HOW SOON WILL THE FED BE CUTTING RATES?
When the minutes of the June Fed meeting were published by the FOMC on July 03, 2024; the only thing that was evident was that the Fed continues to be ambivalent. The Fed members refused to be drawn into any debate on cutting rates, which leaves us with the Million dollar question; “how soon will the Fed cut rates?” Here is our reading of the FOMC minutes and what, we believe, it means for the trajectory of interest rates in the US.
The gist of the story is that the FOMC consensus view has shifted from scepticism to caution. That is an improvement. However, there is still a long mental road to traverse, before the Fed embarks on rate cuts. The question is not whether; but when!
US BOND YIELDS SOFTEN, AS DOES THE DOLLAR INDEX
Two macro variables that set the tone 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 (%) |
Jul 01, 2024 | 4.471 | 4.412 | 4.493 | 4.386 |
Jul 02, 2024 | 4.438 | 4.457 | 4.465 | 4.414 |
Jul 02, 2024 | 4.355 | 4.426 | 4.445 | 4.339 |
Jul 04, 2024 | 4.372 | 4.364 | 4.376 | 4.353 |
Jul 05, 2024 | 4.278 | 4.374 | 4.404 | 4.269 |
Data Source: Bloomberg
US bond yields started the week at slightly elevated levels of 4.471%, but gradually edged lower to close at 4.278% levels towards the end of the week. Bond yields had jumped up in the previous week on expectations that there was a strong chance of Trump 2.0 in November, when the US went to elections. That price driven spike in bond yields is over and this week saw the bond yields tapering. The Fed minutes were a key trigger for the lower bond yields after the Fed refused to commit any time line on rate cuts. For now, the base case scenario is just one rate cut in 2024 and a best case scenario is 2 rate cuts. However, 2025 is expected to see more aggressive rate cuts. Let us turn to the US dollar index (DXY), a barometer of dollar strength.
Date | Price (%) | Open (%) | High (%) | Low (%) |
Jul 01, 2024 | 105.90 | 105.85 | 105.98 | 105.43 |
Jul 02, 2024 | 105.72 | 105.85 | 106.05 | 105.66 |
Jul 02, 2024 | 105.40 | 105.67 | 105.80 | 105.05 |
Jul 04, 2024 | 105.13 | 105.32 | 105.36 | 105.10 |
Jul 05, 2024 | 104.88 | 105.17 | 105.17 | 104.82 |
Data Source: Bloomberg
In a week when the bond yields fell sharply post the FOMC minutes, the dollar index was not far behind. The surge in the dollar amidst Euro weakness has already played out. For the week, the dollar index started on a steady note, opening at the 105.90 levels, and steadily tapered through the week. However, on Friday, the dollar index closed at 104.88 as the FOMC minutes did put pressure on the dollar index also. During the week, the dollar index scaled a high of 106.05 and a low of 104.82.
INDIA BOND YIELDS TAPER TO CLOSE BELOW THE 7% MARK
The India 10-year bond yields has been oscillating above and below the 7% mark. Last week, we had seen the bond yields spike to 7.008% on the back of expectations that the delayed monsoons could result in a spike in inflation. However, the tone shifted this week after clear signals that the impact on food inflation would be limited.
Date | Price (%) | Open (%) | High (%) | Low (%) |
Jun 10, 2024 | 7.032 | 7.048 | 7.048 | 7.027 |
Jun 11, 2024 | 7.014 | 7.055 | 7.055 | 7.012 |
Jun 12, 2024 | 7.012 | 7.012 | 7.015 | 7.007 |
Jun 13, 2024 | 6.986 | 7.003 | 7.003 | 6.985 |
Jun 14, 2024 | 6.984 | 6.980 | 6.991 | 6.975 |
Jun 17, 2024 | 6.984 | 6.980 | 6.991 | 6.975 |
Jun 18, 2024 | 6.981 | 6.998 | 6.998 | 6.981 |
Jun 19, 2024 | 6.974 | 6.981 | 6.981 | 6.964 |
Jun 20, 2024 | 6.976 | 6.984 | 6.984 | 6.970 |
Jun 21, 2024 | 6.973 | 6.984 | 6.984 | 6.972 |
Jun 24, 2024 | 6.971 | 6.979 | 6.979 | 6.954 |
Jun 25, 2024 | 6.983 | 6.972 | 6.989 | 6.969 |
Jun 26, 2024 | 6.997 | 6.998 | 7.001 | 6.984 |
Jun 27, 2024 | 7.000 | 7.006 | 7.009 | 6.987 |
Jun 28, 2024 | 7.008 | 6.998 | 7.020 | 6.992 |
Jul 01, 2024 | 7.013 | 7.023 | 7.024 | 7.010 |
Jul 02, 2024 | 7.009 | 7.009 | 7.009 | 7.009 |
Jul 02, 2024 | 7.001 | 7.009 | 7.009 | 6.999 |
Jul 04, 2024 | 6.998 | 6.992 | 7.001 | 6.989 |
Jul 05, 2024 | 6.993 | 7.016 | 7.016 | 6.987 |
Data Source: RBI
During the week, the bond yield opened at 7.013% and closed at 6.993%. After the initial jitters, the bond markets are now reconciling to the fact that the delayed monsoons may not have any profound negative impact on food inflation this year. During the week, India 10-year bond yields touched a high of 7.009% and a low of 6.987%. With the fiscal deficit and the current account deficit hinting at subdued yields, the big question mark would still be on the monsoon spread and intensity; as well as the impact on food prices.
RUPEE STAYS UNDER PRESSURE DESPITE GOOD TIDINGS
With the dollar index falling below 105 levels; the rupee was expected to strengthen, but it weakened to close around the 83.500/$ mark.
Date | Price (₹/$) | Open (₹/$) | High (₹/$) | Low (₹/$) |
Jun 10, 2024 | 83.500 | 83.530 | 83.551 | 83.468 |
Jun 11, 2024 | 83.600 | 83.521 | 83.639 | 83.480 |
Jun 12, 2024 | 83.430 | 83.618 | 83.622 | 83.433 |
Jun 13, 2024 | 83.540 | 83.507 | 83.575 | 83.487 |
Jun 14, 2024 | 83.547 | 83.546 | 83.593 | 83.514 |
Jun 17, 2024 | 83.500 | 83.523 | 83.567 | 83.503 |
Jun 18, 2024 | 83.330 | 83.498 | 83.560 | 83.322 |
Jun 19, 2024 | 83.460 | 83.394 | 83.491 | 83.340 |
Jun 20, 2024 | 83.620 | 83.422 | 83.684 | 83.417 |
Jun 21, 2024 | 83.568 | 83.630 | 83.631 | 83.498 |
Jun 24, 2024 | 83.450 | 83.563 | 83.590 | 83.410 |
Jun 25, 2024 | 83.403 | 83.439 | 83.510 | 83.394 |
Jun 26, 2024 | 83.560 | 83.452 | 83.632 | 83.413 |
Jun 27, 2024 | 83.438 | 83.579 | 83.596 | 83.408 |
Jun 28, 2024 | 83.355 | 83.458 | 83.492 | 83.329 |
Jul 01, 2024 | 83.438 | 83.380 | 83.479 | 83.349 |
Jul 02, 2024 | 83.500 | 83.440 | 83.567 | 83.422 |
Jul 02, 2024 | 83.520 | 83.497 | 83.564 | 83.435 |
Jul 04, 2024 | 83.475 | 83.495 | 83.561 | 83.463 |
Jul 05, 2024 | 83.500 | 83.503 | 83.532 | 83.458 |
Data Source: RBI
Just about two weeks back, we had seen the rupee weaken to a level of 83.684/$. That remains a low for the rupee, but in the latest week the rupee made several attempts to get close to that mark. In the previous, we got to see some strength in the rupee after positive tidings coming from the current account surplus in Q4 and the lower 0.7% CAD for FY24. This week, the rupee was under pressure despite the dollar index tapering. That can be attributed to a sharp spike in oil prices as Brent Crude rallied above $87/bbl on a sharp fall in US inventories. That was the key factor in rupee being under pressure during the week, despite FPI inflows of $5.91 Billion into Indian equities in the last 4 weeks. For the week, the USDINR touched a high of 83.349/$ and a low of 83.567/$.
BRENT CRUDE CROSSES $87/BBL ON ROBUST US DEMAND
After hovering below $80/bbl in the early part of June 2024, the oil prices have rallied again. This week, Brent Crude crossed $87/bbl. Even the WTI Crude is now trading above $83/bbl and this has been largely triggered by the sharper than expected drawdown in the US API oil inventories. That is indicating that US demand for oil remains very robust.
Date | Price ($/bbl) | Open ($/bbl) | High ($/bbl) | Low ($/bbl) |
Jun 10, 2024 | 81.63 | 79.38 | 82.17 | 79.34 |
Jun 11, 2024 | 81.92 | 81.97 | 82.36 | 81.19 |
Jun 12, 2024 | 82.60 | 82.08 | 83.34 | 81.96 |
Jun 13, 2024 | 82.75 | 82.42 | 83.05 | 81.80 |
Jun 14, 2024 | 82.62 | 82.05 | 83.39 | 81.92 |
Jun 17, 2024 | 83.52 | 82.07 | 83.79 | 81.54 |
Jun 18, 2024 | 84.53 | 83.62 | 84.70 | 82.97 |
Jun 19, 2024 | 84.29 | 84.61 | 84.98 | 84.17 |
Jun 20, 2024 | 84.86 | 84.40 | 85.14 | 84.19 |
Jun 21, 2024 | 84.33 | 84.78 | 85.30 | 83.95 |
Jun 24, 2024 | 86.01 | 84.99 | 86.16 | 84.71 |
Jun 25, 2024 | 85.01 | 86.06 | 86.23 | 84.74 |
Jun 26, 2024 | 85.25 | 84.89 | 85.81 | 84.47 |
Jun 27, 2024 | 86.39 | 85.01 | 86.50 | 84.88 |
Jun 28, 2024 | 86.41 | 86.56 | 87.22 | 86.24 |
Jul 01, 2024 | 86.60 | 84.90 | 86.88 | 84.85 |
Jul 02, 2024 | 86.24 | 86.71 | 87.46 | 86.16 |
Jul 02, 2024 | 87.34 | 86.44 | 87.39 | 85.89 |
Jul 04, 2024 | 87.43 | 87.09 | 87.59 | 86.51 |
Jul 05, 2024 | 86.54 | 87.45 | 87.95 | 86.49 |
Data Source: Bloomberg
Oil prices crossed the $87/bbl mark in the week, ahead of the OPEC meeting in the coming week. More than the OPEC meet, it was the sharp drawdown of -12.5 Million barrels of crude that triggered fears of supply struggling to meet robust US oil demand. In addition, there are also concerns that Russia may be forced to cut supply later this year, worsening the gap in the market. For the week, Brent crude touched a high of $87.95/bbl and a low of $84.85/bbl.
SPOT GOLD SPIKES TO $2,393/OZ DURING THE WEEK
The table below captures the international spot prices of gold in dollars per troy ounce (oz). A troy ounce is approximately 31.1035 grams.
Date | Price ($/oz) | Open ($/oz) | High ($/oz) | Low ($/oz) |
Jun 10, 2024 | 2,310.53 | 2,296.00 | 2,313.87 | 2,287.31 |
Jun 11, 2024 | 2,316.27 | 2,311.00 | 2,320.17 | 2,297.69 |
Jun 12, 2024 | 2,322.52 | 2,315.53 | 2,341.70 | 2,310.80 |
Jun 13, 2024 | 2,303.54 | 2,325.70 | 2,326.70 | 2,295.68 |
Jun 14, 2024 | 2,332.52 | 2,302.52 | 2,336.87 | 2,301.35 |
Jun 17, 2024 | 2,318.87 | 2,332.20 | 2,333.48 | 2,310.02 |
Jun 18, 2024 | 2,328.33 | 2,319.38 | 2,333.25 | 2,306.63 |
Jun 19, 2024 | 2,327.48 | 2,329.79 | 2,335.10 | 2,323.84 |
Jun 20, 2024 | 2,359.63 | 2,329.15 | 2,365.52 | 2,327.30 |
Jun 21, 2024 | 2,321.51 | 2,360.91 | 2,368.77 | 2,316.82 |
Jun 24, 2024 | 2,332.93 | 2,321.60 | 2,335.02 | 2,317.37 |
Jun 25, 2024 | 2,319.01 | 2,333.25 | 2,337.26 | 2,315.56 |
Jun 26, 2024 | 2,297.91 | 2,320.00 | 2,323.95 | 2,293.70 |
Jun 27, 2024 | 2,327.45 | 2,299.80 | 2,331.00 | 2,296.50 |
Jun 28, 2024 | 2,325.71 | 2,327.75 | 2,339.79 | 2,319.15 |
Jul 01, 2024 | 2,331.70 | 2,326.46 | 2,338.72 | 2,318.55 |
Jul 02, 2024 | 2,329.28 | 2,332.05 | 2,336.90 | 2,319.24 |
Jul 02, 2024 | 2,356.06 | 2,328.00 | 2,365.06 | 2,326.93 |
Jul 04, 2024 | 2,356.12 | 2,353.70 | 2,362.64 | 2,350.76 |
Jul 05, 2024 | 2,391.46 | 2,358.01 | 2,393.04 | 2,354.03 |
Data Source: Bloomberg
The rally in gold prices came this week largely on the back of dollar weakness ahead of the payrolls data. Gold closed the previous week at $2,326/oz, but closed sharply higher at $2,391/oz. Gold traders are also betting on rates cuts being more aggressive in 2025, which will help reduce the opportunity cost of holding gold. Gold may also do a silver catch up. During the week, gold touched a high of $2,393/oz and a low of $2,319/oz.
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