Weekly Musings – Macro Quartet for the week ending January 12, 2024

15 Jan 2024 , 11:40 AM

HIGHER INFLATION OPENS NEW POSSIBILITIES

Just about two weeks back, the future outlook for the US rate trajectory looked crystal clear. The Fed was to cut rates by 75 bps in 2024 and another 100 bps in 2025. However, given the low inflation, the Fed was expected to front-end cuts in 2024. In fact, the CME Fedwatch expected the entire 175 bps of rate cuts to happen in 2024 itself. Two things have changed very subtly in the two recent weeks. The CME Fedwatch continues to hold on to its view that the Fed would cut rates by 175 bps in 2024, but now the markets are not too sure. The first indication came in the previous week from the Fed minutes, which was totally silent on the time table of rate cuts. It showed that Fed remained concerned about inflation.

The answer was out in the current week. US inflation for December 2023 came in 30 bps higher at 3.40%. One can argue that the Fed relies on PCE inflation and not consumer inflation; but it is the consumer inflation that sets the tone for PCE inflation to be announced towards the end of the month. The spike in headline inflation was largely driven by energy inflation, with food inflation and core inflation still trending lower. But oil is the big swing factor today. This opens up the possibility that the Fed may hold rates higher for longer or even explore the possibility of a rate hike. Clearly, new possibilities have opened up and the outlook for US rates will not be as simple and straight-forward as expected.

WHAT WAS THE RUPEE STORY IN THE WEEK?

In fact, the big story for the week was the rupee strengthening to 82.857/$ at the close of het week, with most of the gains coming in on Friday. For the last few months, the USDINR has persistently remained above the 83/$ mark. This week the rupee suddenly hardened very sharply to close below the 83/$ mark, and that too with decisive gains. Analysts find it quite intriguing that the rupee is gaining at a time when the Red Sea crisis threatens to make oil dearer and also hit the Indian trade deficit in a big way. Here are 2 reasons. 

Firstly, the RBI has stopped intervening in the currency market. In the last few weeks, the RBI was intervening and buying dollars to prevent the rupee from appreciating. This was necessitated after the surge in FPI flows in December. However, with the FPI flows slowing in January, the RBI has stopped intervening and buying dollars. That led to a sudden rally in the rupee, although further upsides may be questionable. The second reason for the rupee rally is that the Japan carry trade continues and that is benefiting. There were concerns that the Japanese central bank (BOJ) may also turn hawkish, which could lead to unwinding of carry trades. With that risk out of the way, the rupee surely has reasons to celebrate.

US BOND YIELDS FALLS BELOW 4%; DOLLAR INDEX FLAT?

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 08, 2024	4.027	4.061	4.068	3.966
Jan 09, 2024	4.015	4.023	4.053	3.996
Jan 10, 2024	4.030	4.006	4.043	3.979
Jan 11, 2024	3.975	4.028	4.068	3.968
Jan 12, 2024	3.939	3.962	4.007	3.916

Data Source: Bloomberg

US bond yields had bounced above the 4% mark in the previous week after the Fed minutes had disappointed by not giving indications of a rate cut timetable. However, despite higher than expected inflation at 3.40% in the US for December 2023, the US bond yields retreated below the 4% mark to close at 3.939% for the week. Of course, the yields were volatile during the week with the bond yields crossing above 4% mark on all the trading days of the week. For now, the markets are still sticking by the confidence of the CME Fedwatch that the Fed would implement 6 to 7 rate cuts in the current year 2024.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jan 08, 2024	102.21	102.43	102.62	102.07
Jan 09, 2024	102.57	102.22	102.66	102.11
Jan 10, 2024	102.36	102.48	102.64	102.34
Jan 11, 2024	102.29	102.30	102.76	102.16
Jan 12, 2024	102.40	102.30	102.59	102.09

Data Source: Bloomberg

The week was flat for the dollar index (DXY) staying in a narrow range and closing just above where it started. There are contrasting signals with the CME Fedwatch in total contrast to indications from the Fed minutes and the US inflation data. The DXY indicates that dollar hardening would be much tougher from current levels. The dollar index (DXY) is an index of dollar strength against a basket of hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. While Indian rupee is not part of the basket of hard currencies, the dollar index still has an inverse bearing on rupee strength. For now, the US dollar index is ambivalent.

INDIA BOND YIELDS TAPER DURING THE WEEK

In line with the US bond yields, even the Indian bond yields tapered during the week. For the week to January 12, 2024 bond yields fell from 7.235% levels to 7.178%. The table captures bond yields over last 4 rolling weeks.

Date	Price (%)	Open (%)	High (%)	Low (%)
Dec 18, 2023	7.153	7.171	7.179	7.147
Dec 19, 2023	7.171	7.185	7.185	7.153
Dec 20, 2023	7.171	7.184	7.184	7.165
Dec 21, 2023	7.184	7.173	7.188	7.151
Dec 22, 2023	7.188	7.187	7.198	7.185
Dec 25, 2023	7.188	7.187	7.198	7.185
Dec 26, 2023	7.183	7.213	7.213	7.177
Dec 27, 2023	7.205	7.191	7.208	7.182
Dec 28, 2023	7.207	7.200	7.213	7.191
Dec 29, 2023	7.176	7.225	7.225	7.172
Jan 01, 2024	7.196	7.207	7.207	7.192
Jan 02, 2024	7.206	7.215	7.215	7.204
Jan 03, 2024	7.216	7.215	7.222	7.197
Jan 04, 2024	7.220	7.214	7.224	7.208
Jan 05, 2024	7.235	7.237	7.239	7.225
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

Data Source: RBI

During the week, the bond yield opened at 7.203% but tapered in the next 4 days to close the week at 7.178%. Despite India CPI inflation coming in higher at 5.69% in December, the bond yields celebrated the fact that the actual inflation was below street expectations of 5.87%. If you look at the last 2 weeks, the Indian bond yields are exactly back to where they started. However, it must be noted that Indian bond yields are already well above the repo rates and that is keeping any spike in bond yields in check.

RUPEE STRENGTHENS SHARPLY DURING THE WEEK

After 14 weeks of staying above the 83/$ mark, this week finally saw the rupee strengthening to below the 83/$ mark. This week, the rupee opened at 83.045/$ and closed stronger at 82.857/$ levels. This is despite the fact the US dollar index staying flat during the week and the US inflation coming in higher than expected.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Dec 18, 2023	83.144	83.018	83.173	82.910
Dec 19, 2023	83.106	83.153	83.228	83.070
Dec 20, 2023	83.139	83.111	83.237	83.087
Dec 21, 2023	83.214	83.166	83.291	83.156
Dec 22, 2023	83.166	83.221	83.275	83.102
Dec 25, 2023	83.164	83.179	83.179	83.109
Dec 26, 2023	83.158	83.169	83.218	83.105
Dec 27, 2023	83.263	83.163	83.368	83.163
Dec 28, 2023	83.169	83.268	83.318	83.125
Dec 29, 2023	83.190	83.174	83.242	83.099
Jan 01, 2024	83.238	83.240	83.243	83.150
Jan 02, 2024	83.270	83.179	83.359	83.179
Jan 03, 2024	83.282	83.279	83.348	83.244
Jan 04, 2024	83.243	83.294	83.335	83.195
Jan 05, 2024	83.103	83.235	83.286	83.067
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

Data Source: RBI

After closing at 83.103/$ in the previous week, this week the rupee closed at 82.857/$. The Indian rupee is closely linked to the dollar index, but that was not the case time this time around. In the current week, the dollar index was flat, but the rupee strengthened very sharply, especially on the last day of the week. The rupee strength is based on the bet that, due to the Red Sea crisis, the RBI would put off any rate cuts to the second half of 2024. Also, the RBI is not intervening to defend the dollar since FPI flows have softened in January. That has also helped the rupee to strengthen in the latest week.

BRENT CRUDE ELEVATED AS RED SEA RISK PERSISTS

The latest week saw a spike in crude prices from $76.12/bbl at the start of the week, to close higher at $78.29/bbl. Red Sea crisis is still the overhang.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Dec 18, 2023	77.95	76.80	79.51	75.76
Dec 19, 2023	79.23	78.06	79.67	77.41
Dec 20, 2023	79.70	79.17	80.60	79.07
Dec 21, 2023	79.39	79.00	80.13	77.81
Dec 22, 2023	79.07	79.35	80.37	78.88
Dec 25, 2023	79.07	79.35	80.37	78.88
Dec 26, 2023	81.07	79.04	81.72	78.76
Dec 27, 2023	79.65	80.79	81.33	79.29
Dec 28, 2023	78.39	79.80	79.95	78.25
Dec 29, 2023	77.04	77.38	77.98	76.73
Jan 01, 2024	77.04	77.38	77.98	76.73
Jan 02, 2024	75.89	77.39	79.06	75.60
Jan 03, 2024	78.25	76.06	78.67	74.79
Jan 04, 2024	77.59	78.56	79.41	76.50
Jan 05, 2024	78.76	77.71	79.26	77.66
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

Data Source: Bloomberg

The spike in crude oil prices can be attributed to the Red Sea crisis with Houthi rebels firing missiles at ships carrying merchandise through the Red Sea. Apart from the rising premiums and rising freight rates, the oil markets are also worried that other shipping lines will also follow the example of Maersk and boycott the Red Sea route. In terms of landed cost of crude oil for India, this means higher insurance costs, higher freight costs and higher impact of imported inflation. That is the risk that oil prices are reflecting.

GOLD PRICES ELEVATED AT $2,049/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)
Dec 18, 2023	2,027.00	2,020.09	2,033.71	2,015.99
Dec 19, 2023	2,040.12	2,027.30	2,047.07	2,021.74
Dec 20, 2023	2,029.19	2,040.34	2,043.94	2,029.37
Dec 21, 2023	2,045.49	2,029.44	2,046.07	2,029.44
Dec 22, 2023	2,052.98	2,045.84	2,070.65	2,045.65
Dec 25, 2023	2,054.93	2,054.32	2,058.36	2,053.96
Dec 26, 2023	2,067.20	2,055.73	2,068.65	2,053.59
Dec 27, 2023	2,077.00	2,066.70	2,084.59	2,061.00
Dec 28, 2023	2,066.04	2,077.34	2,088.54	2,065.89
Dec 29, 2023	2,062.59	2,065.15	2,075.15	2,057.75
Jan 01, 2024	2,063.80	2,064.24	2,074.90	2,063.30
Jan 02, 2024	2,058.51	2,062.90	2,079.02	2,056.04
Jan 03, 2024	2,040.19	2,059.15	2,066.12	2,030.68
Jan 04, 2024	2,043.22	2,041.34	2,051.40	2,036.24
Jan 05, 2024	2,044.19	2,043.69	2,064.03	2,024.49
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

Data Source: Bloomberg

Gold prices started lower during the week at $2,027/oz but bounced to $2,049 by close amidst rising uncertainty on the geopolitical and macroeconomic front. While the Fed did not give any time table on rate cuts, higher inflation in the US also added to risks. However, delay in cutting rates, is not great news for gold as lower rates reduce the opportunity cost of holding gold. Amidst the rising risks, gold looks the natural safe haven of choice.