Weekly Musings – Macro Quartet for week ending October 04, 2024

7 Oct 2024 , 04:20 AM

POWELL ON HOW FED LINKS DATA AND MONETARY POLICY

There has been a lot of ink spilt in recent weeks on how data will drive trajectory of rate cuts. According to Powell, the monetary policy colour and trajectory would still be data driven. In a recent speech, the Fed chair Jerome Powell underlined how the Fed links data flows and crafts monetary policy in tandem. This is useful to understand how the flows of data in the future would likely impact the rates trajectory of the Fed.

• According to Powell, the last one year saw healthy gains in the labour force and productivity. The goal of the Fed has always been about restoring price stability without the kind of painful rise in unemployment that has frequently accompanied efforts to bring down high inflation rapidly. Powell is right when he says that high inflation hits the vulnerable segments of society the most. Solving the inflation puzzle and giving them the unemployment problem in exchange would also be unfair, since even unemployment hits the vulnerable segments the hardest. Hence, the delicate balance was the primary mandate of monetary policy. As Powell himself admits; that task is far from completed; although one can say with a degree of self-assurance that substantial progress has been made by the Fed on that front.
• Tracing the history of inflation in recent years, Powell picked on the inflation data since the massive spike in late 2021. It was in late 2021 that high inflation first reared its ugly head and the level of PCE inflation ran well above the Fed goal. This was accompanied by a very tight labour market, with demand far exceeding supply. That limited the effectiveness of most anti-inflation measures mooted by the Fed. That is because the tight labour market kept wages high and that negated any impact of higher rates. However, Powell underlined that keeping the monetary policy restrictive had surely helped the Fed in restoring the balance between overall supply and demand in the economy. As a result, the risks to achieving the employment and inflation goals of the Federal Reserve are roughly in balance as the Fed stands today.
• One factor that has intrigued the markets was why the Fed had held on to status quo for 14 months, after the last rate hike in July 2023. Explaining this 14-month long hiatus since July 2023, Powell underscored that there was a reason for keeping the policy rate at a 20-year high for a full 14 months. For instance, if one looks at core inflation, was above 4% till recently, while the unemployment was at 3.5%. That is a 50-year low unemployment and a level that is defined as full employment by the Fed. Since July 2023, the inflation rate had moved decisively lower and the unemployment rate had moved up from 3.4% to 4.3%. It was this turning of tables that had called for an urgent recalibration of policy stance to reflect tangible progress toward the Fed goals as well as the changed balance of risks. It was time for the Fed to shift focus from inflation control to ensuring full employment. That shift explains the decision to front-load rate cuts.
• The decision of the FOMC to reduce policy rates by 50 basis points reflected a growing confidence that the time was ripe for recalibration of policy. The conviction at this juncture is that an appropriate recalibration of policy stance can ensure that price stability and full employment can be maintained at the same time. It was not exactly antithetical as it looked a few months back.

Despite the Fed being quite outright on the trajectory of the policy, Powell has been quite cautious about when they would shift the stance of the policy to neutral. The only thing Powell committed to was that if the US economy evolved as expected, then the stance of the monetary policy would move toward a more neutral stance. However, Powell also underlined that the shift would be gradual and well deliberated. Very quietly, the Fed has shifted its focus from controlling inflation to ensuring that the growth engine is not disrupted. That strategy appears to be working for now.

US BOND YIELDS AND DOLLAR INDEX SPIKE DURING THE WEEK

Two macro variables set the tone for global markets; 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 (%)
Sep 30, 2024	3.787	3.753	3.806	3.749
Oct 01, 2024	3.731	3.779	3.790	3.696
Oct 02, 2024	3.783	3.733	3.817	3.724
Oct 03, 2024	3.846	3.789	3.855	3.785
Oct 04, 2024	3.969	3.850	3.994	3.834

Data Source: Bloomberg

It is said that in the realm of global macros, a lot can change in a week. Last week, we saw things change in just a few days as the world markets were suddenly exposed to a surge in geopolitical risk and its concomitant implications. Iran and Israel are on the throes of a full-fledged war and that is spooking oil prices, raising the uncertainty quotient in global markets, and pushing investors towards safe haven currencies. The US bond yields have been trending lower since consumer inflation came in at 2.5% in mid-September and later the Fed cut rates by 50 bps. With PCE inflation at 2.2% bond yields should have been lower, but the pressure of geopolitical risk spoilt the party in the week. Market are worried that the markets may have factored in inordinately low inflation, which is unlikely. An event risk like Israel bombing NOIC oil installations or Iran blockading the Hormuz Straits could change the oil price equation completely. That is what the higher bond yields were reflecting.

The 10-year bond yields opened the week at 3.787% and closed the week sharply higher at 3.969% in the light of the rising geopolitical risk and the fear that it could trigger higher inflation and probably a reversal in the dovish policy of the Fed. During the week, the US 10-year bond yields touched a high of 3.994% and a low of 3.696%. The big risk factor to lower bond yields remains the rising geopolitical risk in the Middle East and West Asia. We now turn to the Dollar Index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 30, 2024	100.78	100.42	100.92	100.18
Oct 01, 2024	101.19	100.74	101.39	100.70
Oct 02, 2024	101.68	101.24	101.69	101.16
Oct 03, 2024	101.99	101.64	102.10	101.63
Oct 04, 2024	102.52	101.91	102.69	101.81

Data Source: Bloomberg

Structurally, the dollar index had fallen from a high of 106 to the range of 100-101. In the latest week, the dollar index displayed a sharp bounce. It opened at 100.78 but closed sharply higher at 102.52. The dollar index is a measure of dollar strength, and with the rising geopolitical risk, there are concerns that the Fed may, at some point, underplay it dovishness, especially if inflation was to spike too sharply. Also, in a geopolitical crisis, dollar is the natural safe haven currency and that is leading to a lot of funds gravitating towards the dollar. The dollar index scaled a weekly high of 102.69 and low of 100.18 levels.

INDIA BOND YIELDS CLOSE SHARPLY HIGHER FOR THE WEEK

After the sharp fall in the bond yields in previous weeks, this week saw a sharp rebound in the bond yields. To an extent, the bond yields reflected the rising yields in the US. But it also reflects the possibility that with rising oil inflation, the RBI may look to put off its rate cut plans for now, a factor that spiked the bond yields. Bond yields in India moved up from 6.750% to 6.829% in the latest week, ending sharply higher. The borrowing calendar for H2-FY25 at ₹6.61 Trillion favour lower bond yields; but focus is now entirely on geopolitical risk. Interest costs have been rising in India and cost of funds is pinching at multiple levels. For now, it looks unlikely that RBI will consider rate cuts in the October MPC meet.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 09, 2024	6.854	6.861	6.861	6.852
Sep 10, 2024	6.851	6.855	6.855	6.850
Sep 11, 2024	6.830	6.840	6.841	6.827
Sep 12, 2024	6.811	6.835	6.835	6.806
Sep 13, 2024	6.792	6.819	6.819	6.784
Sep 16, 2024	6.762	6.797	6.797	6.759
Sep 17, 2024	6.779	6.775	6.781	6.753
Sep 18, 2024	6.779	6.775	6.781	6.753
Sep 19, 2024	6.758	6.793	6.793	6.736
Sep 20, 2024	6.761	6.768	6.769	6.747
Sep 23, 2024	6.767	6.775	6.775	6.759
Sep 24, 2024	6.761	6.768	6.770	6.754
Sep 25, 2024	6.738	6.753	6.753	6.735
Sep 26, 2024	6.718	6.740	6.740	6.706
Sep 27, 2024	6.759	6.747	6.767	6.723
Sep 30, 2024	6.750	6.760	6.760	6.744
Oct 01, 2024	6.732	6.759	6.759	6.730
Oct 02, 2024	6.732	6.759	6.759	6.730
Oct 03, 2024	6.777	6.751	6.779	6.744
Oct 04, 2024	6.829	6.793	6.838	6.792

Data Source: RBI

During the week, the bond yield opened at 6.750% and closed higher at 6.829%. Yields were trading around 30-month lows, so a dead cat bounce was expected anyways. An important data point will be the Kharif output this season, which will provide direction to food inflation and also to bond yields. During the week, India 10-year bond yields touched a high of 6.838% and a low of 6.730%. While India inflation has come down to below the RBI target of 4% for two months in a row, food inflation and oil inflation could be the X-factors.

RUPEE WEAKENS TO BEYOND ₹84/$

In the last few weeks, the RBI had been consistently intervening to defend the rupee from weakening beyond ₹84/$. However, RBI has been in the sidelines in the last two weeks.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Sep 09, 2024	83.928	83.945	83.985	83.921
Sep 10, 2024	83.949	84.005	84.009	83.947
Sep 11, 2024	83.960	83.980	84.007	83.926
Sep 12, 2024	83.920	84.015	84.015	83.919
Sep 13, 2024	83.880	83.927	83.955	83.843
Sep 16, 2024	83.840	83.876	83.919	83.834
Sep 17, 2024	83.747	83.907	83.914	83.695
Sep 18, 2024	83.650	83.764	83.807	83.651
Sep 19, 2024	83.620	83.689	83.749	83.558
Sep 20, 2024	83.485	83.620	83.637	83.468
Sep 23, 2024	83.530	83.481	83.577	83.440
Sep 24, 2024	83.600	83.572	83.688	83.518
Sep 25, 2024	83.600	83.605	83.652	83.506
Sep 26, 2024	83.601	83.640	83.729	83.593
Sep 27, 2024	83.710	83.622	83.725	83.598
Sep 30, 2024	83.755	83.696	83.836	83.670
Oct 01, 2024	83.900	83.851	83.951	83.786
Oct 02, 2024	83.920	83.908	84.012	83.849
Oct 03, 2024	83.990	83.927	84.036	83.895
Oct 04, 2024	84.030	84.010	84.052	83.948

Data Source: RBI

Over the last few weeks, RBI had been steadily selling dollars around the ₹84/$ mark, which helped support the rupee. This week, the RBI slowed its purchases amidst rising geopolitical risk. With the US dollar now attracting a lot of safe haven money from abroad amidst geopolitical risk, it is only obvious that the dollar is strengthening. This is despite the dovish stance of the Fed. Secondly, Brent Crude prices spiked sharply in the week from $71/bbl to above $78/bbl, which was a key factor in pulling down the rupee. Thirdly, FPI were heavy net sellers in equities in this week with nearly $3.2 Billion of equities sold in the first 3 days of October. For the week, the USDINR touched a high of 83.670/$ and a low of 84.052/$. The rupee closed the week above the ₹84/$ mark.

BRENT CRUDE SPIKES TO $78/BBL ON GEOPOLITICAL CONCERNS

The discussion on the crude prices has now shifted from the support levels to “how much higher now.” Brent spiked in the week from $71/bbl to $78/bbl.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Sep 09, 2024	71.84	71.66	72.21	70.65
Sep 10, 2024	69.19	71.92	72.28	68.68
Sep 11, 2024	70.61	69.68	71.09	69.00
Sep 12, 2024	71.97	70.60	72.87	70.59
Sep 13, 2024	71.61	72.30	73.24	71.46
Sep 16, 2024	72.75	72.09	73.39	71.52
Sep 17, 2024	73.70	72.91	74.28	72.17
Sep 18, 2024	73.65	73.69	74.10	72.31
Sep 19, 2024	74.88	73.13	75.18	72.91
Sep 20, 2024	74.72	74.78	75.00	74.00
Sep 23, 2024	73.21	73.94	74.44	72.41
Sep 24, 2024	74.47	73.43	75.12	73.26
Sep 25, 2024	72.90	74.44	74.67	72.50
Sep 26, 2024	71.09	72.89	73.28	70.25
Sep 27, 2024	71.54	70.71	72.00	70.44
Sep 30, 2024	71.70	71.88	72.79	71.03
Oct 01, 2024	74.46	71.86	75.45	69.92
Oct 02, 2024	74.67	74.45	76.14	73.60
Oct 03, 2024	77.90	74.58	77.99	74.33
Oct 04, 2024	78.08	77.80	79.29	77.39

Data Source: Bloomberg

Oil had crashed after Citi and BOFA pegged crude price at $60/bbl, forcing rapid long closures in crude futures. However, oil found support at $70/bbl as countries used the lower levels to accumulate strategic oil reserves. This week was all about the escalating geopolitical risk and the possibility that either Israel may bomb NOIC oil installations, or Iran could blockade the Hormuz Straits or both. One hopes that nothing of that kind happens, but you can never be too sure. For the week, Brent crude touched a high of $79.29/bbl and a low of $69.92/bbl.

SPOT GOLD CONTINUES ITS RELENTLESS RALLY

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)
Sep 09, 2024	2,505.25	2,497.32	2,507.42	2,485.60
Sep 10, 2024	2,516.12	2,506.84	2,518.57	2,500.16
Sep 11, 2024	2,511.44	2,515.70	2,529.40	2,501.01
Sep 12, 2024	2,558.75	2,512.02	2,560.21	2,511.02
Sep 13, 2024	2,576.50	2,556.52	2,586.18	2,556.52
Sep 16, 2024	2,582.58	2,578.06	2,589.78	2,575.40
Sep 17, 2024	2,569.52	2,582.46	2,587.01	2,560.84
Sep 18, 2024	2,559.16	2,571.73	2,600.21	2,546.98
Sep 19, 2024	2,586.48	2,559.07	2,594.89	2,551.26
Sep 20, 2024	2,621.96	2,587.50	2,625.79	2,584.81
Sep 23, 2024	2,628.40	2,621.81	2,635.54	2,613.60
Sep 24, 2024	2,656.70	2,628.92	2,664.47	2,622.58
Sep 25, 2024	2,656.82	2,655.90	2,670.60	2,649.84
Sep 26, 2024	2,670.20	2,657.32	2,685.96	2,654.56
Sep 27, 2024	2,657.97	2,669.50	2,674.40	2,643.15
Sep 30, 2024	2,634.49	2,658.30	2,666.11	2,624.78
Oct 01, 2024	2,662.82	2,635.41	2,673.20	2,631.98
Oct 02, 2024	2,657.75	2,661.15	2,663.85	2,641.18
Oct 03, 2024	2,655.90	2,658.66	2,663.40	2,639.73
Oct 04, 2024	2,653.52	2,655.90	2,670.20	2,632.10

Data Source: Bloomberg

Spot Gold opened the week strong at $2,634.49/oz but spent the remaining days in a narrow range before closing the week at $2,653.52/oz. The sharper than expected 50 bps rate cut by the Fed came as a boon for gold prices as it substantially reduces the opportunity cost of holding gold. at the same time, the geopolitical risks in Middle East and West Asia are also triggering safe-haven demand for gold. During the week, gold touched a high of $2,670.20/oz and a low of $2,624.78/oz. Spot Gold has now given a close above $2,600/oz for the third week in a row.