Weekly Musings – Macro Quartet for the week ending March 15, 2024

18 Mar 2024 , 07:23 AM

US BOND YIELDS SPIKE, CRUDE SPIKES TOO

One factor that spooked the equity markets globally during the week, including India, was the persistent rise in the US bond yields. Bond yields on the 10-year benchmark in the UAS started the week around 4.098% and by the end of the week, it had spiked to 4.308%. The sharp rally in the US bond yields was triggered by a concerted sell-off on the bonds. There had been a lot of bond accumulation in bonds on the hope that the rate cuts by the Fed would translate into capital gains for the bond investors. However, the euphoria changed to scepticism after the latest consumer inflation for February 2024 in the US came in 10 bps higher at 3.2%. This raised the possibility of the Federal Reserve back-ending rate cuts further, which led to the mini sell-off in bonds and a spike in bond yields.

At the other end of the spectrum, Brent crude prices spiked to above $85.50/bbl during the week. The spike was triggered less by supply concerns and more by confidence that the demand would not be hurt. This is despite the economies of Japan and the UK slipping into a recession on the back of two consecutive quarters of negative growth. The view that is building up in the market is that despite the slowdown in these two economies, the impact on oil demand may be limited. Two of the largest consumers of oil; the UK and India, have seen growth above expectations and that is likely to keep the oil demand robust. Also, with the OPEC persisting with supply cuts, the oil markets is likely to remain undersupplied. The drawdown of more than 5 Million barrels of oil in US API inventories also spiked oil prices.

US AND INDIA UNLIKELY TO CUT RATES IN H1-2024

The consensus emerging among the economists and market traders is that neither the US Fed, nor the RBI are likely to cut their benchmark rates in the first half. This could be for a different set of reasons altogether. In the US, the back-ending of rate cuts is likely due to the higher than expected inflation. The Fed has already ruled out rate cuts in May and the first rate cut now looks likely only in June or later. In the Indian context, it is the overall uncertainty that is keeping rate cut plans in check. The RBI would not want to cut rates ahead of the general elections, should it lead to a spike in inflation. Also, the full budget is likely to be presented by the government only in July after the new government is in place. Hence, any rate cuts in the US and India looks unlikely in the first half of 2024.

US BOND YIELDS SPIKE; DOLLAR INDEX SPIKES TOO

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 (%)
Mar 11, 2024	4.098	4.083	4.116	4.052
Mar 12, 2024	4.151	4.094	4.172	4.081
Mar 13, 2024	4.188	4.147	4.198	4.131
Mar 14, 2024	4.292	4.190	4.300	4.186
Mar 15, 2024	4.308	4.296	4.322	4.269

Data Source: Bloomberg

US bond yields started in a tepid fashion, but spiked sharply during the week. The spike was accentuated after the US consumer inflation came in 10 bps higher at 3.2%. What really spooked the bond yields was the core inflation on a MOM basis sharply higher at 0.4%. The higher than expected inflation led to a mini sell-off in bonds, by the traders who had accumulated the bonds on rate cuts expectations. For the week, the US bond yields opened at 4.098% and closed the week at 4.308%. In the coming week, it will be about the US Fed policy to be announced on March 20, 2024. Let us now turn to the dollar index (DXY).

Date	Price (%)	Open (%)	High (%)	Low (%)
Mar 11, 2024	102.87	102.74	102.93	102.64
Mar 12, 2024	102.96	102.82	103.18	102.72
Mar 13, 2024	102.79	102.93	103.02	102.67
Mar 14, 2024	103.36	102.76	103.40	102.74
Mar 15, 2024	103.43	103.39	103.49	103.30

Data Source: Bloomberg

The dollar index also closed higher for the week, largely in line with the spike in US bond yields and the CME Fedwatch getting less dovish than the Fed itself. The dollar index (DXY) opened the week at 102.87 and inched up through the week; eventually closing at 103.43 levels. The dollar saw some strength after it became evident that the Fed would not be evaluating rate cuts in the first half of 2024. The dollar index (DXY) measures dollar strength against a basket of hard currencies like Pound, Euro, Yen, Yuan etc.

INDIA BOND YIELDS INCH UP TO 7.062%

During the week, the Indian benchmark 10-year bond yields went up from 7.014% to 7.062%. There were two triggers for the Indian bond yields. Firstly, the India CPI inflation came in flat at 5.09%, but there was a 36 bps spike in food inflation. While the Red Sea crisis raised fears of the spillover impact of longer routes, higher freight costs and higher insurance premiums also weighed on bond yields.

Date	Price (%)	Open (%)	High (%)	Low (%)
Feb 19, 2024	7.099	7.097	7.103	7.075
Feb 20, 2024	7.062	7.118	7.118	7.060
Feb 21, 2024	7.045	7.065	7.065	7.038
Feb 22, 2024	7.062	7.062	7.076	7.045
Feb 23, 2024	7.077	7.074	7.081	7.062
Feb 26, 2024	7.063	7.055	7.066	7.046
Feb 27, 2024	7.068	7.074	7.074	7.061
Feb 28, 2024	7.065	7.076	7.076	7.060
Feb 29, 2024	7.078	7.059	7.082	7.057
Mar 01, 2024	7.060	7.062	7.082	7.057
Mar 04, 2024	7.060	7.051	7.062	7.047
Mar 05, 2024	7.057	7.066	7.066	7.053
Mar 06, 2024	7.054	7.053	7.057	7.048
Mar 07, 2024	7.031	7.054	7.054	7.026
Mar 08, 2024	7.031	7.054	7.054	7.026
Mar 11, 2024	7.014	7.025	7.025	7.006
Mar 12, 2024	7.026	7.025	7.029	7.015
Mar 13, 2024	7.039	7.043	7.043	7.030
Mar 14, 2024	7.041	7.046	7.048	7.038
Mar 15, 2024	7.062	7.060	7.064	7.051

Data Source: RBI

During the week, the bond yield opened at 7.014% but closed lower at 7.062%. The last 3 weeks, the bond yields have been on a see-saw, but over a longer range have tapered from 7.114% to 7.062%. Bond yields had fallen sharply posit the Interim Budget had cut the fiscal deficit target for FY25 to 5.1% and given a glide path of below 4.5% for FY26. However, with elections round the corner, the street expectation is that rate cuts, if any, would be back-ended to the second half of 2024.

RUPEE WEAKENS MARGINALLY TO 82.83/$ AT CLOSE

The rupee, during the week, was not only impacted by crude oil prices going up but also by the strengthening of the dollar. The dollar index went above 103, while the price of Brent Crude spiked above $85/bbl on expectations that the oil market will continue to remain undersupplied in the near future.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Feb 19, 2024	83.026	82.987	83.061	82.949
Feb 20, 2024	82.890	83.031	83.043	82.862
Feb 21, 2024	82.930	82.895	82.983	82.835
Feb 22, 2024	82.837	82.933	82.965	82.812
Feb 23, 2024	82.859	82.845	82.965	82.845
Feb 26, 2024	82.846	82.873	82.914	82.851
Feb 27, 2024	82.877	82.901	82.921	82.841
Feb 28, 2024	82.900	82.924	82.967	82.863
Feb 29, 2024	82.900	82.910	82.957	82.864
Mar 01, 2024	82.841	82.926	82.933	82.836
Mar 04, 2024	82.911	82.845	82.935	82.830
Mar 05, 2024	82.891	82.913	82.938	82.863
Mar 06, 2024	82.780	82.896	82.919	82.801
Mar 07, 2024	82.708	82.820	82.850	82.669
Mar 08, 2024	82.770	82.743	82.792	82.660
Mar 11, 2024	82.720	82.754	82.782	82.645
Mar 12, 2024	82.786	82.739	82.839	82.720
Mar 13, 2024	82.820	82.830	82.923	82.774
Mar 14, 2024	82.915	82.827	82.952	82.803
Mar 15, 2024	82.883	82.990	82.995	82.817

Data Source: RBI

The rupee did weaken during the week from ₹82.72/$ to ₹82.88/$, and that was largely on account of the combined impact of the spike in US dollar index and the spike in crude oil prices. However, it is surprising that despite these factors, and the Red Sea crisis, the impact on the rupee was limited. That can be largely attributed to the frenetic flows into Indian equities and bonds from foreign portfolio investors (FPIs). In the latest week, the FPIs have infused $3.48 Billion into Indian equities amidst a gradual shift back in FPI preferences from debt to equity. Meanwhile, the debt flows have also remined at a strong level due to the expectations of inclusion in the JPM bond index and the Bloomberg Index. These two factors largely neutralized the pressure on the Indian rupee during the week.

BRENT CRUDE SPIKES BY $3.22/BBL DURING THE WEEK

The latest week saw crude prices spike to as high as $85.69/bbl, after opening the week at $82.21/bbl, due to expectations of oil market being undersupplied.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Feb 19, 2024	83.56	83.28	83.60	82.55
Feb 20, 2024	82.34	83.24	83.63	82.05
Feb 21, 2024	83.03	82.50	83.17	81.66
Feb 22, 2024	83.67	83.20	83.96	82.33
Feb 23, 2024	81.62	83.39	83.48	81.43
Feb 26, 2024	82.53	81.41	83.07	81.00
Feb 27, 2024	83.65	82.64	83.70	82.10
Feb 28, 2024	83.68	83.30	84.31	82.60
Feb 29, 2024	81.91	81.83	82.84	81.51
Mar 01, 2024	83.55	82.07	84.34	81.81
Mar 04, 2024	82.80	83.50	84.08	82.57
Mar 05, 2024	82.04	82.74	83.14	81.72
Mar 06, 2024	82.96	82.01	84.05	81.85
Mar 07, 2024	82.96	82.92	83.53	82.07
Mar 08, 2024	82.12	83.20	83.85	81.72
Mar 11, 2024	82.21	82.00	82.75	81.08
Mar 12, 2024	81.92	82.45	83.01	81.69
Mar 13, 2024	84.03	82.45	84.24	81.96
Mar 14, 2024	85.42	84.04	85.69	83.98
Mar 15, 2024	85.34	85.15	85.55	84.60

Data Source: Bloomberg

The OPEC meet has sustained the supply cuts and the latest IEA estimates also expects the demand for oil to be robust. In short, the oil market is likely to be undersupplied. The US is, meanwhile, tightening its sanctions on Russian oil and that is also putting upwards pressure on the oil prices. With projections of crude oil crossing $90 in the Brent market, India may have some reasons to worry on the inflation front!

SPOT GOLD PRICES SPIKES TO $2,177/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 gold price summary.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Feb 19, 2024	2,017.63	2,013.16	2,023.34	2,011.57
Feb 20, 2024	2,023.53	2,017.99	2,030.96	2,015.02
Feb 21, 2024	2,024.99	2,023.80	2,032.22	2,020.19
Feb 22, 2024	2,024.11	2,025.24	2,034.84	2,019.70
Feb 23, 2024	2,035.72	2,024.49	2,041.43	2,015.55
Feb 26, 2024	2,030.66	2,034.49	2,037.59	2,025.10
Feb 27, 2024	2,029.64	2,030.99	2,039.99	2,028.78
Feb 28, 2024	2,034.62	2,030.05	2,038.30	2,024.56
Feb 29, 2024	2,043.24	2,034.92	2,050.79	2,027.75
Mar 01, 2024	2,083.39	2,043.44	2,088.40	2,038.55
Mar 04, 2024	2,114.99	2,082.09	2,119.95	2,079.45
Mar 05, 2024	2,127.55	2,115.15	2,142.15	2,110.52
Mar 06, 2024	2,148.29	2,127.95	2,152.29	2,123.65
Mar 07, 2024	2,159.16	2,148.54	2,164.54	2,144.29
Mar 08, 2024	2,176.90	2,162.03	2,195.19	2,154.09
Mar 11, 2024	2,182.47	2,177.71	2,189.04	2,174.80
Mar 12, 2024	2,157.99	2,183.00	2,184.86	2,150.59
Mar 13, 2024	2,174.40	2,158.25	2,179.91	2,155.54
Mar 14, 2024	2,161.01	2,174.29	2,177.10	2,152.86
Mar 15, 2024	2,155.54	2,162.40	2,173.25	2,155.19

Data Source: Bloomberg

Gold prices had gotten tantalizing close to $2,200/oz last week and this week that level continued to be the resistance for the gold prices. Gold closed slightly lower at $2,156/oz for the week, but the weakness is more because rate cuts have been put off. Rate cuts reduce the opportunity cost of holding gold and make it more attractive. However, gold as an asset class is likely to continue to attract interest due to the fluid geopolitical scenario and the demand for non-fiat currencies. For now, gold is well and firmly above the $2,000/oz mark and looks unlikely to let go off that support.