 08, 2024	104.17	104.03	104.43	103.96
Feb 09, 2024	104.11	104.14	104.26	103.95

Data Source: Bloomberg

The week was flat to rangebound for the dollar index (DXY) as it opened the week at 104.45 and stayed in the range of 104.00 to 104.50 through the week; closing at 104.11 levels. The DXY indicates that dollar hardening may be tougher, considering that the Fed has already given hints that rates may have peaked. The only hope of another rate hike is, if inflation spikes. Dollar index looks rangebound, till the Fed puts out a timetable for rate cuts. DXY sobering could only happen after that. The dollar index (DXY) is an index of dollar strength against a basket of hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. 

INDIA BOND YIELDS MOVES UP TO 7.114%

During the week, the Indian bond yields spiked from 7.050% to 7.114%. Most the yield spike came because the RBI policy did not give any timetable for rate cuts or cut its outlook for inflation in FY25. The Red Sea crisis has also raised fears that the inflation could remain high for longer. Hence, bond yields are up, despite lower fiscal deficit outlook in interim budget. 

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Feb 05, 2024	7.091	7.092	7.096	7.071
Feb 06, 2024	7.092	7.096	7.096	7.070
Feb 07, 2024	7.074	7.075	7.078	7.064
Feb 08, 2024	7.082	7.073	7.092	7.048
Feb 09, 2024	7.114	7.091	7.118	7.075

Data Source: RBI

During the week, the bond yield opened at 7.091% but edged up to 7.050%. In the previous week, the bond yields had tapered on hopes that the government would be able to keep fiscal deficit in check. However, this week, the RBI policy outlook on inflation has held yields higher. The markets are also awaiting the CPI inflation data for January 2024, which is expected to taper towards the 5.2% mark. That could help to sober bond yields.

RUPEE CLOSES EXACTLY AT THE 83/$ MARK

In the previous week, the rupee had shown signs of strength amidst a favourable interim budget and a sharp fall in crude oil prices. However, in the current week, the dollar is back at 83/$ with the ceasefire talks between Israel and Hamas collapsing and the oil prices rallying to around $82.5/bbl in the current week.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Feb 05, 2024	83.036	83.011	83.095	82.956
Feb 06, 2024	83.062	83.044	83.079	83.015
Feb 07, 2024	82.977	83.070	83.091	82.934
Feb 08, 2024	82.978	82.981	83.021	82.893
Feb 09, 2024	83.000	82.984	83.059	82.945

Data Source: RBI

The rupee ended flat compared to the previous weekly close. Interestingly, the RBI has also been buying dollars to ensure that the exporters do not suffer from a strong rupee, when exports are pegged 5% lower for FY24. The RBI has been intervening to protect exporters.

BRENT CRUDE FALLS SHARPLY ON DUAL TRIGGERS

The latest week saw crude prices spike sharply from $77.33/bbl to $82.19/bbl, a reversal after falling sharply in the previous week on ceasefire hopes in West Asia.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Feb 05, 2024	77.99	77.90	78.33	76.62
Feb 06, 2024	78.59	77.95	79.08	77.63
Feb 07, 2024	79.21	78.70	79.50	78.49
Feb 08, 2024	81.63	79.30	81.90	79.03
Feb 09, 2024	82.19	81.72	82.45	81.21

Data Source: Bloomberg

Last week, the ceasefire hopes led oil prices lower. However, the Israel Hamas talks fell apart and oil is back at $82.19/bbl at close. This is also likely to put pressure on the Indian rupee in the coming week. The other factor, apart from the worsening situation in the Red Sea, is robust growth estimates for oil importing nations like the US, China, and India; as outlined by the IMF in its World Economic outlook (WEO) update of January 2024. Strong demand is also keeping crude oil prices robust.

SPOT GOLD PRICES EASES TO $2,024/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 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
Feb 05, 2024	2,024.67	2,039.91	2,042.32	2,014.40
Feb 06, 2024	2,035.46	2,024.99	2,039.02	2,022.55
Feb 07, 2024	2,034.22	2,035.90	2,044.65	2,030.65
Feb 08, 2024	2,033.18	2,034.55	2,038.94	2,019.75
Feb 09, 2024	2,024.16	2,033.65	2,037.44	2,020.30

Data Source: Bloomberg

Gold prices rallied this week from $2,037/oz to $2,024/oz; virtually erasing the gains of the previous week. Interestingly, gold is under pressure despite the geopolitical crisis engendered by the Houthi rebels in Yemen. However, the world over, countries are contemplating rate cuts but are not able to implement the same due to inflation fears. Lower interest rates will help gold by reducing the opportunity cost of holding gold. Once the rate cuts happen, we could see a more aggressive and persuasive rally in gold prices.