Weekly Musings – Macro Quartet for the week ending June 14, 2024

18 Jun 2024 , 09:38 AM

FED SAYS RATE CUTS WILL HAPPEN; BUT GRADUALLY

It was a week of frenetic data flows. Indian markets saw key data points like consumer inflation, WPI inflation, industrial production and trade deficit announced during the week. However, there were also two global data points that mattered a lot. Firstly, the US CPI inflation for May 2024 came in 10 bps lower at 3.3%. At the same time, the Fed policy statement held status quo on rates at 5.25% to 5.50% range. However, the big story was that the Fed cut is guidance to just one rate cut in 2024, while assuring the markets that it would make it up with more aggressive rate cuts in 2025. The one underlying theme of the Fed statement was that rate cuts will happen, but it will not be as aggressive as the Fed rate hikes. Instead, the rate cuts will be gradual, such that the inflation target of 2% is not compromised, From a global markets perspective, here are some key takeaways from the Fed June 2024 statement. Higher for longer appears to be the overpowering theme.0

• One thing that came out clearly in the Fed policy statement was that the restrictive monetary policy was having the desired effect on inflation. However, the Fed members were waiting to see sufficient progress on the inflation front. The Fed will not wait till inflation touches 2% to cut rates; but it needs to see decisive progress on those lines.
• If there were any rate hike fears in the market, the Fed has taken efforts to dispel them. Powell clarified that no Fed member had rate hikes as their base case, so rate hikes are not on the agenda for now. The Fed consensus is that, the extant policy is restrictive enough to push inflation lower, even if it impacts the US economic growth.
• However, Powell also admitted that the central bank did not have the confidence to start lowering interest rates immediately. This is despite CPI inflation for May coming in 10 bps lower, due to concerns on the energy inflation front. Even the May 2024 inflation data shows intense pressure from the energy basket. Also gains from food inflation and core inflation may saturate.
• The good news is that, while the hard landing was avoided by the US, the GDP data and labour data was getting in sync with 2% inflation goal. Even as GDP growth cooled to 1.3% in Q1-2024; labour market is in better balance. However, the Fed will wait for more ratification to ensure that inflation is structurally lower.
• The big question was whether the high inflation in Q1 in the US was a trend or an exception. For now, it looks like it was just a random event and had no structural implications. It is more a bump on the road, and not a sign of things to come. At least, the recent GDP and labour market reading appear to corroborate that.
• The bottom line; what are the implications of the Fed statement for rate trajectory till the middle of 2025? The lower inflation print and pressure on GDP; have kept the September rate cut in the picture. July rate cuts are ruled out and the Fed may need really supportive data to plan the second rate cut in 2024. However, the Fed is pencilling in a much more aggressive rate cut program in 2025.

What do the data flows for the week mean for US bond yields and also for the related US dollar index (DXY)?

US BOND YIELDS  AND DOLLAR INDEX – MOVING IN OPPOSITE DIRECTIONS

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 (%)
Jun 10, 2024	4.471	4.453	4.479	4.441
Jun 11, 2024	4.402	4.463	4.465	4.394
Jun 12, 2024	4.318	4.410	4.428	4.250
Jun 13, 2024	4.248	4.304	4.328	4.223
Jun 14, 2024	4.221	4.252	4.273	4.188

Data Source: Bloomberg

US bond yields started the week at subdued levels of 4.471%, but gradually edged lower to touch 4.221% levels towards the end of the week. The US bond yields were led lower first by the US headline inflation coming in 10 bps lower at 3.3%. While the Fed cut rate cuts to just 1 cut in 2024, the bond yields still tapered as the rate cuts are expected to be more aggressive and proactive in 2025. That led to a sharp fall in the bond yields.  The markets are veering around to the belief that rates will still be cut, even if back-ended. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jun 10, 2024	105.15	104.93	105.39	105.04
Jun 11, 2024	105.23	105.15	105.46	105.10
Jun 12, 2024	104.64	105.28	105.32	104.26
Jun 13, 2024	105.20	104.69	105.28	104.64
Jun 14, 2024	105.55	105.23	105.81	105.18

Data Source: Bloomberg

That looks like an anomaly since the US bond yields and the dollar index normally move I the same direction. However, in a week when the bond yields fell, the dollar index strengthened. There was a reason for that and it can be largely attributed to the weakness in the Euro. The political turmoil in France led to a sharp fall in the Euro and that spiked the dollar. The Euro is nearly 57% of the trade weighted dollar index so the impact was immediate and sharp. That explains the dichotomy between the bond yields and the dollar index during the week. For the week, the dollar index started on a steady note, opening at the 105.15 levels, and stayed in a range. However, on Friday, the dollar index spiked from 105.20 to 105.55 as the crisis in France appeared to have larger repercussions. During the week, the dollar index scaled a high of 105.81 and a low of 104.26.

INDIA BOND YIELDS EASE BELOW THE 7% MARK

The previous week had been a volatile week for the Indian bond markets. After falling below 7% mark in the previous 2 weeks, the benchmark 10-year bond yields bounced back above the 7% mark, and closed at 7.018%. However, as political certainty returned with the formation of the Modi 3.0 government, the bond yields again eased below 7% mark.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 20, 2024	7.078	7.101	7.101	7.069
May 21, 2024	7.078	7.101	7.101	7.069
May 22, 2024	6.997	7.053	7.053	6.993
May 23, 2024	6.997	7.053	7.053	6.993
May 24, 2024	6.998	6.997	7.001	6.985
May 27, 2024	6.981	7.016	7.016	6.967
May 28, 2024	6.995	6.981	6.998	6.971
May 29, 2024	7.008	7.020	7.020	6.987
May 30, 2024	7.003	7.022	7.022	6.995
May 31, 2024	6.986	6.991	6.994	6.980
Jun 03, 2024	6.947	6.955	6.963	6.945
Jun 04, 2024	7.033	6.955	7.062	6.951
Jun 05, 2024	7.026	7.034	7.054	7.023
Jun 06, 2024	7.015	7.020	7.023	7.013
Jun 07, 2024	7.018	7.020	7.036	7.005
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

Data Source: RBI

During the week, the bond yield opened at 7.032% and closed at 6.984%. Last week had seen fears that coalition politics may result in fiscal prudence being relegated to the background. However, the markets are now reconciling to the fact that it will be business as usual for fiscal prudence. During the week, India 10-year bond yields touched a high of 7.048% and a low of 6.975%.

RUPEE WEAKENS TO 83.55/$ AMIDST COALITION WORRIES

With the dollar index spiking to 105.55 levels; the rupee weakened to 83.55/$, despite positive inflows from FPIs during the week.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
May 20, 2024	83.280	83.302	83.328	83.224
May 21, 2024	83.250	83.297	83.373	83.226
May 22, 2024	83.220	83.324	83.328	83.210
May 23, 2024	83.240	83.286	83.322	83.190
May 24, 2024	83.060	83.285	83.300	83.018
May 27, 2024	83.102	83.070	83.147	83.034
May 28, 2024	83.160	83.137	83.209	83.103
May 29, 2024	83.340	83.197	83.411	83.172
May 30, 2024	83.280	83.363	83.442	83.246
May 31, 2024	83.424	83.321	83.501	83.235
Jun 03, 2024	83.083	83.124	83.188	82.952
Jun 04, 2024	83.524	83.120	83.676	83.085
Jun 05, 2024	83.370	83.539	83.585	83.277
Jun 06, 2024	83.466	83.390	83.527	83.357
Jun 07, 2024	83.521	83.472	83.529	83.365
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

Data Source: RBI

In the previous week, the rupee weakness was driven by political uncertainty, but this week it was all about strength in the dollar amidst the sharp fall in the Euro value. Even as political concerns eased in India and the new government took oath, the big story was all about the political crisis in France, the weakness in the Euro and the consequent strength in the dollar. Not surprisingly, the rupee weakened during the week, despite FPIs infusing $1.41 Billion into Indian equities during the week. For the week, rupee touched a high of 83.433/$ and a low of 83.639/$.

BRENT CRUDE BOUNCES TO $82.62/BBL ON US DRAWDOWNS

After hovering below $80/bbl for most part of the previous week, the latest week to June 14, 2024 saw the oil prices again bouncing back above $80/bbl. The spike in oil prices came after the US API reserves saw a drawdown of more than 2.42 Million barrels during the week. Of course, the OPEC is expected to boost supplies in the second half of 2024.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
May 20, 2024	83.71	83.98	84.49	83.11
May 21, 2024	82.88	83.75	83.76	82.04
May 22, 2024	81.90	82.58	82.63	81.57
May 23, 2024	81.36	81.59	82.97	80.93
May 24, 2024	82.12	81.40	82.46	80.65
May 27, 2024	83.10	82.20	83.20	82.08
May 28, 2024	84.22	83.00	84.62	83.00
May 29, 2024	83.60	84.61	85.02	83.29
May 30, 2024	81.86	83.51	83.77	81.80
May 31, 2024	81.62	81.74	82.18	81.17
Jun 03, 2024	78.36	81.15	81.65	78.09
Jun 04, 2024	77.52	78.14	78.22	76.76
Jun 05, 2024	78.41	77.29	78.66	77.18
Jun 06, 2024	79.87	78.70	80.08	78.38
Jun 07, 2024	79.62	80.05	80.38	79.32
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

Data Source: Bloomberg

Oil prices spiked 3.8% in the week to $82.62/bbl. US drawdowns were larger than expected. For the week, Brent crude touched a high of $83.34/bbl and a low of $79.34/bbl.

SPOT GOLD EASES LOWER TO $2,333/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.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
May 20, 2024	2,425.12	2,415.02	2,450.13	2,407.34
May 21, 2024	2,421.64	2,426.84	2,434.00	2,406.32
May 22, 2024	2,378.25	2,423.75	2,426.64	2,374.98
May 23, 2024	2,328.37	2,378.60	2,383.86	2,327.00
May 24, 2024	2,333.76	2,328.40	2,347.54	2,325.40
May 27, 2024	2,350.74	2,334.50	2,358.56	2,332.36
May 28, 2024	2,360.95	2,352.29	2,364.12	2,340.17
May 29, 2024	2,338.77	2,361.00	2,362.86	2,334.75
May 30, 2024	2,343.00	2,339.67	2,351.83	2,322.72
May 31, 2024	2,326.97	2,345.07	2,353.24	2,323.96
Jun 03, 2024	2,350.35	2,329.61	2,354.82	2,314.76
Jun 04, 2024	2,327.68	2,349.00	2,351.76	2,315.53
Jun 05, 2024	2,354.78	2,328.00	2,358.07	2,325.88
Jun 06, 2024	2,375.61	2,355.16	2,378.57	2,353.60
Jun 07, 2024	2,292.71	2,376.50	2,387.85	2,286.77
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

Data Source: Bloomberg

After rallying to above $2,420/oz, gold had fallen in the previous week to $2,292/oz. Gold hardened this week on hopes that rate cuts would be aggressive by 2025. This cuts the opportunity cost of holding gold. During the week, gold touched a high of $2,342/oz and a low of $2,287/oz. September 2024 may see the next move in gold, when the Fed actually starts to cut rates.