Weekly Musings – Macro Quartet for the week ending January 05, 2024

8 Jan 2024 , 09:42 AM

FED MINUTES DISAPPOINTS MARKETS AT MULTIPLE LEVELS

The minutes of the Fed announced on January 03, 2024; were rather innocuous in that it almost said nothing. However, the markets were disappointed that the minutes did not really build upon the positive signals given out by the Fed statement 3 weeks ago. In the statement, Fed had indicated that it would cut rates by 75 bps in year 2024 and another 100 bps in year 2025. The CME Fedwatch stretched its enthusiasm and factored in full 175 bps rate cut in the year 2024 itself. However, the minutes made little progress on this debate. Not only did the Fed fail to give a time table for rate cuts; but it also did not specifically commit when and whether it will commence rate cuts in 2024. That had an impact at multiple levels on the various global macros.

On the one hand, US bond yields spiked above the 4% mark while the dollar index also bounced back. The Red Sea crisis kept the price of Brent Crude elevated at above $78/bbl while the price of gold tempered a bit. That is because, gold had rallied on the hopes that the Fed would go aggressive on rate cuts. Lower interest rates reduce the opportunity cost of holding gold and making gold more attractive as an asset class. However, the Fed not only did not spell out a time table for the rate cuts, but did not even commit on rate cuts at a conceptual level. That led to a mild tapering of gold prices globally.

FY24 GDP OUTLOOK ROBUST, BUT NOW INFLATION HAS TO CHIP IN

Towards the end of the week, the MOSPI released its first advance estimate (FAE) of FY24 GDP at 7.3%. That was not only 10 bps above the FY23 rate of GDP growth, but also a full 30 bps above the RBI enhanced estimate for FY24. There are concerns that the hike in GDP growth has come purely due to lower inflation even as nominal growth has considerably slowed. That has raised some question about the tax collections in this year and the implications for the fiscal deficit. 

There are doubts if the government would be able to maintain the fiscal deficit at 5.9% in FY24. Even if that may not be a major concern, the bigger concern is whether the RBI can now lower its fiscal deficit estimates to 5.2% of GDP in FY25 and further to 4.5% of GDP in FY26, as it had committed earlier. The other big challenge is that inflation has to now chip in. Growth across GDP, IIP and core sector have already played a big part and current account deficit is well under control. The big challenge remains inflation, which continues to be 155 bps above the median RBI target of 4% inflation. Unless inflation is brought down sharply towards the 4% goal, the full benefits of GDP growth may be tough to come by.

US BOND YIELDS BOUNCE ABOVE 4%; DOLLAR INDEX HIGHER?

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 (%)
Jan 01, 2024	3.898	3.879	3.898	3.866
Jan 02, 2024	3.941	3.899	4.023	3.881
Jan 03, 2024	3.920	3.950	4.010	3.894
Jan 04, 2024	4.003	3.914	4.006	3.901
Jan 05, 2024	4.051	4.003	4.103	3.953

Data Source: Bloomberg

US bond yields, are still a good 95 bps below the recent peak of 5%. However, this week we saw the US bond yields bounce back above the 4% mark after a gap of several weeks. There was a lot of optimism built into the US bond yields after the last Fed statement. However, there was some disappointment after the Fed minutes did not give out any clear signal on the trajectory of rate cuts. In fact, the Fed minutes did not even give any indication that the Fed would be starting the process of cutting rates any time soon.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jan 01, 2024	101.38	101.38	101.38	101.38
Jan 02, 2024	102.20	101.42	102.25	101.34
Jan 03, 2024	102.49	102.15	102.73	102.07
Jan 04, 2024	102.42	102.46	102.53	102.14
Jan 05, 2024	102.41	102.39	103.10	101.91

Data Source: Bloomberg

The sharp fall in the dollar index (DXY) was arrested in the latest week as it bounced back to above the 102.40 levels during the week. Once again, it was the Fed minutes that raised hopes that the dollar could strengthen once again and that led to the dollar index rising more than 1 point during the week. The dollar index (DXY) is an index of dollar strength against a basket of hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. The rupee is not part of this basket of hard currencies, but the dollar index still has a strong bearing on the rupee value. For now, the US dollar index is showing signs of dollar strength.

INDIA BOND YIELDS BOUNCE BACK DURING THE WEEK

Indian bond yields for the week to January 05, 2024 bounced from 7.176% levels to 7.235%. The table captures bond yields over last 4 rolling weeks; with the second column showing the closing bond yield level.

Date	Price (%)	Open (%)	High (%)	Low (%)
Dec 11, 2023	7.281	7.287	7.287	7.273
Dec 12, 2023	7.275	7.279	7.280	7.267
Dec 13, 2023	7.259	7.262	7.269	7.257
Dec 14, 2023	7.194	7.222	7.224	7.185
Dec 15, 2023	7.163	7.204	7.206	7.155
Dec 18, 2023	7.153	7.171	7.179	7.147
Dec 19, 2023	7.171	7.185	7.185	7.153
Dec 20, 2023	7.171	7.184	7.184	7.165
Dec 21, 2023	7.184	7.173	7.188	7.151
Dec 22, 2023	7.188	7.187	7.198	7.185
Dec 25, 2023	7.188	7.187	7.198	7.185
Dec 26, 2023	7.183	7.213	7.213	7.177
Dec 27, 2023	7.205	7.191	7.208	7.182
Dec 28, 2023	7.207	7.200	7.213	7.191
Dec 29, 2023	7.176	7.225	7.225	7.172
Jan 01, 2024	7.196	7.207	7.207	7.192
Jan 02, 2024	7.206	7.215	7.215	7.204
Jan 03, 2024	7.216	7.215	7.222	7.197
Jan 04, 2024	7.220	7.214	7.224	7.208
Jan 05, 2024	7.235	7.237	7.239	7.225

Data Source: RBI

During the week, the bond yield opened at 7.196% but bounced in the next 4 days to close the week at 7.235%. with the India CPI inflation coming in at 5.55% in November, it is likely to be slightly higher in December due to delays in Kharif crop hitting the market and Rabi sowing. The absence of any rate cut timetable in the Fed minutes also disappointed the US bond yields and that rubbed off on the Indian bond yields also. Bond markets are betting that the RBI may not exactly follow the US Fed when it comes to aggressive rate cuts.

RUPEE STRENGTHENS MARGINALLY DURING THE WEEK

For the 14th week in a row, the Indian rupee stayed above the 83/$ mark. This week, the rupee opened at 83.238/$ and closed stronger at 83.103/$ levels. This is despite the fact that the US dollar index showed signs of strengthening during the week.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Dec 11, 2023	83.350	83.409	83.451	83.349
Dec 12, 2023	83.396	83.368	83.434	83.324
Dec 13, 2023	83.350	83.399	83.438	83.346
Dec 14, 2023	83.307	83.287	83.372	83.266
Dec 15, 2023	83.020	83.308	83.332	82.927
Dec 18, 2023	83.144	83.018	83.173	82.910
Dec 19, 2023	83.106	83.153	83.228	83.070
Dec 20, 2023	83.139	83.111	83.237	83.087
Dec 21, 2023	83.214	83.166	83.291	83.156
Dec 22, 2023	83.166	83.221	83.275	83.102
Dec 25, 2023	83.164	83.179	83.179	83.109
Dec 26, 2023	83.158	83.169	83.218	83.105
Dec 27, 2023	83.263	83.163	83.368	83.163
Dec 28, 2023	83.169	83.268	83.318	83.125
Dec 29, 2023	83.190	83.174	83.242	83.099
Jan 01, 2024	83.238	83.240	83.243	83.150
Jan 02, 2024	83.270	83.179	83.359	83.179
Jan 03, 2024	83.282	83.279	83.348	83.244
Jan 04, 2024	83.243	83.294	83.335	83.195
Jan 05, 2024	83.103	83.235	83.286	83.067

Data Source: RBI

After closing at 83.190/$ in the previous week, this week the rupee closed at 83.103/$. The Indian rupee is closely linked to the dollar index, but that was not the case time this time around. In the current week, the dollar index bounced sharply, but the rupee strengthened. That could be partially due Japan announcing plans to stay hawkish, underlining that Yen carry trade would continue. Also, the Red Sea crisis has forced a spike in oil costs and that is likely to translate into imported inflation for India. That could be one reason, the RBI has bene holding back on cutting rates for now. That is good for the rupee.

BRENT CRUDE RISES AS MAERSK LINES BOYCOTTS RED SEA ROUTE

The latest week saw a sharp spike in crude prices from a low of $75.89/bbl during the week, to close higher at $78.76/bbl at the close of the week.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Dec 11, 2023	76.03	75.73	76.50	75.01
Dec 12, 2023	73.24	76.17	76.66	72.86
Dec 13, 2023	74.26	73.26	74.70	72.29
Dec 14, 2023	76.61	74.76	77.35	74.44
Dec 15, 2023	76.55	76.66	77.23	75.29
Dec 18, 2023	77.95	76.80	79.51	75.76
Dec 19, 2023	79.23	78.06	79.67	77.41
Dec 20, 2023	79.70	79.17	80.60	79.07
Dec 21, 2023	79.39	79.00	80.13	77.81
Dec 22, 2023	79.07	79.35	80.37	78.88
Dec 25, 2023	79.07	79.35	80.37	78.88
Dec 26, 2023	81.07	79.04	81.72	78.76
Dec 27, 2023	79.65	80.79	81.33	79.29
Dec 28, 2023	78.39	79.80	79.95	78.25
Dec 29, 2023	77.04	77.38	77.98	76.73
Jan 01, 2024	77.04	77.38	77.98	76.73
Jan 02, 2024	75.89	77.39	79.06	75.60
Jan 03, 2024	78.25	76.06	78.67	74.79
Jan 04, 2024	77.59	78.56	79.41	76.50
Jan 05, 2024	78.76	77.71	79.26	77.66

Data Source: Bloomberg

The sudden spike in crude oil prices can be attributed to the Red Sea crisis with Houthi rebels firing missiles at ships carrying merchandise through the Red Sea. More than the rising premiums and rising freight rates, the oil markets were worried after the world’s largest shipping group, Maersk of Denmark, decided to avoid the Red Sea route. That means; more shipping lines may follow this route, making oil supplies tighter and deliveries more delayed. That is likely to put upward pressure on oil prices.

GOLD PRICES ELEVATED AT $2,044/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)
Dec 11, 2023	1,981.30	2,003.60	2,008.72	1,975.95
Dec 12, 2023	1,979.44	1,981.59	1,996.80	1,977.19
Dec 13, 2023	2,026.39	1,979.74	2,027.55	1,973.09
Dec 14, 2023	2,035.53	2,026.59	2,047.98	2,024.33
Dec 15, 2023	2,018.19	2,035.80	2,045.55	2,015.68
Dec 18, 2023	2,027.00	2,020.09	2,033.71	2,015.99
Dec 19, 2023	2,040.12	2,027.30	2,047.07	2,021.74
Dec 20, 2023	2,029.19	2,040.34	2,043.94	2,029.37
Dec 21, 2023	2,045.49	2,029.44	2,046.07	2,029.44
Dec 22, 2023	2,052.98	2,045.84	2,070.65	2,045.65
Dec 25, 2023	2,054.93	2,054.32	2,058.36	2,053.96
Dec 26, 2023	2,067.20	2,055.73	2,068.65	2,053.59
Dec 27, 2023	2,077.00	2,066.70	2,084.59	2,061.00
Dec 28, 2023	2,066.04	2,077.34	2,088.54	2,065.89
Dec 29, 2023	2,062.59	2,065.15	2,075.15	2,057.75
Jan 01, 2024	2,063.80	2,064.24	2,074.90	2,063.30
Jan 02, 2024	2,058.51	2,062.90	2,079.02	2,056.04
Jan 03, 2024	2,040.19	2,059.15	2,066.12	2,030.68
Jan 04, 2024	2,043.22	2,041.34	2,051.40	2,036.24
Jan 05, 2024	2,044.19	2,043.69	2,064.03	2,024.49

Data Source: Bloomberg

Gold prices did taper during the week due to the Fed being non-committal on rate cuts in 2024. The markets were expecting a timetable on rate cuts. Lower rates help gold as they reduce opportunity cost of holding gold. However, gold only slipped from $2063/oz to $2,044/oz. It looks like the geopolitical risk of the Red Sea stand-off is keeping gold prices robust. After all, the yellow metal shines the most when the going gets rough!