Weekly Musings – Macro Quartet for the week ending May 03,. 2024

6 May 2024 , 12:15 PM

TWO SCENARIOS BEFORE THE US FEDERAL RESERVE

The most important event of the week was the Fed statement on May 01, 2024, which did not speak of the timing of rate cuts. However, the Fed did underline that rate hikes were ruled out. That means; the two options before the Fed would be to either cut rates aggressively or hold rates higher for longer. The CME Fedwatch puts the best odds at 2 rate cuts in 2024 and two more by July 2025. However, Morgan Stanley has provided a more analytical evaluation of the likely scenarios.

Option 1: Fed holds rates higher for longer

This is what most publications have been talking about and even the FOMC members appear to be in sync with this view. However, Morgan Stanely believes that higher for longer will come at a cost and that cost will be higher pain for the rate sensitive sectors like banking, financials, real estate developers, automobiles etc. The report also underlined that some of the vulnerable sections of the US economy like the middle and the lower middle class, were already vulnerable to high rates. They would only see their credit card bills and home loan mortgages go up further.

Option 2: Fed pre-emptively cuts rates

This does not look like a possibility if you go by Fed pronouncements and the FOMC voices. However, Morgan Stanley believes that this alternative cannot be ruled out because, rate decisions are not just economic decisions; but also, political, and social decisions. Hence there is the possibility that the Fed may not wait for inflation to come down sharply; but instead, may pre-emptively cut rates. It could also slow the pace of shredding the bond book. Since that has already commenced, one cannot rule out a more pre-emptive approach by the Fed when it comes to rates. There is a small risk in this choice, as it could fan the flames of inflation. For the Fed it will be a tough choice. Beyond a point, theoretical dictates of policy don’t matter and pragmatism is what counts. The Fed may have just reached that point, where the roads diverge.

US BOND YIELDS TAPER; DOLLAR INDEX ALSO EDGES LOWER

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 (%)
Apr 29, 2024	4.611	4.655	4.659	4.607
Apr 30, 2024	4.682	4.611	4.692	4.603
May 01, 2024	4.641	4.682	4.694	4.581
May 02, 2024	4.589	4.630	4.651	4.567
May 03, 2024	4.509	4.587	4.596	4.446

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.611%, but tapered later in the week to close at a level of 4.509%. During the week, the US 10-year bond yields touched a high of 4.692% and a low of 4.446%. Clearly, the bias was towards the lower side. The Fed statement, while it sounded innocuous, did push the yields lower. The remark from the Fed chair that rate hikes were ruled, almost made it pointless to think about higher bond yields, which explains why the bond yields lower in the week. Also, the Morgan Stanley report stated that rate cuts cannot be ruled out and even went to the extent of pencilling up to 3 rate cuts in 2025, starting from July 2024. That may sound far-fetched at this juncture, but then macros change rapidly at short notice; as we have seen in the past.

In previous weeks, the CPI inflation reading and the Fed minutes had given clear indication that rate cuts would not happen till inflation convincingly showed hints of moving towards 2%. The GDP data and the PCE inflation also corroborated that view. However, in the Fed policy statement, the Fed had ruled out rate hikes. That leaves only two options viz. holding rates higher for longer; and cutting rates pre-emptively. The latter option cannot be entirely ruled out since higher rates are putting a lot of pressure on the most vulnerable segments of the American population. That is the last thing you want in an election year. Let us now turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 29, 2024	105.70	105.97	106.08	105.46
Apr 30, 2024	106.33	105.70	106.35	105.67
May 01, 2024	105.71	106.33	106.49	105.44
May 02, 2024	105.31	105.71	105.89	105.28
May 03, 2024	105.08	105.30	105.37	104.52

Data Source: Bloomberg

The dollar index had a relatively flat week, but edged lower in the last 3 days of the week. It started the week on a steady note, opening at the 105.70 levels but closed lower at 105.08 levels. During the week, the dollar index scaled a high of 106.49 and a low of 104.52. Clearly, the bias of the dollar index (DXY) appears to be on the downside now. For the week, the dollar index closed tepid, gradually losing value in the last 3 days of the week. Dollar index is now trading well short of the psychological 107 levels. This is the level, the dollar index has crossed only three times in the last 40 years, which is why that level is significant. It now looks like a distant possibility.

INDIA BOND YIELDS EDGE LOWER TO 7.149%

For the second week in a row, the bond yields trended lower in the latest week to May 03, 2024. This week, bond yields fell from 7.199% to 7.149%. the yields have fallen close to 9 basis points in the last 2 weeks

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 08, 2024	7.154	7.141	7.162	7.135
Apr 09, 2024	7.154	7.141	7.162	7.135
Apr 10, 2024	7.116	7.133	7.133	7.113
Apr 11, 2024	7.116	7.133	7.133	7.113
Apr 12, 2024	7.179	7.178	7.187	7.169
Apr 15, 2024	7.175	7.193	7.193	7.160
Apr 16, 2024	7.193	7.193	7.200	7.185
Apr 17, 2024	7.193	7.193	7.200	7.185
Apr 18, 2024	7.180	7.170	7.187	7.155
Apr 19, 2024	7.225	7.206	7.233	7.197
Apr 22, 2024	7.192	7.241	7.242	7.188
Apr 23, 2024	7.167	7.184	7.184	7.163
Apr 24, 2024	7.186	7.175	7.190	7.160
Apr 25, 2024	7.204	7.193	7.206	7.188
Apr 26, 2024	7.199	7.238	7.238	7.188
Apr 29, 2024	7.196	7.185	7.203	7.176
Apr 30, 2024	7.195	7.199	7.205	7.185
May 01, 2024	7.195	7.199	7.205	7.185
May 02, 2024	7.162	7.170	7.173	7.159
May 03, 2024	7.149	7.160	7.163	7.147

Data Source: RBI

During the week, the bond yield opened at 7.196% and closed at 7.149%. In the last six weeks, the benchmark Indian bond  yields had spiked from 7.014% to 7.225%; but tapered in the recent two weeks. The India bond yields are approximately reflecting the fall in the US bond yield and the possibility that the Fed might actually consider pre-emptive rate cuts much earlier than what the CME Fedwatch may be suggesting. Like the Fed, even the RBI MPC has ruled out any chances of a rate cut till inflation fell sharply. However, both the RBI and the Fed have rate cuts on their agenda; and most likely it could be pre-emptive. That is what the falling bond yields are reflecting in the latest week. During the week, the India 10-year bond yields touched a high of 7.205% and a low of 7.147%.

RUPEE CLOSES AT 83.38/$ AMIDST SHARP FALL IN CRUDE

With the dollar index falling to 105 levels, and the crude oil prices also falling sharply in the week, one would have expected the rupee to strengthen a lot more. However, the rupee just about strengthened by about 3 basis points during the week. That could be attributed to FPI selling and a likely weak monsoon due to heat wave conditions.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Apr 08, 2024	83.270	83.344	83.352	83.225
Apr 09, 2024	83.182	83.271	83.291	83.166
Apr 10, 2024	83.389	83.227	83.426	83.147
Apr 11, 2024	83.324	83.413	83.438	83.295
Apr 12, 2024	83.540	83.368	83.622	83.316
Apr 15, 2024	83.484	83.481	83.544	83.413
Apr 16, 2024	83.637	83.534	83.700	83.469
Apr 17, 2024	83.650	83.673	83.747	83.589
Apr 18, 2024	83.530	83.590	83.605	83.487
Apr 19, 2024	83.358	83.548	83.721	83.362
Apr 22, 2024	83.360	83.423	83.457	83.306
Apr 23, 2024	83.269	83.384	83.407	83.260
Apr 24, 2024	83.319	83.280	83.362	83.257
Apr 25, 2024	83.310	83.338	83.402	83.255
Apr 26, 2024	83.400	83.268	83.422	83.267
Apr 29, 2024	83.410	83.385	83.513	83.352
Apr 30, 2024	83.450	83.459	83.537	83.397
May 01, 2024	83.455	83.474	83.532	83.446
May 02, 2024	83.435	83.430	83.503	83.401
May 03, 2024	83.382	83.404	83.474	83.316

Data Source: RBI

In the last 5 weeks, the rupee weakened from ₹82.900/$ to ₹83.650/$, but has been gaining ground in the last 2 weeks. This week, the USDINR closed at ₹83.38/$. The Indian rupee has now been above 83/$ for 7 weeks in a row. Despite positive cues from the dollar index and the oil prices, the rupee did not show great signs of strength. That could be attributed to the weakening flows of FPIs into equity and debt.

BRENT CRUDE FALLS SHARPLY TO $82.83/BBL

The latest week saw crude prices correct sharply through the week from $89.37/bbl to $82.83/bbl as US inventories spiked.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Apr 08, 2024	90.38	90.09	91.10	88.78
Apr 09, 2024	89.42	90.63	90.94	89.25
Apr 10, 2024	90.48	89.55	90.71	88.83
Apr 11, 2024	89.74	90.52	90.92	89.38
Apr 12, 2024	90.21	90.14	92.18	90.05
Apr 15, 2024	90.10	90.95	91.05	88.73
Apr 16, 2024	90.02	90.43	90.84	89.41
Apr 17, 2024	87.29	90.11	90.17	87.13
Apr 18, 2024	87.11	87.42	87.80	86.09
Apr 19, 2024	87.21	87.07	90.75	86.20
Apr 22, 2024	87.00	87.07	87.26	85.79
Apr 23, 2024	88.42	87.20	88.51	86.03
Apr 24, 2024	88.02	88.45	88.86	87.65
Apr 25, 2024	89.01	87.89	89.31	87.31
Apr 26, 2024	89.37	89.24	89.85	88.81
Apr 29, 2024	88.40	89.22	89.29	88.11
Apr 30, 2024	87.86	88.41	88.79	87.46
May 01, 2024	83.44	85.80	85.89	83.29
May 02, 2024	83.67	83.59	84.44	83.05
May 03, 2024	82.83	83.94	84.39	82.81

Data Source: Bloomberg

After hovering near $90/bbl, Brent fell sharply to $82.83/bbl during the week. US inventories spiked by close to 4.91 Million barrels in the latest week, which led to a sharp fall in crude prices. Markets were also apprehensive that holding rates higher for longer could effectively hit oil demand.

SPOT GOLD CLOSES AT $2,302/OZ FOR 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)
Apr 08, 2024	2,338.89	2,322.00	2,354.09	2,302.86
Apr 09, 2024	2,352.58	2,339.24	2,365.34	2,336.94
Apr 10, 2024	2,332.79	2,352.91	2,360.15	2,319.54
Apr 11, 2024	2,373.24	2,333.17	2,377.80	2,325.84
Apr 12, 2024	2,343.43	2,373.59	2,431.53	2,333.90
Apr 15, 2024	2,382.51	2,343.86	2,387.59	2,324.59
Apr 16, 2024	2,382.83	2,382.86	2,398.34	2,362.95
Apr 17, 2024	2,360.81	2,383.20	2,395.63	2,354.84
Apr 18, 2024	2,378.25	2,360.74	2,392.84	2,360.70
Apr 19, 2024	2,390.45	2,378.60	2,417.79	2,372.96
Apr 22, 2024	2,326.29	2,388.20	2,388.72	2,325.29
Apr 23, 2024	2,321.81	2,326.62	2,334.48	2,291.40
Apr 24, 2024	2,315.82	2,322.19	2,337.16	2,311.90
Apr 25, 2024	2,331.78	2,316.20	2,344.86	2,305.28
Apr 26, 2024	2,338.72	2,332.16	2,352.62	2,326.30
Apr 29, 2024	2,334.44	2,337.50	2,346.85	2,320.08
Apr 30, 2024	2,284.57	2,335.10	2,336.54	2,284.94
May 01, 2024	2,317.88	2,285.91	2,328.40	2,281.66
May 02, 2024	2,303.29	2,319.89	2,326.57	2,285.58
May 03, 2024	2,301.89	2,304.27	2,320.52	2,277.60

Data Source: Bloomberg

The price of gold has tapered after touching a high of $2,400/oz. However, this could just be a temporary pause, and not the end of the rally. There is still a lot of central bank demand for gold and that is likely to keep gold prices buoyant. Spot gold prices have now fallen by nearly $100/oz in last few weeks. Delayed rate cuts are also turning out to be an overhang on gold prices as the promise of lower opportunity cost of holding gold is lost. However, we may not have seen the end of the gold rally still!