Weekly Musings – Macro Quartet for week ending September 20, 2024

25 Sep 2024 , 05:47 PM

FED MACRO PROJECTIONS TAKE BIG TURN IN SEPTEMBER 2024

While the Fed cut rates by 50 basis points in its September 18, 2024 meeting, the real action was in the quarterly projection shifts. These quarterly projections are longer term in nature and pertain to the next 4 years and also to the long term. Each quarter, the FOMC updates the projections of key macros like GDP growth, PCE inflation, core inflation, unemployment, and the interest rate outlook. This time around, there has been sharp change in the Fed quarterly projections in September 2024, as compared to the last set of projections made in June 2024. The table below captures a gist of the key macro projections changes.

Variable	CY-2024 (%)	CY-2025 (%)	CY-2026 (%)	Longer run (%)
Change in real GDP (Sep-24)	2.00	2.00	2.00	1.80
June-2024 projection	2.10	2.00	2.00	1.80
Unemployment rate (Sep-24)	4.40	4.40	4.30	4.20
June-2024 projection	4.00	4.20	4.10	4.20
PCE inflation (Sep-24)	2.30	2.10	2.00	2.00
June-2024 projection	2.60	2.30	2.00	2.00
Core PCE inflation (Sep-24)	2.60	2.20	2.00	Not Available
June-2024 projection	2.80	2.30	2.00	Not Available
Federal funds rate (Sep-24)	4.40	3.40	2.90	2.90
June-2024 projection	5.10	4.10	3.10	2.80

Data Source: US Federal Reserve (CY refers to calendar year)

Here are some of the key takeaways from the FOMC long term projections for the September 2024 quarter, and the updates to the projections for coming years.

• What is the Fed outlook for GDP growth, given the fact that the rate cut of 50 bps happened on the back of concerns that the rising unemployment rate pointed to a likely hard landing for the economy,. For CY2024, real GDP growth is expected at 2.0%; about 10 bps lower than the June projection of 2.1%. However, projections of GDP growth for 2025 and beyond have not changed. However, with Q2 GDP closing at 3.0% and Q3 also expected at 3.0%, the final figure could well be higher than 2.0% for 2024.
• Let us turn to the unemployment projections. For year 2024, unemployment rate expectation has spiked by 40 basis points from 4.0% to 4.4%. This could be triggered by the recent spike in joblessness, but the Fed apparently sees this problem as endemic, considering that unemployment projections for 2025 and 2026 are also up 20 bps. This will reduce the pressure on wages and keep inflation in check, which is good in a sense.
• What about inflation headline and core inflation? Fed lowered the inflation projection for 2024 and 2025. Combined with higher unemployment, it provides the perfect milieu for the Fed to justify aggressive rate cuts. For the year 2024, the PCE inflation target in September update has been cut by 30 bps from 2.6% to 2.3%, compared to the June update. Even for 2024, the PCE inflation has been cut by 20 bps to 2.1%. So, get ready to not see 2% inflation, at least till middle of 2026. Core inflation was also cut by 20 bps, but amidst supply chain uncertainties, it remains an X-factor, with limited predictability.
• Let us move to the bottom line! What does this mean for interest rate trajectory. The policy doves and the financial markets would be pleased. For end-2024, the interest rate projection has been cut sharply by 70 bps from 5.1% to 4.4% in September 2024. That hints at another 50 bps rate cut by end of 2024. Even the end-2025 projection has been cut by 70 bps to 3.4%, hinting at an additional 100 bps cut by end of 2025 (200 bps in all). The long term equilibrium rate of interest in the US is pegged at 2.9%.

With its concerns over the US economic growth story, the Fed is shifting focus from inflation control and price stability to ensuring full employment. Let us now shift to the other macros.

US BOND YIELDS INCH UP, DOLLAR INDEX TAPERS

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 16, 2024	3.618	3.646	3.662	3.618
Sep 17, 2024	3.648	3.618	3.655	3.599
Sep 18, 2024	3.713	3.642	3.721	3.634
Sep 19, 2024	3.719	3.715	3.768	3.691
Sep 20, 2024	3.741	3.713	3.764	3.700

Data Source: Bloomberg

The US bond yields have been trending lower since consumer inflation came in at 2.5% for August and even earlier, when Jerome Powell indicated at Jackson Hole that the time was ripe for rate cuts. Subsequently, even governor Chris Waller batted for front-loading rate cuts. By the end of the previous weeks, the US bond yields had already factored in a 50 bps rate cut in September 2024 and another 50 bps rate cut by December 2024. Hence, when the rates were actually cut by 50 bps on September 18, 2024, there was not much of a surprise element. Clearly, the Fed has decided to go with the doves like Waller, rather than the hawks like Michell Bowman and cut rates aggressively. However, with aggressive rate cuts already factored in, bond yields actually inched up in the week.

The 10-year bond yields opened the week at 3.618% and closed the week at 3.741%, steadily inching up through the week. During the week, the US 10-year bond yields touched a high of 3.768% and a low of 3.599%. With the Fed cutting rates by 50 bps in September and hinting at another 50 bps by December, the focus shifts to upcoming data points like Q2 GDP projection, August PCE inflation, September unemployment figure etc. These data points will have to be persistently supportive of an aggressively dovish stance. We now turn to the Dollar Index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 16, 2024	100.711	101.035	101.035	100.635
Sep 17, 2024	100.567	100.380	100.690	100.240
Sep 18, 2024	100.282	100.595	100.835	99.885
Sep 19, 2024	100.321	100.710	101.180	100.220
Sep 20, 2024	100.423	100.390	100.735	100.125

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 100.711 but closed lower at 100.423. The dollar index is a measure of dollar strength, so the Fed cutting rates and other central banks leaving rates intact has also put pressure on the dollar index. A lot will depend on whether the FOMC sticks to its rate trajectory till the end of 2025, which means the dollar would structurally be under pressure. The dollar index scaled a weekly high of 101.180 and low of 99.885 levels.

INDIA BOND YIELDS CLOSE FLAT IN THE WEEK

After the sharp fall in the bond yields in the previous week, this week saw bond yields closing almost where it started off. Bond yields are already trading at a 30-month low on expectations that the RBI will also cut rates in tandem with the Fed. Bond yields in India moved down from 6.762% to 6.761% in the latest week, ending almost where it started. A lot will depend on how the RBI reacts to the Fed rate cuts; and there is no signal till now. If Fed gets aggressively dovish, RBI may not be able to remain neutral for too long. Interest costs have been rising in India and cost of funds is pinching at multiple levels. Clearly, RBI will take cognisance of this fact; sooner rather than later.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
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

Data Source: RBI

During the week, the bond yield opened at 6.762% and closed flat at 6.761%. Yield are already trading around 30-month lows. 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 6.797% and a low of 6.736%. While India inflation has come down to below the RBI target of 4% for two months in a row, the bond yields would still be awaiting for cues from the food inflation front for greater clarity.

RUPEE MUSTERS STRENGTH TO 83.5/$

In the last 2 weeks, the RBI had been consistently intervening to defend the rupee from weakening beyond ₹84.$. This week, RBI support was not exactly required.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
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

Data Source: RBI

Over the last few weeks, RBI has been steadily intervening and selling dollars around the ₹84/$ mark, which had helped support the rupee. Now, the RBI intervenes through the domestic currency markets and also through global NDF markets to offer genuine support to the Indian rupee. This week several factors combined to harden the rupee, even without the RBI intervention. Firstly, the Fed decision to cut rates by 50 bps has put pressure on the dollar index and given a fillip to the rupee. Secondly, Brent Crude prices are hovering in the range of $70/bbl to $74/bbl, which is far more comfortable than previous levels of $80/bbl. Thirdly, FPI flows were robust for the fifth week in a row with inflows of $696 Million in a truncated week of just 3 reporting days. FPIs have infused $7.5 Billion in the last 5 weeks and $16 Billion in the last 100 days. For the week, the USDINR touched a high of 83.468/$ and a low of 83.919/$.

BRENT CRUDE HOLDS SUPPORT OF $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 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
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

Data Source: Bloomberg

Oil had crashed after Citi and BOFA pegged crude price at $60/bbl. That had forced rapid long closures in crude futures. However, oil found support at $70/bbl as countries used the lower levels to accumulate strategic oil reserves. For the week, Brent crude touched a high of $75.18/bbl and a low of $71.52/bbl.

SPOT GOLD RALLIES SHARPLY ON 50 BPS RATE CUT

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 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
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

Data Source: Bloomberg

Spot Gold opened the week strong at $2,582.58/oz but spent the first 3 days in a narrow range. However, 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. Of course, the geopolitical strife is also triggering safe-haven demand for gold; as is the dollar weakness. During the week, gold touched a high of $2,625.79/oz and a low of $2,446.98/oz. This is the first close above $2,600/oz and has now rallied over 30% in 2024!