Weekly Musings – Macro Quartet for week ending September 27, 2024

1 Oct 2024 , 10:39 AM

AUGUST PCE INFLATION: BLOW HOT, BLOW COLD

The latest PCE inflation data put out by the US Bureau of Economic Analysis (BEA) appears to be a very dovish kind of an indicator and supportive of aggressive rate cuts. However, scratch the surface and the real story is a lot more confusing and not as straight forward as it originally appeared to be. Before we get to our blow hot, blow cold story, let us first have a quick look at the PCE inflation on a yoy basis with granular break-up of components.

Break-up of PCE Inflation (YOY)	Jan-24	Feb-24	Mar-24	Apr-24	May-24	Jun-24	Jul-24	Aug-24
Headline PCE Inflation (Year on Year)	2.6	2.6	2.8	2.7	2.6	2.4	2.5	2.2
Goods	-0.5	-0.3	–	–	-0.3	-0.4	-0.2	-0.9
Durable goods	-2.2	-2.1	-1.9	-2.2	-3.0	-2.7	-2.4	-2.2
Nondurable goods	0.4	0.7	1.1	1.2	1.2	0.9	1.0	-0.2
Services	4.1	4.0	4.2	4.0	3.9	3.8	3.7	3.7
Addenda:
Core PCE excluding food and energy	3.1	2.9	3.0	2.9	2.7	2.6	2.6	2.7
Food	1.5	1.4	1.5	1.3	1.2	1.3	1.2	1.1
Energy goods and services	-4.7	-2.2	1.7	1.9	3.0	0.3	0.4	-5.0

Data Source: US Bureau of Economic Analysis (BEA)

The above table classifies yoy PCE inflation into goods and services inflation; and also breaks up inflation into food, energy, and core inflation. Here is what we read from the table.

• Headline PCE inflation has shown a secular downward trend since April 2023. Between December 2023 and August 2024, the PCE inflation has fallen by a full 40 bps to 2.2%. At this rate, the headline PCE inflation is just about 20 bps away from the long-term Fed target of 2.0% for headline inflation. The last mile, looks a lot simpler than it did before; but is that really. Actually, the situation is more like blow; blow cold confusion.
  
• Let us first talk about the rather innocuous goods and services inflation for August 2024. PCE inflation for goods in August 2024 was sharply lower at -0.9% compared to 0.0% in July 2024. Within the ambit of goods, the durable goods basket showed additional improvement from -2.4% to -2.2% while the inflation in non-durable goods dipped sharply by 120 bps from 1.0% to -0.2%. Clearly, goods continue to be deflationary. But, what about services? For the month of August, the services inflation was flat at 3.7%. First the good news on services. In the last 9 months, services inflation has tapered from 4.1% to 3.7%. In fact, services inflation was 5.6% in April 2023. However, in absolute terms, services inflation continues to be sticky part of the inflation story. That means; the fall in services inflation has been nowhere close to what the headline PCE inflation is indicating; and most of the deflating has only happened in goods.
  
• Let us look at PCE inflation from the perspective of core inflation and food inflation. Core PCE inflation has bounced from 2.5% to 2.6% and further to 2.7% in the last 3 sequential months. Even though food inflation is down by 10 bps at 1.1%, the core inflation indicates that the best of the supply chain normalization is history. Going ahead, core inflation could either be flat or higher; turning out to be a drag on PCE headline inflation.
  
• But the real reason we are ambivalent about PCE inflation falling is that the energy basket remains a major risk factor for the overall PCE basket. In May 2024 PCE Energy inflation had been 3.0%; and between May and August 2024, the energy inflation has fallen 800 bps to -5.0%. The concern is that this does not fully reflect the strife in West Asia and the worsening geopolitics across Iran, Israel, and Lebanon.

To sum up, the fall in energy basket is not fully reflecting the risks in the region and that could change the PCE inflation narrative. At least, that is a potent risk factor!

US BOND YIELDS FLAT, DOLLAR INDEX TAPERS FURTHER

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 23, 2024	3.751	3.757	3.794	3.730
Sep 24, 2024	3.732	3.745	3.810	3.726
Sep 25, 2024	3.791	3.732	3.793	3.726
Sep 26, 2024	3.796	3.783	3.821	3.754
Sep 27, 2024	3.751	3.792	3.809	3.741

Data Source: Bloomberg

The US bond yields have been trending lower since consumer inflation came in at 2.5%. The subsequent thrust to lower bond yields in the US came from Jerome Powell’s Jackson Hole address as well as the FOMC decision to cut rates by 50 bps and front-load rate cuts all the way to the end of 2025. However, the latest fall in PCE inflation to 2.2% got reflected in the bond yield son the last day of the week. However, with aggressive rate cuts already factored in, bond yields were broadly flat for the week.

The 10-year bond yields opened the week at 3.751% and closed the week exactly at the same level; although it did rise during the week and fell back sharply on Friday after the PCE inflation came in at 2.2%. During the week, the US 10-year bond yields touched a high of 3.821% and a low of 3.726%. 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 the September unemployment ratio and the minutes of the FOMC meet. We now turn to the Dollar Index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 23, 2024	100.93	100.78	101.23	100.74
Sep 24, 2024	100.24	100.93	101.05	100.24
Sep 25, 2024	100.93	100.24	100.99	100.22
Sep 26, 2024	100.60	100.93	100.97	100.48
Sep 27, 2024	100.42	100.60	100.88	100.16

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 100.93 but closed lower at 100.42. 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 and, possibly, even dip below 100 levels. The dollar index scaled a weekly high of 101.23 and low of 100.16 levels.

INDIA BOND YIELDS CLOSE MARGINALLY LOWER FOR THE WEEK

After the sharp fall in the bond yields in previous weeks, this week saw a very marginal tapering in the benchmark bond yields. 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 6.761% to 6.759% in the latest week, ending marginally lower. The borrowing calendar for H2-FY25 at ₹6.61 Trillion is also likely to favour lower bond yields. Interest costs have been rising in India and cost of funds is pinching at multiple levels. RBI will, probably, cognisance of this fact in its October 2024 monetary policy.

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

Data Source: RBI

During the week, the bond yield opened at 6.767% and closed flat at 6.759%. 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 6.775% and a low of 6.706%. While India inflation has come down to below the RBI target of 4% for two months in a row, food inflation remains the X-factor for now.

RUPEE WEAKENS TO 83.71/$

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 for the recent two weeks.

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

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 several factors combined to ease the pressure on 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 fell sharply in the week to $71/bbl, which is far more comfortable than $80/bbl. Thirdly, FPI flows were robust for the sixth week in a row with inflows of $2.83 Billion. FPIs have infused $10.5 Billion in the last 6 weeks and $19 Billion in the last 101 days. For the week, the USDINR touched a high of 83.440/$ and a low of 83.729/$. The slight fall in the rupee during the week was more on account of RBI staying out of the currency markets for now.

BRENT CRUDE WEAKENS TO $71/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, but may not hold for long.

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

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, the prices of Brent Crude fell sharply for two reasons. Firstly, there are indications that the OPEC may resume normal production of oil. Secondly, the aggressive China stimulus is hinting at a real slowdown in Chinese demand, which is not great news for crude oil demand. For the week, Brent crude touched a high of $75.12/bbl and a low of $70.25/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 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
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

Data Source: Bloomberg

Spot Gold opened the week strong at $2,628.40/oz but spent the remaining days in a narrow range before closing the week at $2,657.97/oz. 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. With a virtual situation in Lebanon, it is triggering safe-haven demand for gold; coupled with dollar weakness. During the week, gold touched a high of $2,685.96/oz and a low of $2,613.60/oz. Spot Gold has now given a close above $2,600/oz for the second week in a row.