Weekly Musings – Macro Quartet for the week ending March 01, 2024

4 Mar 2024 , 06:53 AM

INDIAN GDP MUCH BETTER THAN EXPECTED

The recent week saw Indian MOSPI announcing the Q3 GDP as well as the second estimate for full year GDP. Both flattered on the upside and that made a big difference in terms of the impact on the macros, at least the India specific macros. For instance, the Q3 GDP for FY24 came in sharply higher at 8.4%. Now, ahead of the GDP announcement, the consensus was at around 6.7% with the most optimistic estimates at around 7.2%. The actual data was a good 120 bps above the most optimistic estimates of GDP growth. The growth in GDP was triggered by a stunning bounce in manufacturing, even as agricultural output faltered amidst the elevated risks of the El Nino effect. 

But the bigger trigger came from the full year GDP estimate, which was the second advance estimate. The final GDP number for the fourth quarter and for the full year FY24 will be available on the last working day of May 2024. But, let us get back to the current data. As per the second estimate, India’s full year GDP for FY24 is pegged at 7.6%. Now comes the real irony. The GDP for the first 3 quarters of FY24 have been upgraded to above 8%. If the full year GDP has to come in at 7.6%, then the fourth quarter GDP growth must fall to 5.9%. At the current momentum, that looks unlikely. The consensus view here is that eventually the full year GDP may also converge towards 8%, which will be absolutely flattering.

US INFLATION DOWN, BUT RATE CUTS CAN WAIT FOR NOW

For a long time, the US Fed waited for inflation to come down. As of January 2024, the PCE (personal consumption expenditure) inflation is down to 2.4%. That is just about 40 bps short of the Fed target of 2.0%. Now, that should logically induce the Fed to front end rate cuts, but that does not appear to be the case. If one listens to the recent pronouncements by the Fed members, most of them are more cautious about macro global risks, that celebrating the fall in inflation. The real story is that with robust GDP growth and inflation falling anyways, the Fed sees no reason to rush through with rate cuts. That explains why the Fed has been silent about the time table for rate cuts. Now it looks like, the Fed may choose to play a more cautious game, and deploy rate cuts only in H2-2024.

US BOND YIELDS MODERATE; DOLLAR INDEX CLOSES FLAT

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 26, 2024	4.281	4.258	4.309	4.217
Feb 27, 2024	4.303	4.283	4.321	4.258
Feb 28, 2024	4.266	4.305	4.309	4.264
Feb 29, 2024	4.254	4.266	4.319	4.225
Mar 01, 2024	4.186	4.254	4.296	4.178

Data Source: Bloomberg

US bond yields were volatile during the week in a narrow range, but managed to hold above the 4.1% mark. The lower bond yields were triggered by some bond buying in the week on hopes that the Fed may cut rates early.  Also, the 20 bps lower PCE inflation announced on February 29, 2024, resulted in a sharp fall in the 10-year bond yields on Friday. For the week, the US bond yields opened at 4.281% and closed the week at 4.186%. The most important trigger in the coming week will be Powell’s testimony before the Senate Banking Committee on half-yearly monetary policy. Let us now turn to the dollar index (DXY).

Date	Price (%)	Open (%)	High (%)	Low (%)
Feb 26, 2024	103.83	103.96	104.02	103.71
Feb 27, 2024	103.83	103.78	103.92	103.61
Feb 28, 2024	103.97	103.84	104.24	103.81
Feb 29, 2024	104.16	103.92	104.20	103.66
Mar 01, 2024	103.86	104.13	104.29	103.84

Data Source: Bloomberg

The dollar index closed flat for the week, but it was rangebound in a volatile market. The dollar index (DXY) opened the week at 103.83 and stayed in the range of 103.80 to 104.20 through the week; closing at 103.86 levels. The dollar did see some strength after the better than expected GDP data for Qr4, but the general weakness was triggered by the likely impact of the UK and Japan slipping into recession. The DXY awaits the Fed rate cut timetable, wherein the Fed has been non-committal. The next trigger could come only when the rate cut time table is announced by the Fed. That looks elusive for now. Incidentally, the dollar index (DXY) measures dollar strength against a basket of hard currencies like Pound, Euro, Yen, Yuan etc.

INDIA BOND YIELDS TAPER TO 7.060%

During the week, the benchmark 10-year bond yields tapered from 7.077% to 7.060%. The yields have been trending lower ever since the CPI inflation in India came in sharply lower at 5.1% for January 2024. The February inflation is expected to fall below 5%. While the Red Sea crisis has raised fears of the spillover impact of longer routes, higher freight costs and higher insurance premiums; the bond yields have ignored that for now.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Feb 26, 2024	7.063	7.055	7.066	7.046
Feb 27, 2024	7.068	7.074	7.074	7.061
Feb 28, 2024	7.065	7.076	7.076	7.060
Feb 29, 2024	7.078	7.059	7.082	7.057
Mar 01, 2024	7.060	7.062	7.082	7.057

Data Source: RBI

During the week, the bond yield opened at 7.063% but closed lower at 7.060%. The last 3 weeks, the bond yields have been on a see-saw, but within a narrow range. Bond yields had fallen sharply after the Interim Budget had cut the fiscal deficit target for FY25 to 5.1% and given a glide path of below 4.5% for FY26. With the elections coming up and the full budget still awaited, the RBI looks unlikely to cut rates for now. The next big trigger would be when the RBI provides some guidance on rate cuts, especially considering the high real rates of interest and the fact that rates are already 135 bps above the pre-pandemic rates.

RUPEE STAYS BELOW 83/$ MARK THROUGH THE WEEK

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. Last week, positive FPI flows strengthened the rupee and this week, the strength has continued with the better than expected GDP data. For now, there is not much pressure coming from the dollar index, and that is also keeping the Indian rupee in a position of strength.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Feb 26, 2024	82.846	82.873	82.914	82.851
Feb 27, 2024	82.877	82.901	82.921	82.841
Feb 28, 2024	82.900	82.924	82.967	82.863
Feb 29, 2024	82.900	82.910	82.957	82.864
Mar 01, 2024	82.841	82.926	82.933	82.836

Data Source: RBI

The rupee ended stronger at ₹82.841/$ compared to the previous weekly close of ₹82.859/$. Incidentally, this marks the ninth trading session when the rupee has been below ₹83/$. In the last two weeks, the FPIs have infused $1.1 Billion into equities, even as they have continued to infuse money into Indian debt, ahead of the JP Morgan index inclusion. Secondly, with the UK and Japan slipping into official recession, there are concerns that oil demand may see damage. That is positive for the rupee as it arrests imported inflation.

BRENT CRUDE CLOSES STRONG AFTER A VOLATILE WEEK

The latest week saw crude prices spike to $83.55/bbl, as growth impulses in the US and Indian markets gave a fillip to oil demand.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Feb 26, 2024	82.53	81.41	83.07	81.00
Feb 27, 2024	83.65	82.64	83.70	82.10
Feb 28, 2024	83.68	83.30	84.31	82.60
Feb 29, 2024	81.91	81.83	82.84	81.51
Mar 01, 2024	83.55	82.07	84.34	81.81

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 prices had fallen sharply on demand concerns, after the UK and Japan officially slipped into recession. This was after reporting 2 consecutive quarters of negative GDP growth. In the current week, the bounce in oil prices was on the back of higher GDP and lower inflation indications from the US and India, two of the largest markets for global oil.

SPOT GOLD PRICES SPIKES TO $2,083/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)
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
Feb 26, 2024	2,030.66	2,034.49	2,037.59	2,025.10
Feb 27, 2024	2,029.64	2,030.99	2,039.99	2,028.78
Feb 28, 2024	2,034.62	2,030.05	2,038.30	2,024.56
Feb 29, 2024	2,043.24	2,034.92	2,050.79	2,027.75
Mar 01, 2024	2,083.39	2,043.44	2,088.40	2,038.55

Data Source: Bloomberg

Gold prices rose marginally in the week to $2,083/bbl. There were broadly two reasons for the sharp spike in the price of gold in this week. Firstly, there is the worsening geopolitical situation, especially in the Middle East and West Asia. Many of the big central banks from this region are also expected to be buying gold as reserves. Additionally, the markets are betting that the Fed may actually cuts rates sooner than it appears in the Fed minutes, especially after the latest reading on PCE inflation came in at 2.4%. However, the dollar has been resilient in recent days and that is likely to limit any gold rally.