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

18 Feb 2024 , 06:33 PM

INDIA BOND YIELDS TAPER; RUPEE WEAKENS

In the previous week, the India bond yields had moved up due to the RBI not providing any time table on rate cuts. However, this week, the bond yields again edged below the 7.1% mark. That was because the inflation figure came sharply lower by 60 basis points at 5.1%. This has once again raised the hopes that the RBI may cut rates sooner than expected. However, that is unlikely considering that there is the general election slated in May and the full budget will only be presented by July. In all possibilities, the RBI may not cut the interest rates till the Union Budget is presented and the colour of the budget is known. However, the more interesting aspect of the week was the slightly pressure on the rupee.

For the week, the rupee closed at ₹83.013/$, and this is weaker than the close of the previous week. The pressure on the rupee came from a number of factors. The dollar index (DXY) continues to edge higher and that was one of the factors keeping the rupee under pressure. Secondly, there is the FPI outflows in the recent past. One can argue that FPIs have been net buyers in debt; and that is correct. However, the persistent equity selling does have a sentimental impact on the rupee. The third factor that weakened the rupee is that the RBI has not been defending the ₹83/$ turn any longer. That has also led  to the weakness in the rupee.

HOW HIGH CAN CRUDE PRICES GO?

For now, estimates vary about how high crude prices can go. Oil analysts are of the view that the bullish view on oil is finally back for a number of reasons. Geopolitical risk continues to be elevated at this juncture. With the last ceasefire talks between the Hamas and Israel falling through, it looks very unlikely that the geopolitical risk could recede any time soon. That will keep the oil prices elevated. Secondly, the demand for oil is picking up and that is likely to improve further as GDP growth across key oil consumers like the US, China and India has also been looking up. Lastly, the OPEC may have internal differences, but it is unlikely to boost the supply of oil any time soon. They would prefer to keep the oil market undersupplied so that the pricing power remains with the seller. With the support of Saudi Arabia and Russia, that should not be too difficult for the oil producers.

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 12, 2024	4.179	4.183	4.197	4.146
Feb 13, 2024	4.326	4.179	4.328	4.150
Feb 14, 2024	4.261	4.328	4.332	4.246
Feb 15, 2024	4.234	4.255	4.257	4.187
Feb 16, 2024	4.281	4.238	4.330	4.236

Data Source: Bloomberg

US bond yields were volatile during the week and in a range, but managed to hold above the 4.2% mark. The higher bond yields were triggered by the US consumer inflation reading in the week.  To be fair, the inflation did taper from 3.3% to 3.1% for January 2024. However, this was 20 bps above the Bloomberg consensus estimate of 2.9%.  That led to a spike in yields during the week as it closed at the 4.281% mark. The Fed policy has not spoken much about rate cuts except for ruling out the possibility of rate cuts in the March policy. The coming week will see the Fed minutes being published and the markets will be reading between the lines to decipher a message on the rate trajectory signals. Let us now turn to the dollar index (DXY).

Date	Price (%)	Open (%)	High (%)	Low (%)
Feb 12, 2024	104.17	104.08	104.28	103.89
Feb 13, 2024	104.96	104.18	104.96	103.97
Feb 14, 2024	104.72	104.83	104.98	104.66
Feb 15, 2024	104.30	104.66	104.71	104.18
Feb 16, 2024	104.30	104.30	104.67	104.17

Data Source: Bloomberg

The dollar index closed flat for the week, but it was rangebound in a volatile market. The dollar index (DXY) opened the week at 104.96 and stayed in the range of 104.00 to 104.50 through the week; closing at 104.30 levels. The spike was due to higher than expected inflation. The DXY indicates that dollar may harden further if the Fed continues to put off its rate cut decisions, especially after the inflation reading. For now, another rate hike looks unlikely, but higher for longer is enough to harden the dollar. For now, the DXY awaits the Fed rate cut timetable. DXY sobering may only happen after that. The dollar index (DXY) measures dollar strength against a basket of hard currencies like Pound, Euro, Yen, Yuan etc. 

INDIA BOND YIELDS TAPER TO 7.099%

During the week, the benchmark 10-year bond yields tapered from 7.114% to 7.099%. The yields tapered in the week due to the consumer inflation (CPI) coming in lower than expected at 5.1%; a fall of 60 bps over last month. Last week, the bond yields had spiked because the RBI policy had not given any indication of the rate cut timetable. The Red Sea crisis has also raised fears that consumer inflation could remain higher for longer, especially considering the immediate impact of longer routes, higher freight costs and higher insurance premiums that shippers are now required to pay.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Feb 12, 2024	7.097	7.120	7.120	7.090
Feb 13, 2024	7.097	7.105	7.109	7.096
Feb 14, 2024	7.114	7.136	7.140	7.110
Feb 15, 2024	7.085	7.104	7.104	7.079
Feb 16, 2024	7.099	7.097	7.103	7.075

Data Source: RBI

During the week, the bond yield opened at 7.097% but closed flat at 7.099%. The last 3 weeks, the bond yields have been on a see-saw. The week to February 02, 2024 saw bond yields tapering due to the budget cutting its fiscal deficit estimates. Last week, the bond yields rallied on the back of the RBI not providing any time table for rate cuts. In the current week, the bond yields have been impacted by the lower than expected inflation number at 5.1%. For the coming week, the big data flow will be the RBI minutes of the Monetary Policy Committee Meeting that concluded with the policy announcement on February 08, 2024.

RUPEE CLOSES BEYOND THE 83/$ MARK

In the week after the Interim Budget, the rupee had shown signs of strength amidst a favourable interim budget and a sharp fall in crude oil prices. The previous week saw the price of oil closing around the ₹83/$ mark and in the current week, the rupee has weakened and closed beyond that mark.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Feb 12, 2024	82.970	83.025	83.057	82.951
Feb 13, 2024	83.098	83.008	83.121	82.963
Feb 14, 2024	83.034	83.104	83.120	83.015
Feb 15, 2024	82.988	83.035	83.075	82.982
Feb 16, 2024	83.013	82.991	83.049	82.983

Data Source: RBI

The rupee ended weaker at ₹83.013/$ 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 already pegged 5% lower for FY24. In the coming week, the FPI flows will continue to be the key driver of the rupee value while the minutes of the US Fed and the minutes of the RBI MPC will be key inputs for the rupee-dollar equation.

BRENT CRUDE SURGES ON GEOPOLITICAL PRESSURES

The latest week saw crude prices spike sharply to $83.47/bbl, a virtual continuation of the crude price hardening trend of the previous week.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Feb 12, 2024	82.00	81.94	82.19	80.77
Feb 13, 2024	82.77	82.00	83.24	81.96
Feb 14, 2024	81.60	82.60	83.60	81.39
Feb 15, 2024	82.86	81.42	83.25	80.72
Feb 16, 2024	83.47	82.79	83.66	81.89

Data Source: Bloomberg

With the ceasefire hopes off the table for now, oil prices have trended sharply higher in the last 2 weeks. Last week, the price of Brent Crude spiked to above $82/bbl and this week, the crude price has closed at $83.47/bbl. This is also one of the factors putting pressure on the Indian rupee as it threatens India with imported inflation. With the GDP growth of oil importing countries like the US, China, and India to stay robust, the higher demand potential will also keep oil on the boil. The oil market continues to remain undersupplied.

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 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
Feb 12, 2024	2,019.79	2,024.53	2,028.09	2,011.91
Feb 13, 2024	1,992.13	2,019.90	2,030.05	1,990.19
Feb 14, 2024	1,992.39	1,992.55	1,996.14	1,984.30
Feb 15, 2024	2,004.09	1,992.69	2,008.49	1,990.25
Feb 16, 2024	2,013.10	2,004.40	2,015.25	1,995.48

Data Source: Bloomberg

Gold prices tapered further but held the $2,000/bbl mark, closing the week at $2,013.10/oz. With the rate cuts off the table for now (lower rates reduce the opportunity cost of holding gold), gold prices do not have any fundamental support. The only technical factor impacting gold sentiments is the ongoing crisis in the Red Sea. The next rally in gold prices may have to wait till there is clarity on the trajectory and pace of rate cuts by the US Fed. That will be the key to gold prices in the future.