Weekly Musings – Macro Quartet for week ending October 11, 2024

14 Oct 2024 , 06:49 AM

WHY THE US FED CANNOT BE TOO AGGRESSIVELY DOVISH

On October 10, 2024, when the US Bureau of Labour Statistics (BLS) announced the consumer inflation data; it looked another leg up for rate cuts. After all, consumer inflation had fallen further to 2.4%, and is now just 40 bps away from the target. However, this inflation data cannot be seen in isolation. It has to be seen in conjunction with the recent unemployment data and the FOMC minutes. That is where the first dichotomy arises. For instance, the unemployment has fallen progressively from 4.3% to 4.2% and then to 4.1% in the last 3 months. In September, the non-farm payroll additions have been sharply higher, almost dismissing the hard landing fears. Now, combine that with what Michelle Bowman said post the US Fed meet on September 18, 2024, “The 50 bps rate hike may give a wrong impression that the Fed is already winning its battle against inflation, at the same time issuing an erroneous warning that economic growth was in dire straits.” Both were incorrect and that is why Bowman had put up a dissent note. The latest minutes of the Fed only underline the fact that the verdict on 50 bps rate cut was a lot more split. Let us now talk about the US consumer inflation data for September 2024.

For the month of September 2024, the US consumer inflation came in lower by 10 bps at 2.4%. However, the real concern is that the data was a lot more mixed and worrisome than what the headline consumer inflation revealed. Here is why.

• In September 2024, food inflation moved up 20 bps at 2.3%. The upward thrust to food inflation came from cereals, meat, dairy products, fruits, and vegetables. Only food away from home and limited service meals saw the inflation tapering.
• The second concern was core inflation, which was 10 bps higher at 3.3%. The upward pressure came from apparel, used cars, physician services, airline fares, and motor maintenance costs. With supply chain gains done, core inflation can only trend higher.
• The real worry is on Energy inflation. For September, energy inflation slumped another 280 bps from -4.0% to -6.8%. The figure is yoy inflation and does not adequately capture the short term pressure on account of Brent Crude inching towards $80/bbl.

Remember, headline CPI inflation is still 40 bps above the 2% inflation target, and there is pressure building on all fronts. That is why the Fed cannot afford to be overtly dovish and that is also evidenced by how the CME Fedwatch has recently toned down its aggression. The Fed has started off with an aggressive 50 bps rate cut and has also made aggressive promises. It has almost committed to another 50 bps rate cut by end of 2024 and an additional 100 bps by end of 2025. That is 200 bps overall from the peak. That is likely to come under questions for 3 reasons. Firstly, front loading assumptions were based on a likely growth scare coming from the 4.3% unemployment figure in July 2024. However, subsequent data points on GDP and unemployment have underlined that it may have just been a temporary scare. The second reason is the glide path of inflation. Again, the Fed has underestimated the last mile difficulties and the assumption is that 2% will be a cakewalk. That will not be the case. Thirdly, the relatively sticky core inflation is the real issue as the headline inflation normally tends to follow the lead of core inflation on a trending basis. Rate cuts will still happen, but the dovish story of 200 bps by end of year 2025 may be easier said than done.

US BOND YIELDS SPIKE; DOLLAR INDEX ENDS HIGHER

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 (%)
Oct 07, 2024	4.026	3.981	4.033	3.967
Oct 08, 2024	4.035	4.020	4.057	3.996
Oct 09, 2024	4.067	4.018	4.078	4.006
Oct 10, 2024	4.094	4.073	4.120	4.051
Oct 11, 2024	4.073	4.069	4.118	4.059

Data Source: Bloomberg

In the last two weeks, it looks like the undertone of global bond yields has changed sharply. Last week, the US bond yields rallied after it became apparent from the jobs data that US Fed rate cuts would be more restrained going ahead. This week, the bond yield rallied further. The rally in bond yields was also triggered by some bond selling after several traders who had entered bonds to play falling yields, started to cash out. The US bond yields had been trending lower since PCE inflation came in at 2.2%. In the last week two things changed. Firstly, the FOMC minutes and the US jobs data indicated that hard landing may not really be a concern for the US Fed. Secondly, it also became apparent that with geopolitical risk and rising core inflation, the headline inflation in the US may also come under pressure. That means, rate cuts would be more calibrated than indicated.

The 10-year bond yields opened the week at 4.026% and closed the week sharply higher at 4.073% in the light of the rising geopolitical risk and the fear that it could trigger higher inflation and probably a reversal in the ultra-dovish policy of the Fed. During the week, the US 10-year bond yields touched a high of 4.120% and a low of 4.033%. In just 2 weeks, the US bond yields have spiked from 3.743% to 4.073%. We now turn to the Dollar Index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Oct 07, 2024	102.54	102.49	102.62	102.37
Oct 08, 2024	102.55	102.46	102.64	102.29
Oct 09, 2024	102.93	102.48	102.94	102.46
Oct 10, 2024	102.99	102.88	103.18	102.72
Oct 11, 2024	102.89	102.88	102.99	102.77

Data Source: Bloomberg

Structurally, the dollar index had fallen from a high of 106 to the range of 100-101. In the previous week, the dollar index displayed a sharp bounce. It opened at 100.78 but closed sharply higher at 102.52. This week, the rally in the dollar index continued as it went up from 102.54 to 102.89 levels. The dollar index is a measure of dollar strength, and with the rising geopolitical risk, there are is the typical safe-haven shift to dollars that is likely to happen, and it is already visible. We are already seeing a lot of risk-off funds gravitating towards dollar assets . Dollar index scaled a weekly high of 103.18 and low of 102.29 levels.

INDIA BOND YIELDS EDGE LOWER ON RATE CUT EXPECTATIONS

After the sharp spike in bond yields in the previous week, the general expectation was that bond yields would spike above the 7% mark in the current week. However, that was not to be. Unlike the US Fed, the RBI did not act on rates, so expectations are still there that the RBI would cut rates, sooner rather than later. Bond yields in India moved down from 6.846% to 6.788% in the latest week, ending lower. The borrowing calendar for H2-FY25 at ₹6.61 Trillion favour lower bond yields; and the markets are betting that the impact of the geopolitical risk in West Asia on India should be limited. For now, it looks like the RBI may consider rate cuts in December 2024 or in February 2025.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Oct 07, 2024	6.846	6.846	6.853	6.813
Oct 08, 2024	6.806	6.845	6.845	6.802
Oct 09, 2024	6.766	6.818	6.818	6.741
Oct 10, 2024	6.776	6.805	6.805	6.750
Oct 11, 2024	6.788	6.770	6.798	6.767

Data Source: RBI

During the week, the bond yield opened at 6.846% and closed lower at 6.788%. Yields were trading around 30-month lows, so a dead cat bounce happened last week; but that is done and dusted. An important data point in the coming week will be the CPI inflation and the trade data; apart from kharif data. During the week, India 10-year bond yields touched a high of 6.853% and a low of 6.741%. While India inflation has stayed below the RBI target of 4% for two months in a row, September inflation is expected to be sharply higher.

RUPEE WEAKNESS TAKES IT WELL BEYOND ₹84/$

In the last few weeks, the RBI had been consistently intervening to defend the rupee from weakening beyond ₹84/$. However, it looks like the RBI may stay out for now.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Oct 07, 2024	83.980	84.007	84.018	83.945
Oct 08, 2024	83.945	83.969	83.996	83.915
Oct 09, 2024	83.950	83.938	83.980	83.893
Oct 10, 2024	83.940	83.939	83.992	83.930
Oct 11, 2024	84.101	83.965	84.121	83.942

Data Source: RBI

Over the last few weeks, RBI had been steadily selling dollars around the ₹84/$ mark, which helped support the rupee. In the last two weeks, the rupee closed the weak above ₹84/$, a clear indication that the RBI would now look at higher defence points. RBI had already slowed dollar selling amidst rising geopolitical risk. With the US dollar attracting a lot of safe haven money from investors, dollar strength is almost inevitable. This is notwithstanding the dovish stance of the Fed. Secondly, Brent Crude prices stayed around $78/bbl, which was also a factor in weakening the rupee. Thirdly, FPI were heavy net sellers in equities in this week at $3.76 Billion; and $7 Billion of selling in last 8 trading sessions. For the week, the USDINR touched a high of 83.893/$ and a low of 84.121/$. The rupee closed the week very close to the low point of the week.

BRENT CRUDE CLOSES FLAT AFTER A VOLATILE WEEK

The discussion on the crude prices has now shifted from the support levels to the resistance level. Experts are now pegging Brent to break above $80/bbl and move to $90/bbl mark.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Oct 07, 2024	81.13	77.49	81.17	77.39
Oct 08, 2024	77.47	81.01	81.16	76.39
Oct 09, 2024	76.78	77.52	78.00	75.19
Oct 10, 2024	79.27	76.73	79.72	76.73
Oct 11, 2024	78.88	79.13	79.50	78.04

Data Source: Bloomberg

In the last few weeks, there seems to be persistent accretion to the US oil reserves, which is sort of preventing the Brent Crude prices from going above $80/bbl. This week geopolitical situation was relatively stable, although the peace was quite tense. Markets are awaiting the next piece of action from Iran and Israel. For the week, Brent crude touched a high of $81.17/bbl and a low of $75.19/bbl.

SPOT GOLD RALLIES, BUT A LOT SLOWER NOW

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 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
Oct 07, 2024	2,643.58	2,651.20	2,659.91	2,637.70
Oct 08, 2024	2,621.94	2,643.50	2,653.09	2,604.79
Oct 09, 2024	2,607.77	2,620.19	2,624.65	2,605.18
Oct 10, 2024	2,629.48	2,608.14	2,631.63	2,604.15
Oct 11, 2024	2,656.00	2,630.80	2,661.55	2,627.65

Data Source: Bloomberg

Spot Gold opened the week at $2,643.58/oz but spent the remaining days in a narrow range before closing the week at $2,656.00/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. However, the glide path is not too clear now, which is why gold is in a range. During the week, gold touched a high of $2,661.55/oz and a low of $2,604.15/oz. Spot Gold has now given a close above $2,600/oz for four weeks in a row!