Weekly Musings – Macro Quartet for week ending September 13, 2024

18 Sep 2024 , 05:53 PM

US INFLATION GIVES A BOOST TO RATE CUT HOPES

In September 2024, there were two data points influencing the Fed decision on rates. First was the jobs data which continued to show unemployment at 4.2% and flat in absolute terms. That is an indication that the risk of an economic slowdown was real. At the same time, the US consumer inflation came in 40 bps lower at 2.5%, over the previous month. This also made a strong case for rate cuts. The net impact could be that the Fed will embark on rate cuts when the FOMC meeting concludes on September 18, 2024. The question is not whether, but by how much?

The US consumer inflation was the last big data point before the FOMC policy statement on September 18, 2024. With both the data points clearly hinting at a likely rate cut, there are some conflicts that have to be addressed by the Federal Reserves. While the unemployment at 4.2% is nearly 100 bps higher than the lows of last year, the GDP growth remains robust at near 3% in the second quarter and consumer spending continues to be strong. Secondly, while inflation has trended lower, most of the downward thrust is coming from the oil basket, while core sector basket is showing pressure as the normalization of supply chain bottlenecks has played out.

The big question is not whether a rate hike would happen? That is very likely. The question is if it would be front-loaded and what the trajectory of rates would be? Jerome Powell, speaking at Jackson Hole, had underlined that he did not foresee more than one rate cut this year. In stark contrast, CME Fedwatch expects is pencilling in 100 bps of rate cuts by end of 2024, and a whopping 225 to 250 bps of rate cuts by the end of 2025. That clarity will not exactly emerge from the Fed statement, but from the quarterly projections of long-term macros which will also be announced along with the September policy.

FRONT LOADING RATE CUTS – FEASIBLE, BUT UNLIKELY

If one goes by the statements made by Powell at Jackson Hole and later by Chris Waller at the University of Notre Dame, front loading of rate cuts is surely feasible. Waller has even suggested that the rate cuts should be front loaded and the Fed should not delay rate cuts, the way they delayed rate hikes in late 2021. However, there are 3 things that will bother the Fed. Firstly, the US budget deficit for July 2024 is nearly 40% higher than the estimate, which itself could be inflationary. Secondly, while oil inflation has tapered and food inflation is constant, the core inflation is showing signs of bottoming out. Above all, there are still enough hawks within the FOMC. They are clear that any kind of front ending of rate cuts would put the US monetary policy at risk, should it trigger inflation all over again.

The moral of the story, therefore, seems to be that while front loading of rate cuts is feasible, it is unlikely to happen. The CME Fedwatch is probably being a little too aggressive. While the likes of Powell and Waller may trend towards front-loading; most others would prefer to err on the side of caution. There are no two opinions about the fact that there are signals of an economic slowdown and there are also clear hints of inflation being tamed. Despite what critics may say, the Fed has managed the upcycle of rates quite well, based on its own judgement and internal debate. That is likely to be the trend going ahead too. But, come September 18, 2024 and we could get the first signals of the road ahead.

US BOND YIELDS AND DOLLAR INDEX SHOW SOFT TREND

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 09, 2024	3.702	3.734	3.763	3.691
Sep 10, 2024	3.640	3.704	3.725	3.637
Sep 11, 2024	3.661	3.637	3.689	3.605
Sep 12, 2024	3.680	3.659	3.706	3.638
Sep 13, 2024	3.657	3.650	3.678	3.623

Data Source: Bloomberg

The US bond yields have been trending lower ever since the inflation tapered and Jerome Powell gave a clear indication at Jackson Hole that the time was ripe for rate cuts. In the last two weeks, the rather aggressively dovish tone of Chris Waller has also had an impact on the bond yields in the US. In fact, Waller went to the extent of suggesting that the time was ripe for front loading of rate cuts, rather than take a very calibrated approach. However, most members of the FOMC continued to favour a calibrated approach, since caution has served them well in the upcycle of interest rates. In addition, the sharp fall in the US consumer inflation from 2.9% to 2.5% also pushed down the bond yields in the US.

The 10-year bond yields opened the week at 3.702% and closed the week at 3.657%, steadily falling through the week. During the week, the US 10-year bond yields touched a high of 3.763% and a low of 3.605%. A lot will now depend on what the Fed announces on September 18, 2024 at the Fed meeting and the language of the Fed. More importantly, the long term projections quarterly update will also give clues to what the FOMC members are planning for the US monetary system for the longer run. We now turn to Dollar Index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 09, 2024	101.55	101.19	101.70	101.14
Sep 10, 2024	101.63	101.64	101.77	101.54
Sep 11, 2024	101.68	101.66	101.82	101.27
Sep 12, 2024	101.37	101.78	101.84	101.22
Sep 13, 2024	101.11	101.17	101.19	100.88

Data Source: Bloomberg

Structurally, the dollar index has fallen from a high of 106 to the range of 100-101. In the latest week, the dollar index opened at 101.55 but closed lower at 101.11. The dollar index is a measure of dollar strength, but it also largely moves in tandem with the bond yields in the US. Lower yields reduce the attractiveness of dollar assets and weaken the dollar. A lot will depend on whether the FOMC decides to front-load the rate cuts or prefers just one rate cut for this year. The trajectory of dollar will depend on how aggressively the Fed front-loads rate cuts. The dollar index scaled a weekly high of 101.84 and low of 100.88 levels.

INDIA BOND YIELDS TAPER TO 30-MONTH LOW OF 6.792%

The week saw a rather sharp fall in the Indian bond yields, which touched a 30-month low at 6.792% at close of the week. In fact, if you look at the trajectory of the bond yields in India; it has moved down from 6.854% to 6.792% in the latest week, but was absolute static in the three weeks prior to that. A lot will depend on how the RBI reacts to the Fed rate cuts. If the Fed shows aggressive dovishness, then RBI may not be able to remain neutral for too long. Interest costs have been rising in India and solvency ratios have been worsening. It is likely that RBI will take cognisance of this fact to avoid derailing the economic growth engine.

Date	Price (%)	Open (%)	High (%)	Low (%)
Aug 19, 2024	6.864	6.871	6.871	6.860
Aug 20, 2024	6.856	6.874	6.874	6.850
Aug 21, 2024	6.853	6.849	6.859	6.846
Aug 22, 2024	6.852	6.861	6.861	6.843
Aug 23, 2024	6.859	6.855	6.862	6.849
Aug 26, 2024	6.851	6.854	6.854	6.848
Aug 27, 2024	6.861	6.863	6.863	6.854
Aug 28, 2024	6.861	6.858	6.866	6.856
Aug 29, 2024	6.864	6.870	6.870	6.862
Aug 30, 2024	6.863	6.872	6.872	6.862
Sep 02, 2024	6.876	6.877	6.878	6.865
Sep 03, 2024	6.870	6.885	6.885	6.869
Sep 04, 2024	6.859	6.861	6.863	6.857
Sep 05, 2024	6.855	6.853	6.856	6.851
Sep 06, 2024	6.854	6.852	6.855	6.846
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

Data Source: RBI

During the week, the bond yield opened at 6.854% and closed lower at 6.792%, the lowest level in the last 30 months. In the three weeks prior to that, the India bond yields were flat in a very narrow range. An important data point will be the Kharif output this season, which will provide bond yield direction. During the week, India 10-year bond yields touched a high of 6.861% and a low of 6.784%. While India inflation has come down to below the RBI target of 4% for two months in a row, it is the food inflation that will hold the key to RBI decision.

RUPEE GETS RBI SUPPORT AT 84/$
In the last 2 weeks, the RBI had been consistently intervening to defend the rupee from weakening beyond ₹84.$. This week, RBI support was once again evident.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Aug 19, 2024	83.850	83.865	83.952	83.826
Aug 20, 2024	83.780	83.877	83.927	83.406
Aug 21, 2024	83.892	83.780	83.970	83.628
Aug 22, 2024	83.941	83.892	84.007	83.889
Aug 23, 2024	83.814	83.941	83.942	83.800
Aug 26, 2024	83.840	83.806	83.923	83.787
Aug 27, 2024	83.910	83.870	83.965	83.870
Aug 28, 2024	83.900	83.963	83.988	83.910
Aug 29, 2024	83.880	83.944	83.956	83.839
Aug 30, 2024	83.872	83.893	83.956	83.813
Sep 02, 2024	83.880	83.875	83.946	83.850
Sep 03, 2024	83.950	83.919	83.991	83.897
Sep 04, 2024	83.960	83.994	84.020	83.940
Sep 05, 2024	83.961	83.979	84.004	83.957
Sep 06, 2024	83.985	83.988	83.990	83.906
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

Data Source: RBI

The one difference this week was that the steady RBI intervention at ₹84/$ actually helped the rupee to strengthen this week. It is not just the RBI intervention but there are several factor that have helped the rupee to harden. Firstly, Brent Crude prices are now hovering in the range of $70/bbl to $72/bbl. Secondly, the dollar index has been persistently weakening and has come down from a high of 106 levels to almost the 100 levels. That has started reflecting on the rupee value too. Above all, FPI flows have been robust. FPIs infused $2.10 Billion into Indian equities in the latest week, taking totally FPI net inflows into equity to $15 billion in the last 100 days. Of course, global EM currencies are under pressure and that may put pressure on the rupee in the near future. For the week, the USDINR touched a high of 83.843/$ and a low of 84.009/$. For now, the RBI support is working.

BRENT CRUDE TAKES SUPPORT AROUND $70/BBL

The discussion on the crude prices has now shifted from the resistance levels to the support levels. For now, Brent Crude appears to be holding $70/bbl levels.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Aug 19, 2024	77.66	79.60	79.81	77.48
Aug 20, 2024	77.20	77.66	78.35	76.55
Aug 21, 2024	76.05	77.13	78.21	75.65
Aug 22, 2024	77.22	75.96	77.70	75.77
Aug 23, 2024	79.10	77.24	79.27	77.03
Aug 26, 2024	81.43	79.35	81.58	79.24
Aug 27, 2024	79.55	81.26	81.59	79.47
Aug 28, 2024	78.65	79.87	80.01	77.95
Aug 29, 2024	79.94	78.52	80.78	78.12
Aug 30, 2024	78.80	79.92	80.60	78.57
Sep 02, 2024	77.52	76.95	77.63	76.21
Sep 03, 2024	73.75	77.16	77.55	73.51
Sep 04, 2024	72.70	73.67	74.80	72.35
Sep 05, 2024	72.69	72.76	74.20	72.37
Sep 06, 2024	71.06	72.81	73.53	70.61
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

Data Source: Bloomberg

Oil had crashed sharply after Citi and BOFA had pegged the price of crude at $60/bbl. That had forced rapid long closures in crude futures. However, oil found support at $70/bbl as countries normally use lower levels to accumulate to their strategic oil reserves. For the week, Brent crude touched a high of $73.24/bbl and a low of $68.68/bbl.

SPOT GOLD RALLIES ON POSSIBLE FRONT-LOADING OF RATE CUTS

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)
Aug 19, 2024	2,503.92	2,508.40	2,510.45	2,485.83
Aug 20, 2024	2,513.74	2,501.55	2,532.05	2,497.33
Aug 21, 2024	2,511.95	2,512.82	2,520.09	2,494.15
Aug 22, 2024	2,487.66	2,512.94	2,514.69	2,470.91
Aug 23, 2024	2,512.41	2,487.60	2,518.36	2,486.56
Aug 26, 2024	2,516.89	2,511.43	2,527.76	2,508.71
Aug 27, 2024	2,524.57	2,518.30	2,526.27	2,503.41
Aug 28, 2024	2,502.25	2,522.74	2,529.15	2,493.66
Aug 29, 2024	2,521.18	2,504.65	2,528.77	2,503.65
Aug 30, 2024	2,503.45	2,519.62	2,526.80	2,494.34
Sep 02, 2024	2,499.29	2,502.74	2,507.50	2,490.14
Sep 03, 2024	2,492.76	2,500.50	2,506.44	2,473.25
Sep 04, 2024	2,494.19	2,492.94	2,500.19	2,471.95
Sep 05, 2024	2,516.32	2,495.50	2,523.55	2,493.77
Sep 06, 2024	2,516.36	2,497.33	2,529.28	2,485.22
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

Data Source: Bloomberg

Spot Gold opened the week subdued at $2,505.25/oz but bounced back and closed the week at $2,576.50/oz amidst hopes of the Fed front loading rate cuts. Gold stayed above $2,500/oz through the week after indications that the rate cuts could be more aggressive amidst lower inflation. That reduces the opportunity cost of holding gold. The geopolitical strife is also triggering safe-haven demand for gold. During the week, gold touched a high of $2,586.18/oz and a low of $2,485.60/oz.