Weekly Musings – Macro Quartet for the week ending February 23, 2024

26 Feb 2024 , 06:43 AM

UK AND JAPAN SLIP INTO RECESSION

In the previous week, we had news flows that two of the largest and most influential economies in the world, officially slipped into recession. Now, recession has been defined in economics as two consecutive quarters of negative growth. That even happened to the US briefly last year, but the US economy has managed to recover. Let us look at the UK first. In the last 2 quarters ended September 2023 and December 2023, the UK economy contracted by -0.1% and -0.3% respectively. Clearly Rishi Sunak’s policies are not working and the nagging pain of BREXIT continues to create problems for the UK. For now, their biggest challenge is not just production, but productivity; and that appears to be the missing link.

The other economy that has slipped into recession is Japan. In the last 2 quarters ended September 2023 and December 2023, the Japanese economy contracted by -0.8% and -0.1% respectively. Ironically, Japan had all along maintained a dovish stance, even as the US, UK and the Euro Zone continued to adopt a hawkish stance. However, all that dovishness and liquidity comfort has done little to help the Japanese economy, which officially slipped into recession in the latest quarter. Why do these 2 economies matter. Between Japan and the UK, they account for combined GDP of $9 Trillion and a market that is almost matching. Any slowdown in such a large economy will obviously have a spillover impact on global output, trade, and demand. Japan and the UK may be negating the effects of US recovery.

RATE CUTS MAY BE OFF THE TABLE FOR NOW

The Indian investors have been eagerly tracking the language of the Fed and the RBI on rate cuts. If you go by the recent Fed minutes and the RBI MPC minutes; rate cuts appear to be off the table for now. The US Fed has already ruled out any rate cuts till May, so it could only happen in June or later. The Fed wants to handle the last mile inflation more cautiously. On the India story, the RBI has not even committed to rate cuts. However, any rate cuts look unlikely till the new government is in place post the elections and the full budget has been presented by the Finance Minister. Till then, rate cuts are ruled out. Incidentally, rates trajectory is one factor that has a rather deep imprint on the key macros discussed here.

US BOND YIELDS TAPER; DOLLAR INDEX DOES THE SAME

Two macro variables that set the trend for the global macros are the 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 (%)
Feb 19, 2024	4.317	4.296	4.328	4.282
Feb 20, 2024	4.275	4.317	4.319	4.244
Feb 21, 2024	4.319	4.283	4.331	4.250
Feb 22, 2024	4.331	4.323	4.354	4.295
Feb 23, 2024	4.248	4.343	4.351	4.246

Data Source: Bloomberg

US bond yields were volatile during the week in a narrow range, but managed to hold above the 4.2% mark. The lower bond yields were triggered by some bond buying in the week on hopes that the Fed may venture to cut rates early.  Last week, the consumer inflation did taper from 3.3% to 3.1% for January 2024; but it was still 20 bps above the Bloomberg consensus estimate of 2.9%.  For the current week, the US bond yields opened at 4.317% and closed the week at 4.248%. The coming week has some critical triggers in the US like the Q4 GDP second estimate and the PCE inflation. Let us now turn to the dollar index (DXY).

Date	Price (%)	Open (%)	High (%)	Low (%)
Feb 19, 2024	104.29	104.28	104.37	104.14
Feb 20, 2024	104.08	104.32	104.41	103.80
Feb 21, 2024	104.01	104.04	104.21	103.94
Feb 22, 2024	103.96	103.91	104.13	103.43
Feb 23, 2024	103.94	103.95	104.05	103.77

Data Source: Bloomberg

The dollar index closed lower for the week, but it was rangebound in a volatile market. The dollar index (DXY) opened the week at 104.29 and stayed in the range of 103.90 to 104.30 through the week; closing at 103.94 levels. The dollar saw some general weakness this week due to the likely impact of the UK and Japan slipping into recession. For now, another rate hike looks unlikely, but higher for longer is enough to harden the dollar. The DXY awaits the Fed rate cut timetable, which was not available even in the Fed minutes. In March, the Fed also updates its long term macros, and that could give the first hint of the rate cut timetable. The dollar index (DXY) measures dollar strength against a basket of hard currencies like Pound, Euro, Yen, Yuan etc; and it could sober once the time table for rate cuts is set out by the Federal Reserve. That does not appear to be coming for now!

INDIA BOND YIELDS TAPER TO 7.077%

During the week, the benchmark 10-year bond yields tapered from 7.099% to 7.077%. The yields have been trending lower ever since the CPI inflation in India came in sharply lower at 5.1% for January 2024. The Red Sea crisis has raised fears that consumer inflation could remain higher for longer, especially considering the spillover impact of longer routes, higher freight costs and higher insurance premiums. Bond yields have ignored that for now.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jan 29, 2024	7.171	7.182	7.182	7.165
Jan 30, 2024	7.155	7.164	7.164	7.147
Jan 31, 2024	7.144	7.152	7.152	7.139
Feb 01, 2024	7.064	7.129	7.135	7.039
Feb 02, 2024	7.050	7.054	7.058	7.021
Feb 05, 2024	7.091	7.092	7.096	7.071
Feb 06, 2024	7.092	7.096	7.096	7.070
Feb 07, 2024	7.074	7.075	7.078	7.064
Feb 08, 2024	7.082	7.073	7.092	7.048
Feb 09, 2024	7.114	7.091	7.118	7.075
Feb 12, 2024	7.097	7.120	7.120	7.090
Feb 13, 2024	7.097	7.105	7.109	7.096
Feb 14, 2024	7.114	7.136	7.140	7.110
Feb 15, 2024	7.085	7.104	7.104	7.079
Feb 16, 2024	7.099	7.097	7.103	7.075
Feb 19, 2024	7.099	7.097	7.103	7.075
Feb 20, 2024	7.062	7.118	7.118	7.060
Feb 21, 2024	7.045	7.065	7.065	7.038
Feb 22, 2024	7.062	7.062	7.076	7.045
Feb 23, 2024	7.077	7.074	7.081	7.062

Data Source: RBI

During the week, the bond yield opened at 7.099% but closed lower at 7.077%. The last 3 weeks, the bond yields have been on a see-saw. Bond yields had fallen sharply after the Interim Budget had sharply cut the fiscal deficit target. In the previous week, the bond yields rallied on the back of the RBI not providing any time table for rate cuts. In the current week, the bond yields tapered, although the RBI is unlikely to cut rates for now. For the coming week, the big data flow will be the GDP data, the core sector data, and the fiscal deficit update; all of which will have a deep imprint on the 10-year bond yields in India.

RUPEE STRENGTHENS TO BELOW THE 83/$ MARK

In the week after the Interim Budget, the rupee had shown signs of strength amidst a favourable interim budget but higher crude prices had since weakened the rupee. This week, the rupee strengthened to below the 83/$ mark on a closing basis, a clear outcome of positive FPI flows and a late fall in the crude prices during the week.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jan 29, 2024	83.134	83.149	83.173	83.118
Jan 30, 2024	83.120	83.136	83.177	83.087
Jan 31, 2024	83.095	83.100	83.132	82.998
Feb 01, 2024	82.947	83.083	83.091	82.915
Feb 02, 2024	82.999	82.952	83.027	82.826
Feb 05, 2024	83.036	83.011	83.095	82.956
Feb 06, 2024	83.062	83.044	83.079	83.015
Feb 07, 2024	82.977	83.070	83.091	82.934
Feb 08, 2024	82.978	82.981	83.021	82.893
Feb 09, 2024	83.000	82.984	83.059	82.945
Feb 12, 2024	82.970	83.025	83.057	82.951
Feb 13, 2024	83.098	83.008	83.121	82.963
Feb 14, 2024	83.034	83.104	83.120	83.015
Feb 15, 2024	82.988	83.035	83.075	82.982
Feb 16, 2024	83.013	82.991	83.049	82.983
Feb 19, 2024	83.026	82.987	83.061	82.949
Feb 20, 2024	82.890	83.031	83.043	82.862
Feb 21, 2024	82.930	82.895	82.983	82.835
Feb 22, 2024	82.837	82.933	82.965	82.812
Feb 23, 2024	82.859	82.845	82.965	82.845

Data Source: RBI

The rupee ended stronger at ₹82.859/$ compared to the previous weekly close. There were two factors that triggered the strength in the rupee this week. Firstly, the FPIs infused $404 Million into equities in the current week and that helped the rupee. More importantly, with the UK and Japan slipping into official recession, there are concerns that oil demand may see some damage. That also led to a fall in crude prices and a strengthening of the rupee.

BRENT CRUDE FALLS ON GLOBAL GROWTH CONCERNS

The latest week saw crude prices fall sharply to $81.62/bbl, a virtual detraction from the crude price hardening trend in recent weeks.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jan 29, 2024	82.40	84.13	84.80	82.03
Jan 30, 2024	82.87	82.62	83.30	81.34
Jan 31, 2024	81.71	82.94	82.94	81.59
Feb 01, 2024	78.70	80.57	81.55	78.57
Feb 02, 2024	77.33	79.15	79.44	76.85
Feb 05, 2024	77.99	77.90	78.33	76.62
Feb 06, 2024	78.59	77.95	79.08	77.63
Feb 07, 2024	79.21	78.70	79.50	78.49
Feb 08, 2024	81.63	79.30	81.90	79.03
Feb 09, 2024	82.19	81.72	82.45	81.21
Feb 12, 2024	82.00	81.94	82.19	80.77
Feb 13, 2024	82.77	82.00	83.24	81.96
Feb 14, 2024	81.60	82.60	83.60	81.39
Feb 15, 2024	82.86	81.42	83.25	80.72
Feb 16, 2024	83.47	82.79	83.66	81.89
Feb 19, 2024	83.56	83.28	83.60	82.55
Feb 20, 2024	82.34	83.24	83.63	82.05
Feb 21, 2024	83.03	82.50	83.17	81.66
Feb 22, 2024	83.67	83.20	83.96	82.33
Feb 23, 2024	81.62	83.39	83.48	81.43

Data Source: Bloomberg

In the last couple of weeks, the oil prices had rallied after the ceasefire talks between Israel and Hamas had failed. In the previous week, Brent Crude spiked to $83.47/bbl. However, this week saw a sharp fall in the crude prices, largely on demand concerns. The UK and Japan officially slipped into recession after reporting 2 consecutive quarters of negative GDP growth. UK central bank has been hawkish while the Japanese central bank has been dovish. Both strategies do not seem to have worked, so obviously it is now about being dovish or about being hawkish. It is more about structural defects in the economy.

SPOT GOLD PRICES RISES TO $2,036/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. Here is a gist of gold prices in the week.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
Jan 29, 2024	2,031.75	2,019.40	2,037.75	2,017.38
Jan 30, 2024	2,036.12	2,031.97	2,048.48	2,029.19
Jan 31, 2024	2,037.19	2,036.58	2,056.08	2,031.00
Feb 01, 2024	2,054.09	2,037.59	2,065.42	2,029.55
Feb 02, 2024	2,036.59	2,055.09	2,058.20	2,027.45
Feb 05, 2024	2,024.67	2,039.91	2,042.32	2,014.40
Feb 06, 2024	2,035.46	2,024.99	2,039.02	2,022.55
Feb 07, 2024	2,034.22	2,035.90	2,044.65	2,030.65
Feb 08, 2024	2,033.18	2,034.55	2,038.94	2,019.75
Feb 09, 2024	2,024.16	2,033.65	2,037.44	2,020.30
Feb 12, 2024	2,019.79	2,024.53	2,028.09	2,011.91
Feb 13, 2024	1,992.13	2,019.90	2,030.05	1,990.19
Feb 14, 2024	1,992.39	1,992.55	1,996.14	1,984.30
Feb 15, 2024	2,004.09	1,992.69	2,008.49	1,990.25
Feb 16, 2024	2,013.10	2,004.40	2,015.25	1,995.48
Feb 19, 2024	2,017.63	2,013.16	2,023.34	2,011.57
Feb 20, 2024	2,023.53	2,017.99	2,030.96	2,015.02
Feb 21, 2024	2,024.99	2,023.80	2,032.22	2,020.19
Feb 22, 2024	2,024.11	2,025.24	2,034.84	2,019.70
Feb 23, 2024	2,035.72	2,024.49	2,041.43	2,015.55

Data Source: Bloomberg

Gold prices rose marginally in the week to $2,036/bbl. There are two contrasting forces that are working on gold prices. Lower interest rates are always positive for gold as it reduces the opportunity cost of holding gold. With the Fed non-committal on rate cuts, that did not work for gold prices. However, it must be remembered that gold is a safe haven asset which offers a solid value hedge in times of geopolitical and economic uncertainty. This week, the UK and Japan slipped into recession while the Red Sea crisis continues to simmer. These factors kept gold prices buoyant this week, despite concerns over rates.