Weekly Musings – Macro Quartet for the week ending January 19, 2024

24 Jan 2024 , 09:53 AM

FED TALKS TOUGH; RED SEA GETS ROUGHER

Two underlying trends stood out in the week to January 19, 2024. If you go by Fed speak, they are talking a lot tougher. With consumer inflation higher by nearly 30 bps in December, Fed speak is now throwing up 2 distinct possibilities. One is that the rate cuts may be more back-ended that previous envisaged. The Fed had committed 75 bps rate cuts in 2024 and 100 bps in 2025. That still looks feasible, but Fed may not consider rate cuts in the first half of 2024. The second possibility is that just to stamp its central role in monetary policy, the Fed may go ahead and implement a 25 bps rate hike to control inflation. That may not mean much, but it once again underlines that the CME Fedwatch has jumped the gun.

The Red Sea crisis just got rougher. Casualties in Gaza are mounting and other countries in the Middle East and West Asia are finding it tough to sit back and watch. Yemen has taken on Israel openly and Iran is in the fray. Other GCC countries are playing a defensive game. As civilian death toll in Gaza mounts, the Arabs may not be able to stay neutral much longer. That means; Red Sea crisis also spreads to the Arab Peninsula and the Strait of Hormuz, making the situation a lot more acute. For India, it means lower export volume and higher import costs. That is already evident in the rising bond yields and falling rupee. The oil prices held steady this week, despite clear indication that the Chinese economies was slowing.

CONCERNS AHEAD OF BUDGET 2024-25

The new story emerging in the week is that there are some distinct concerns on the financials ahead of the Union Budget 2024-25 on February 01, 2024. That is just a little over a  week away. As per the latest MOSPI first advance estimates (FAD) of FY24 GDP, the real growth in FY24 likely to be driven by lower inflation. In other words, the nominal GDP growth in FY24 would be sharply lower than in FY23. Now, weak nominal growth is not great news for tax collections, since these are based on the gross numbers. Lower tax collections imply that the government may see fiscal deficit for FY24 go up to 6.0%, instead of 5.9%.

Higher fiscal deficit means the government may put off the glide path of fiscal deficit. That will not go down well with rating agencies and institutional investors. The other possibility is the government sticks to the glide path of 5.3% fiscal deficit in FY25 and 4.5% in FY26. That would bring fiscal deficit within FRBM limits. However, in that case, government may have to compromise on capex in FY25, something that has driven investor sentiments in the last two years. Either ways; the budget has a tough choice between a rock and a hard place.

US BOND YIELDS SPIKE ABOVE 4%; DOLLAR INDEX POSITIVE

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 15, 2024	3.986	3.966	4.002	3.949
Jan 16, 2024	4.054	3.986	4.083	3.977
Jan 17, 2024	4.106	4.062	4.129	4.037
Jan 18, 2024	4.142	4.104	4.154	4.071
Jan 19, 2024	4.130	4.152	4.198	4.123

Data Source: Bloomberg

US bond yields had fallen sharply below the 4% mark in the previous week on hopes that the Fed would still cut rates by 75 bps in FY25, despite not offering a timetable as part of the minutes of the Fed policy. However, two things led to a spike in US bond yields this week. The Fed speak indicates that the Fed was open to going slow on rate cuts and was also open to the possibility of raising rates to check inflation. Secondly, the week also saw the CME Fedwatch losing confidence and veering towards the Fed stance. US bond yields were volatile, but bounced from 3.986% to 4.13%. The CME Fedwatch is now reconciled to rate cuts of just 125 bps, against the expectation of 175 bps rate cuts in the previous week.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jan 15, 2024	102.40	102.44	102.67	102.31
Jan 16, 2024	103.36	102.74	103.43	102.74
Jan 17, 2024	103.45	103.36	103.69	103.26
Jan 18, 2024	103.54	103.37	103.63	103.15
Jan 19, 2024	103.29	103.37	103.55	103.24

Data Source: Bloomberg

The week was flat to positive for the dollar index (DXY) as it opened the week at 102.40 and gradually rallied well above the 103 mark. The DXY indicates that dollar hardening may be tougher, but if US bond yields are going to harden, then it was just a matter of time before the dollar index also started rallying. Incidentally, the dollar index (DXY) is an index of dollar strength against a basket of hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. While Indian rupee is not part of the basket of hard currencies, the dollar index has a strong impact on the USDINR value as the dollar continues to be the dominant currency for world trade, commerce, and investments.

INDIA BOND YIELDS BOUNCE BACK TO 7.184%

In line with the US bond yields, even Indian bond yields rallied this week; albeit briefly. For the week to January 19, 2024 bond yields rose from 7.148% levels to 7.184%. On a yoy basis, the dollar index is exactly where it was last week. Here are 4 rolling weeks bond yields.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Jan 08, 2024	7.203	7.233	7.233	7.201
Jan 09, 2024	7.189	7.183	7.197	7.182
Jan 10, 2024	7.178	7.192	7.192	7.176
Jan 11, 2024	7.165	7.192	7.192	7.162
Jan 12, 2024	7.178	7.168	7.181	7.158
Jan 15, 2024	7.148	7.153	7.153	7.134
Jan 16, 2024	7.146	7.161	7.161	7.140
Jan 17, 2024	7.163	7.161	7.165	7.151
Jan 18, 2024	7.178	7.177	7.180	7.169
Jan 19, 2024	7.184	7.194	7.196	7.177

Data Source: RBI

During the week, the bond yield opened at 7.148% but progressed in the next 4 days to close the week at 7.184%. The higher inflation in the previous week, combined with the Fed talking hawkish on rates in the current week had led to the US bond yields spiking. Indian bond yields also bounced in sympathy. If you look at the last 2 weeks, the Indian bond yields continue to be stay below the 7.2% mark. However, it must be noted that Indian bond yields are already well above the repo rates and that is keeping any spike in bond yields in check.

RUPEE WEAKENS DURING THE WEEK

In the previous week, rupee had rallied below 83/$, after spending 14 weeks above 83/$. However, the latest week again saw weakening of the Indian rupee. This was largely on account of expectations that the Red Sea crisis could now start hitting Indian exports. 

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Jan 08, 2024	83.045	83.124	83.178	83.026
Jan 09, 2024	83.109	83.053	83.149	83.029
Jan 10, 2024	83.023	83.113	83.185	82.959
Jan 11, 2024	83.063	83.004	83.121	82.930
Jan 12, 2024	82.857	83.068	83.104	82.779
Jan 15, 2024	82.827	82.835	82.929	82.775
Jan 16, 2024	83.084	82.832	83.150	82.829
Jan 17, 2024	83.182	83.085	83.217	83.035
Jan 18, 2024	83.165	83.197	83.205	83.098
Jan 19, 2024	83.086	83.187	83.192	83.036

Data Source: RBI

After closing at 82.857/$ in the previous week, the rupee closed this week at 83.086/$. The Indian rupee is closely linked to the dollar index, and that strengthened this week in sync with the rising US bond yields. The rupee was also hit by the net FPI selling of $2.03 billion in Indian equities. At a more fundamental level, the rupee also weakened due to concerns that the fiscal deficit could end FY24 at 6.0% instead of 5.9% as envisaged in budget estimates. 

BRENT CRUDE FLAT AS RED SEA OFFSETS CHINA SLOWDOWN

The latest week flat crude prices at $78.56/bbl, was slightly higher than the start of the week. Red Sea crisis is still the overhang.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Jan 08, 2024	76.12	78.70	78.95	75.26
Jan 09, 2024	77.59	76.30	78.19	75.95
Jan 10, 2024	76.80	77.48	78.73	76.38
Jan 11, 2024	77.41	76.70	79.10	76.66
Jan 12, 2024	78.29	78.75	80.75	77.96
Jan 15, 2024	78.15	78.14	78.90	76.85
Jan 16, 2024	78.29	78.43	79.40	77.60
Jan 17, 2024	77.88	77.77	78.19	76.50
Jan 18, 2024	79.10	78.15	79.30	77.33
Jan 19, 2024	78.56	79.10	79.73	78.32

Data Source: Bloomberg

In recent weeks, the Red Sea crisis has kept oil on the boil. This week, oil prices were supposed to taper after the Chinese growth numbers came in much lower than expected. That is likely to hit global demand for oil in a big way. However, the flat closing is indicative that the pressure of the Red Sea crisis has largely offset the demand concerns from China. Oil prices reflect the higher costs of moving oil globally. 

GOLD PRICES LOWER AT $2,029/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 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
Jan 08, 2024	2,027.84	2,044.08	2,046.71	2,016.84
Jan 09, 2024	2,029.59	2,028.40	2,042.09	2,026.11
Jan 10, 2024	2,023.40	2,029.94	2,040.44	2,020.45
Jan 11, 2024	2,028.09	2,023.74	2,039.69	2,013.32
Jan 12, 2024	2,048.72	2,028.30	2,062.35	2,027.99
Jan 15, 2024	2,054.49	2,048.09	2,059.25	2,045.80
Jan 16, 2024	2,027.59	2,054.91	2,055.65	2,024.29
Jan 17, 2024	2,005.72	2,027.90	2,033.05	2,001.91
Jan 18, 2024	2,022.67	2,006.09	2,023.45	2,005.43
Jan 19, 2024	2,029.09	2,023.05	2,039.49	2,020.37

Data Source: Bloomberg

Gold prices started higher during the week at $2,055/oz but closed lower at $2,029/oz amidst the possibility that the Fed may delay rate cuts or even hike rates. A rate cut would have reduced the opportunity cost of holding gold and favoured gold prices, but that was not to be, resulting in a fall in gold; although it still stays above $2,000/oz. That does not, in any way, detract from the allure of gold as a natural safe haven of choice!