Weekly Musings – Macro Quartet for week ending October 25, 2024

28 Oct 2024 , 10:05 AM

RUPEE STAYS WEAK, BUT NOT MUCH TO WORRY

The rupee weakness continued during the week as it stayed decisively above the level of ₹84/$. There were several triggers for the rupee weakness in a range. Let us look at the downside risks to the rupee first. FPI selling has been the big story in the last one month. IN fact, in the 18 trading sessions of October 2024, the FPIs have sold close to $10.22 Billion in Indian equities. Interestingly, this was also synchronized with the long-China / short-India narrative. With the India growth story coming into question amid high valuations, there was a short term shift of money from India to China. India’s high Buffett Ratio is also an issue.

The FPIs were betting big on the Chinese government fuelling the markets with a stimulus. However, as of date, the Chinese government is yet to lay out the contours of the stimulus package. Geopolitical risk remains a major downside risk for the rupee as it means higher crude oil prices and also higher imported inflation. These are translating into rupee weakness. The only reason the rupee did not weaken much beyond the level of ₹84/$ was that the RBI continued to intervene by selling dollars in spot market. That kept the rupee steady in a range. Most likely, the RBI will allow a slightly weaker USDINR to boost exports.

WHY OIL PRICES SPIKED IN THE WEEK?

In the previous week, the price of oil had weakened down to $73/bbl on the back of demand concerns after the OPEC demand outlook pegged a sharp fall in Chinese demand for imported oil. That led to a sharp weakness in the oil prices as traders sold off. In this week, the trigger for higher crude prices was the worsening geopolitical situation in West Asia. This is the first time that Israel undertook large scale targeted attacks inside Iran. Oil prices have spiked for several reasons. There is an expectation that both Iran and Israel would try and push for an early resolution, especially considering that the US is in the midst of presidential elections.

There are expectations that the price of oil will spike if the trade routes are impacted. As of now, there is a problem in the Red Sea trade. However, there are expectations that if push comes to shove, Iran may look to block the Straits of Hormuz, something akin to what Nasser of Egypt had done with the Suez Canal in 1956. For India, this would pose a major challenge considering its deep dependency on imported crude for running its global scale refineries in India. But, the real story in the week was about gold.

PRECIOUS METAL GETS MORE PRECIOUS

In the last few weeks, we have seen the prices of gold and silver spike across the world. In India, both the precious metals are at record levels and has continued to see robust demand during the festive season. There have been several reasons for the gold prices to spike to all-time record levels in the global market. Firstly, the lower rate regime automatically makes gold more attractive as it reduces the opportunity cost of holding gold. Secondly, the times of macroeconomic and geopolitical uncertainty are the perfect time for safe haven buying in gold. Above all, several economists have been warning about volatile global currencies resulting in gold emerging as a stable currency-cum-asset class. It is hard to say when it will happen and if it will happen; but that is surely a distinct possibility.

US BOND YIELDS MOVE UP; DOLLAR INDEX 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 21, 2024	4.182	4.097	4.198	4.077
Oct 22, 2024	4.206	4.194	4.222	4.164
Oct 23, 2024	4.242	4.212	4.260	4.210
Oct 24, 2024	4.202	4.248	4.248	4.182
Oct 25, 2024	4.232	4.204	4.250	4.174

Data Source: Bloomberg

In the last 3 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. That sentiments continues in this week also, and some of the key data points in the coming week like PCE inflation, GDP advance estimate and unemployment numbers in the US will impact the US bond yields. In the latest week, bond yields were flat to positive on hopes that the Fed may go slow on rate cuts, especially after the recent data flows hinted at a calibrated approach to rate cuts. The US bond yields had been trending lower since PCE inflation and the consumer inflation came in lower in recent months. However, even the Fed admits now that the hard landing fears may have been overplayed a bit. That is evident if one looks at the US quarterly GDP date, the positive shift in unemployment numbers, and the Atlanta Fed GDP forecasts.

For the week, the 10-year bond yields opened the week at 4.182% and closed the week higher at 4.232%. Bond yields had spiked in the last 3 weeks on expectations of a slower than expected rate cut. Persistent selling of bonds by traders also pulled down bond prices and pushed up the yields. For instance, in a span of 3 weeks, the US bond yields have spiked from 3.743% to 4.232%. Let us now turn to the Dollar Index.

Date	Price (X)	Open (X)	High (X)	Low (X)
Oct 21, 2024	104.01	103.46	104.02	103.42
Oct 22, 2024	104.08	103.97	104.13	103.82
Oct 23, 2024	104.43	104.09	104.57	104.09
Oct 24, 2024	104.06	104.43	104.45	104.01
Oct 25, 2024	104.26	104.05	104.34	103.94

Data Source: Bloomberg

It may be recollected that the dollar index had fallen from a high of 106 to the range of 100-101. In the week to October 11, 2024, the dollar index bounced from 100.78 102.52 levels; while in the week to October 18, 2024; the dollar index rallied from 103.30 to 103.49 levels. This week, the rally in the dollar index continued as it built upon a strong gap-up opening; opening at 104.01 and closing the week at 104.26. 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 happening. We are seeing a lot of risk-off funds gravitating towards dollar assets . Dollar index scaled a weekly high of 104.57 and low of 103.42 levels for the week.

INDIA BOND YIELDS EDGE HIGHER AS INFLATION SPIKES

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 cut rates. Bond yields rallied this week after market indications that rate cuts may not happen before February 2025. Bond yields in India moved up from 6.837% to 6.845% in the latest week. The general view in the market is that despite the Fed action, the RBI may continue to be cautious about rate cuts; and that was amply evident in the RBI MPC minutes published during this week. That was explained by bond yields inching up slightly. For now, it looks like the RBI may consider rate cuts only in February 2025; especially after we witnessed a sharp spike in the consumer inflation to 5.49%, in tandem with the spike in food prices due to delayed withdrawal of monsoons.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Oct 14, 2024	6.782	6.788	6.788	6.767
Oct 15, 2024	6.769	6.794	6.794	6.765
Oct 16, 2024	6.773	6.762	6.775	6.758
Oct 17, 2024	6.784	6.775	6.787	6.770
Oct 18, 2024	6.809	6.794	6.821	6.789
Oct 21, 2024	6.837	6.831	6.842	6.804
Oct 22, 2024	6.832	6.859	6.859	6.818
Oct 23, 2024	6.818	6.831	6.833	6.811
Oct 24, 2024	6.822	6.843	6.843	6.808
Oct 25, 2024	6.845	6.836	6.849	6.818

Data Source: RBI

During the week, the bond yield opened at 6.837% and closed higher at 6.845%. Yields were trading around 30-month lows, so the bounce in the last 3 weeks was not entirely without reason. There are several important data points in the coming week which include the US PCE inflation, US GDP growth, US unemployment, India core sector growth and India fiscal deficit update for the first half of FY25. For the week, the India bond yields touched a high of 6.859% and a low of 6.804%.

RUPEE BEYOND ₹84/$; DESPITE RBI INTERVENTION

In the last few weeks, the RBI had been consistently intervening to defend the rupee from weakening beyond ₹84/$. However, in the last two weeks, the RBI has not defended the level of ₹84/$, as much as it has tried for a calibrated fall in the rupee.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Oct 14, 2024	84.045	84.065	84.099	84.004
Oct 15, 2024	84.040	84.048	84.075	83.995
Oct 16, 2024	84.030	84.047	84.074	83.958
Oct 17, 2024	84.035	84.038	84.067	83.990
Oct 18, 2024	84.065	84.015	84.077	84.015
Oct 21, 2024	84.070	84.075	84.080	84.032
Oct 22, 2024	84.070	84.060	84.085	84.043
Oct 23, 2024	84.056	84.103	84.110	84.044
Oct 24, 2024	84.050	84.065	84.079	84.037
Oct 25, 2024	84.095	84.084	84.096	84.041

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 consistently above ₹84/$, a clear indication that the RBI would look at higher defence points, and also allow a gradual weakening of the rupee to boost exports. The reserve position indicates that the RBI is still intervening by selling dollars, but in a much smaller way. With the US dollar attracting safe haven flows from investors, dollar strength is inevitable. Rupee has also been hit by geopolitical risk and a worsening CAD situation. For the week, the USDINR touched a high of 84.032/$ and a low of 84.110/$.

BRENT CRUDE BOUNCES ON GEOPOLITICAL CONCERNS

The discussion on the crude prices has now shifted from the support levels to the resistance level. However, with oil import demand from China still weak, the demand concerns on crude oil are here to stay for a much longer time.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Oct 14, 2024	77.46	78.55	78.55	74.86
Oct 15, 2024	74.25	75.22	75.57	73.34
Oct 16, 2024	74.22	74.71	74.93	73.42
Oct 17, 2024	74.45	74.47	74.92	73.26
Oct 18, 2024	73.06	74.59	74.95	72.50
Oct 21, 2024	74.29	73.11	74.57	72.80
Oct 22, 2024	76.04	74.23	76.32	73.57
Oct 23, 2024	74.96	75.73	76.05	74.42
Oct 24, 2024	74.38	75.35	76.54	74.00
Oct 25, 2024	76.05	74.66	76.14	74.17

Data Source: Bloomberg

In the last few weeks, there was persistent accretion to the US oil reserves, which had prevented Brent Crude prices from going above $80/bbl. This week, the spike in crude oil was due to the recent targeted attacks by Israel on Iran. That is likely to keep crude volatile in a range. For the week, Brent crude touched a high of $76.54/bbl and a low of $72.80/bbl.

SPOT GOLD INCHES PAST $2,750/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)
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
Oct 14, 2024	2,651.05	2,657.21	2,666.94	2,643.16
Oct 15, 2024	2,660.99	2,651.75	2,669.07	2,638.31
Oct 16, 2024	2,673.24	2,663.00	2,685.73	2,658.71
Oct 17, 2024	2,692.55	2,674.05	2,696.80	2,673.00
Oct 18, 2024	2,720.25	2,692.41	2,722.87	2,691.48
Oct 21, 2024	2,719.65	2,721.71	2,740.61	2,714.23
Oct 22, 2024	2,748.38	2,720.00	2,749.47	2,718.93
Oct 23, 2024	2,717.54	2,749.52	2,758.53	2,708.79
Oct 24, 2024	2,735.70	2,717.99	2,743.38	2,715.72
Oct 25, 2024	2,747.69	2,736.10	2,747.97	2,716.97

Data Source: Bloomberg

Spot Gold opened the week at $2,719.65/oz but spent the remaining days steadily moving up, before closing the week at $2,747.69/oz. This is the first time that gold has crossed above $2,750/oz, even on an intraday basis. The 50 bps rate cut by the Fed came as a boon for gold prices as it reduced the opportunity cost of holding gold. However, the glide path is not too clear now; although gold bulls are expecting $3,000/oz to be eventually taken out by next year. During the week, gold touched a high of $2,758.53/oz and a low of $2,708.79/oz. Spot Gold has now given a close above $2,700/oz for the second week in a row and has rallied more than 30% in the last one year!