Weekly Musings – Macro Quartet for the week ending January 26, 2024

29 Jan 2024 , 09:17 AM

A TALE OF 3 POLICIES

The coming week and the week after that will see important policy statements in India and in the US. The most important document at this juncture is the upcoming interim budget. One can argue that an interim budget is more like a vote on account; but the experience of 2019 was that the then NDA government almost presented a full budget in February itself. It remains to be seen if the FM does an encore, but there are more specific concerns at a fiscal level. Can the government rein in fiscal deficit at 5.9% for FY24? Can the budget stick to the glide path to 5.3% in FY25 and 4.5% in FY26? Will the focus on fiscal prudence mean that the government will compromise on capex spending. These are some key question to address.

The other two policies, other than the Union Budget will include the Fed policy in this week and the RBI monetary policy in the next week. The Fed policy is not about rate hikes or rate cuts. Status quo is the most likely outcome. However, markets will be keen to see if the Fed offers a time table for rate cuts and indicate when it will start to lower rates. For now, the CME Fedwatch is tentative. RBI policy will be about whether it waits for the Fed to take the lead on rate cuts or whether the RBI charts its own course on rate cuts. RBI demonstrated in the last couple of years; its independent streak when it comes to monetary policy. The macro data points will be dependent on these 3 policy statements in next few days.

WILL THE OIL PRICE SPIKE HIT THE INDIAN RUPEE?

The price of crude oil spiked to $83.55/bbl during the last week. The surge in the oil prices was partly outcome of the aggravation in the Red Sea. Houthi Rebels recently inflicted serious damages to an oil tanker being transported by Trafigura. Now it looks like two oil trading giants (Trafigura and Vital) may prefer the Horn of Africa route. That will not only delay shipments of oil to and from Asia, but it will also result in a sharp spike in the cost of oil. Oil tends to be inflationary and that is not great news at a time when the government has been trying its best to keep inflation and the inflation expectations under check.

But the bigger question is; whether the spike in oil prices will spill over in the form of weakness in the Indian rupee. There are several reasons it could. The merchandise exports are already hit by weak demand in several countries. Now that is likely to be exacerbated by the Red Sea crisis. In addition, imports are likely to become more expensive and that will rub off on the domestic price levels. Higher imports prices result in imported inflation and that is likely to put pressure on the rupee. Also, the last quarter could see a spike in the current account deficit (CAD) and that could another risk factor for the Indian rupee.

US BOND YIELDS STAY ABOVE 4%; DOLLAR INDEX RANGEBOUND

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 22, 2024	4.107	4.136	4.140	4.075
Jan 23, 2024	4.132	4.101	4.155	4.088
Jan 24, 2024	4.180	4.134	4.188	4.086
Jan 25, 2024	4.120	4.184	4.195	4.120
Jan 26, 2024	4.139	4.113	4.166	4.093

Data Source: Bloomberg

US bond yields had fallen sharply below the 4% mark in the week before last on hopes that the Fed would cut rates by 75 bps in 2024 and 100 bps in 2025. However, the Fed minutes did not offer any time table on rate cuts and Fed speak was still veering towards the hawkish zone. That led to US 10-year yield bouncing above 4% mark in the previous week. In the latest week, the yields have stayed persistently stayed above 4.1%, which shows that the Fed may not be in a hurry to cut rates and that is something even the CME Fedwatch appears to be hinting at. US bond yields were volatile, but bounced from 4.107% to 4.139%. 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.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jan 22, 2024	103.33	103.24	103.37	103.11
Jan 23, 2024	103.62	103.35	103.82	102.98
Jan 24, 2024	103.24	103.51	103.55	102.77
Jan 25, 2024	103.57	103.35	103.68	103.12
Jan 26, 2024	103.43	103.51	103.73	103.15

Data Source: Bloomberg

The week was flat to positive for the dollar index (DXY) as it opened the week at 103.33 and stayed in the range of 103 to 104 for the week. 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. Incidentally, 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 the DXY value still has a deep imprint on the USDINR equation. 

INDIA BOND YIELDS TAPER TO 7.171%

In line with the US bond yields, even Indian bond yields rallied in the early part of the week.  However, indications of a lower than expected fiscal deficit and lower borrowings for FY25 meant that the India bond yields actually tapered for the week. For the week to January 26, 2024, bond yields tapered from 7.184% levels to 7.171%. Of course, this was a truncated week, so a clearer picture will only emerge in the coming week.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
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

Data Source: RBI

During the week, the bond yield opened at 7.184% but tapered during the week to 7.171%. The reason the bond yields tapered during the week was due to the expectations of the government reining in fiscal deficit, defining a lower glide path, and keeping the borrowing target for the year static. Indian bond yields are already well above the repo rates and that is acting as a ceiling against any spike in bond yields. 

RUPEE REMAINS UNDER PRESSURE IN THE WEEK

After briefly strengthening below the 83/$ mark, the INR spent the last two weeks above the 83/$ mark. The aggravation in the Red Sea crisis and the prospects of a higher current account deficit (CAD) have kept the rupee under pressure.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
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

Data Source: RBI

After closing at 83.086/$ in the previous week, the rupee closed this week at 83.115/$. The strong US GDP data and tepid PCE inflation raised the prospects of Fed staying dovish and that led to the rupee strengthening against the dollar on Friday. The rupee was hit by the net FPI selling of $1.71 billion in Indian equities during the week. Fiscal deficit glide path could hold the key to rupee trajectory. 

BRENT CRUDE SPIKES ON ROBUST DEMAND ESTIMATES

The latest week saw crude prices spike to $83.55/bbl, a very sharp spike after staying under $80/bbl during the three weeks prior to that.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
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

Data Source: Bloomberg

While the Red Sea crisis continues to worsen with the missile attack on the Trafigura, the big boost to oil prices this week came from the US GDP data at 3.3% for Q4. That was nearly 130 bps better than street estimates and raised the prospects that oil demand would stay strong and keep oil prices on the boil.

GOLD PRICES END LOWER AT $2,018/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 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
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

Data Source: Bloomberg

Gold prices closed last week at $2,029/oz but tapered this week to $2,018/oz amidst the possibility that the Fed may delay rate cuts. A rate cut would have reduced the opportunity cost of holding gold and favoured gold prices, but that may now be back-ended. However, gold has now held above $2,000/oz for 4 weeks in a row and that is a hint of underlying strength. Domestic prices of gold are likely to be impacted by the hike in customs duty on gold from 10% to 15%. Gold still remains a solid safe haven in volatile markets.