Weekly Musings – Macro Quartet for the week ending May 31, 2024

4 Jun 2024 , 10:11 AM

DID THE FY24 GDP STORY CHANGE THE INDIA NARRATIVE?

It was not just the Q4 GDP story during the week that flattered, but even the full year FY24 GDP figures surprised on the upside. Q4 GDP growth at 7.8% and FY24 GDP at 8.2%, simply reinforces the position of the Indian economy as the fastest growing large economy in the world for the third year in a row. The table below captures the break-up of the Q4 GDP along with a comparison with the last 8 quarters to get a comparative perspective.

Real Sectoral Growth (%)	Q1 FY23	Q2 FY23	Q3 FY23	Q4 FY23	Q1 FY24	Q2 FY24	Q3 FY24	Q4 FY24
Agriculture	2.66	2.27	5.19	7.64	3.74	1.74	0.40	0.57
Mining / Quarrying	6.56	-4.13	1.37	2.87	7.05	11.07	7.50	4.25
Manufacturing	2.18	-7.19	-4.78	0.95	4.95	14.30	11.54	8.94
Utilities	15.55	6.41	8.65	7.30	3.17	10.53	8.97	7.69
Construction	14.69	6.85	9.47	7.41	8.57	13.55	9.58	8.70
Trade/Hotels	22.09	13.20	9.17	6.97	9.69	4.51	6.95	5.13
Financial Services	10.49	8.71	7.69	9.18	12.61	6.24	6.98	7.58
Defence and admin	23.59	7.30	3.52	4.66	8.25	7.75	7.51	7.77
Real GVA	11.34	5.04	4.83	6.03	8.26	7.69	6.79	6.27
Net Taxes	37.60	10.66	-2.56	7.66	7.94	12.65	31.23	22.15
Real GDP	12.81	5.46	4.26	6.18	8.24	8.08	8.57	7.76

Data  Source: MOSPI – all are percentage growth figures (in %)

The sectoral break up that you see in the table above is for the gross value added (GVA). MOSPI does not provide the sectoral break-up of GDP, but since GVA is just shorn of the taxes and subsidies, the underlying trend is captured well enough. There are 5 key points to note here, which explain why this GDP figure is so important.

• After a long time, the GDP growth was above 8% for 3 quarters in a row, before it just fell to 7.8% in Q4, still resulting in an 8.2% GDP growth for the full fiscal year. Unlike FY22, which was on a COVID low, the FY24 data is on top of 2 years of frenetic growth. in the Indian economy, which is what makes it special.
• The pressure point continues to be agriculture and that is not surprising considering that 2024 had deficit monsoons followed by erratic spread. From a high of 7.64% growth in agricultural output in Q4FY23, farm output growth dropped to just 0.57% in Q4FY24.
• The big positive surprise has been manufacturing output, which has averaged above 9% for the last 4 quarters in a row, making it one of the best years for manufacturing. High demand and a surge in capacity utilization helped the manufacturing story.
• The contact intensive sectors like construction, trade, and hotels have slowed in the quarter after several quarters of high growth. That is more due to the pen-up demand post pandemic being already met in the last 2 years. It is just about normalizing now.
• On the services side, the thrust in the latest quarter has come from financial services, insurance, defence, and administrative services. These are more stable demand services, but appear to have picked up steam in FY24, compared to previous years.

An important aspect to this GDP story is that the gap between GDP growth and GVA growth is reducing; which means the role of taxes and subsidies in driving GDP growth is reducing. Also, the low inflation advantage in real GDP growth is also diminishing, which means the real GDP growth is actually being driven by nominal growth. That is a good sign.

US BOND YIELDS EDGE LOWER; DOLLAR INDEX BELOW 105

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 (%)
May 27, 2024	4.461	4.451	4.473	4.446
May 28, 2024	4.548	4.459	4.554	4.445
May 29, 2024	4.616	4.548	4.638	4.542
May 30, 2024	4.550	4.620	4.628	4.542
May 31, 2024	4.503	4.544	4.572	4.485

Data Source: Bloomberg

US bond yields started the week at subdued levels of 4.461%, but gradually edged higher to touch 4.616% towards the middle of the week. However, US bond yields faced some resistance after the weak GDP data for Q1 and the flat PCE inflation data came in. Post these macro data flows, the bond yields tapered to 4.503%, raising hopes of the first rate cut actually happening in September 2024. During the week, the US 10-year bond yields touched a high of 4.638$ and a low of 4.445%. Last week, the Q1 GDP second estimate came in 30 bps lower at 1.3% and the PCE inflation was flat at 2.7%. The first rate cut looks very likely to happen in the US in September 2024 and that could temper bond yields. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 27, 2024	104.60	104.75	104.75	104.57
May 28, 2024	104.61	104.58	104.64	104.33
May 29, 2024	105.10	104.64	105.14	104.59
May 30, 2024	104.72	105.13	105.18	104.63
May 31, 2024	104.67	104.76	104.90	104.36

Data Source: Bloomberg

The dollar index and the 10-year bond yields in the US almost followed a similar pattern. For the week, the dollar index started on a steady note, opening at the 104.60 levels, went up to 105.10 levels but closed the week marginally higher at 104.67 levels. During the week, the dollar index scaled a high of 105.18 and a low of 104.33. As the chances of a rate cut brighten, the dollar is more likely to soften in the coming weeks.

INDIA BOND YIELDS STAY UNDER THE 7% MARK

After spiking for 3 weeks in a row, the bond yields fell sharply in the previous week to below the 7% mark, and closed at 6.998%. In the latest week to May 31, 2024, the bond yields did give a couple of closings above 7%, but ended the week at 6.986%.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 06, 2024	7.108	7.132	7.132	7.106
May 07, 2024	7.129	7.115	7.135	7.109
May 08, 2024	7.138	7.138	7.144	7.130
May 09, 2024	7.135	7.148	7.148	7.125
May 10, 2024	7.127	7.124	7.129	7.111
May 13, 2024	7.116	7.134	7.134	7.114
May 14, 2024	7.109	7.123	7.123	7.105
May 15, 2024	7.086	7.103	7.103	7.082
May 16, 2024	7.076	7.058	7.082	7.055
May 17, 2024	7.095	7.084	7.099	7.080
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

Data Source: RBI

During the week, the bond yield opened at 6.981% and closed at 6.986%. This is the second week in a row that the 10-year bond yields closed below 7% in the year 2024. In the last 4 weeks, the benchmark Indian bond  yields fell from 7.196% to 6.986%. The 20 bps lower fiscal deficit for FY24 at 5.6% is likely to keep the bond yields well under 7%. During the week, India 10-year bond yields touched a high of 7.022% and a low of 6.967%.

RUPEE WEAKENS TO 83.42/$ AMIDST POLITICAL CONCERNS

With the dollar index at 104.67 levels, and the crude oil prices edging below $82/bbl, the rupee should have been stronger, but it ended weaker for the week at ₹83.424/$

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
May 06, 2024	83.475	83.380	83.603	83.380
May 07, 2024	83.470	83.468	83.516	83.433
May 08, 2024	83.462	83.466	83.535	83.449
May 09, 2024	83.462	83.465	83.537	83.442
May 10, 2024	83.553	83.462	83.576	83.454
May 13, 2024	83.506	83.525	83.618	83.481
May 14, 2024	83.482	83.529	83.550	83.472
May 15, 2024	83.414	83.524	83.595	83.355
May 16, 2024	83.450	83.420	83.524	83.404
May 17, 2024	83.302	83.470	83.507	83.260
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

Data Source: RBI

The weakness in the rupee during the week was largely driven by uncertainty on the political front as well as the uncertainty over the GDP data and the fiscal deficit data. Now, all that data is out and that should help the rupee to harden. Last week, FPIs were net sellers to the tune of $424 Million and that also put pressure on the rupee, apart from their heavy short positions in the Nifty index futures. For the week, rupee touched a high of 83.034/$ and a low of 83.501/$.

BRENT CRUDE TAPERS TO $81.62/BBL AHEAD OF OPEC MEET

In the first two weeks of May 2024, price of crude came down sharply from $90/bbl to $82/bbl. In the latest week to May 31, 2024, Brent crude fell further to $81.62/bbl, despite US drawdowns to the tune of more than 4 Million barrels from the reserves.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
May 06, 2024	83.60	83.24	83.83	82.78
May 07, 2024	82.99	83.74	83.82	82.42
May 08, 2024	83.58	83.02	83.82	81.71
May 09, 2024	83.88	83.79	84.33	83.45
May 10, 2024	82.79	84.21	84.53	82.70
May 13, 2024	83.36	82.78	83.84	82.26
May 14, 2024	82.78	83.43	83.62	82.11
May 15, 2024	82.75	82.76	83.07	81.05
May 16, 2024	83.27	83.03	83.78	82.31
May 17, 2024	83.96	83.45	84.04	83.08
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

Data Source: Bloomberg

Oil prices fell further in the week to $81.62/bbl despite the US inventories showing a sharp draw down of more than 4 Million barrels. That could be explained by the expectation that the OPEC meet may be more accommodative to the African members on output increase. For the week, Brent crude touched a high of $85.02/bbl and a low of $81.17/bbl.

SPOT GOLD MARGINALLY LOWER AT $2,327/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 06, 2024	2,326.15	2,293.98	2,331.98	2,291.91
May 07, 2024	2,315.20	2,326.31	2,329.98	2,310.10
May 08, 2024	2,309.05	2,315.40	2,321.43	2,303.74
May 09, 2024	2,345.88	2,309.04	2,347.59	2,306.67
May 10, 2024	2,360.14	2,346.26	2,378.45	2,345.25
May 13, 2024	2,338.45	2,360.38	2,364.56	2,332.38
May 14, 2024	2,355.88	2,338.39	2,359.66	2,334.94
May 15, 2024	2,386.04	2,358.20	2,390.36	2,351.82
May 16, 2024	2,377.90	2,391.93	2,397.40	2,371.10
May 17, 2024	2,414.89	2,376.81	2,422.87	2,373.96
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

Data Source: Bloomberg

After rallying to above $2,400/oz, gold has slightly tapered. It now awaits clarity on whether the Fed would actually cut rates in September, which could be another trigger for gold to rally, as it reduces the opportunity cost of holding gold. However, gold has had a frenetic run and may now remain in a range as macroeconomic growth indicators turn positive. During the week, gold touched a high of $2,364/oz and a low of $2,322/oz. The next move in gold may be triggered by Fed rate action.