Weekly Musings – Macro Quartet for the week ending May 17, 2024

21 May 2024 , 08:20 AM

YIELDS TAPER, AS RUPEE AND GOLD SHOW STRENGTH

It was a week in which the US dollar weakened in tandem with falling inflation. For the month of April, the US CPI inflation fell by 10 bps to 3.4%. That is not a sharp fall, but for now it rules out any chances of a rate cut. It also means that “higher for longer” would possibly end by September 2024, when the Fed effects its first rate cuts. So, the story of the week was about the dollar index weakening closer to the 104 levels. As a result, oil prices edged up slightly to $84/bbl while the Indian rupee also strengthened from 83.55/$ to 83.30/$. But the big story was the spike in gold prices. As rate cut hopes picked up and the dollar tapered, spot closed above the $2,400 mark for the first time ever, closing the week at $2,414/oz. Gold is now being recognized as a bit of everything. It is an investment, a hedge, a currency and above all, a contrarian play against a weakening dollar.

• Let us start with crude oil prices for the week. Brent crude prices edged up to close the week at around $84/bbl. Not much has changed on the OPEC front, but it has been the US inventories that have been the swing factor in recent weeks. This week, the US inventories saw a huge drawdown of -3.104 Million barrels, after 3 weeks of inventory spikes. The fall was expected this week, but was twice the Bloomberg estimate. This is despite record output by the US and Canada, indicating that supply chain challenges, amidst the Red Sea crisis, was hitting US inventories once again.
• The rupee showed strength in the week; hardening from ₹83.553/$ to $83.302/$. Ironically, this strength in the rupee came despite the crude prices inching up and the FPIs selling Indian equities to the tune of $1.34 Billion in the week. FPIs have now sold Indian equities worth $6 Billion in the last 5 weeks and have been net sellers in April and May 2024. However, the rupee gained solace from the dollar weakness amidst expectations that the Fed may finally embark on its rate cut journey from September 2024 onwards. However, the timetable of rate cuts remains a question mark!
• For the week ended May 17, 2024; gold spiked and it spiked really hard. In the previous week to May 10, 2024, the price of spot gold had rallied from $2,301/oz (One oz or troy ounce is roughly equivalent to 31.1035 grams) to $2,360/oz. In the lates week to May 17, 2024, the price of gold rallied further to $2,415/oz. In the last 2 weeks, the price of gold has rallied a full 5%, making it a solid high octane asset class for investors. While the Fed may not take up 3 rate cuts in 2024, it looks very likely that they may cut rates two times in 2024 and two more times by the first half of 2025. So, by middle of 2025, the US Fed rates should be in the range of 4.25%-4.50%, a figure that would make gold incredibly more attractive due to the lower opportunity cost of holding gold. at the same time, most central banks including that of China, Turkey, Middle East, and India are adding to their gold reserves to reduce their dependence on the US dollar.

US BOND YIELDS EDGE LOWER; DOLLAR INDEX BELOW 105

Two macro variables that set the tone 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 (%)
May 13, 2024	4.486	4.490	4.499	4.457
May 14, 2024	4.445	4.489	4.534	4.441
May 15, 2024	4.336	4.449	4.449	4.333
May 16, 2024	4.367	4.336	4.384	4.311
May 17, 2024	4.422	4.367	4.426	4.362

Data Source: Bloomberg

US bond yields started the week at elevated levels of 4.486%, but gradually edged lower to close the week at 4.422%. During the week, the US 10-year bond yields touched a high of 4.534% and a low of 4.311%. Compared to the previous week, the US bond yields were in more volatile in the week to May 17, 2024. While some of the hawks in the Fed continue to question rate cuts in 2024, Powell has again hinted that the probability of a rate cut was a lot higher than the probability of a rate hike. Powell’s speech, combined with lower CPI inflation at 3.4%, led the US bond yields lower. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 13, 2024	105.20	105.33	105.37	105.06
May 14, 2024	105.06	105.20	105.46	104.96
May 15, 2024	104.21	105.06	105.06	104.18
May 16, 2024	104.50	104.21	104.63	104.08
May 17, 2024	104.49	104.50	104.80	104.39

Data Source: Bloomberg

The dollar index was  sharply lower this week. It fell decisively fell below the 105 levels during the week after the inflation data was announced. The dollar index started the week on a steady note, opening at the 105.20 levels but closed lower at 104.49 levels. The fall was sharpest on Wednesday; the day of the CPI inflation announcement. During the week, the dollar index scaled a high of 105.46 and a low of 104.08. The lower inflation combined with the Fed indications of 2 rate cuts in 2024, have pulled the dollar index decisively lower.

INDIA BOND YIELDS EDGE LOWER TO 7.095%

For the third week in a row, the bond yields trended lower in the latest week to May 17, 2024. This week, bond yields fell from 7.127% to 7.095%. The India bond yields have fallen more than 11 bps in the last 3 weeks, giving out clearly dovish signals.

Date	Price (%)	Open (%)	High (%)	Low (%)
Apr 22, 2024	7.192	7.241	7.242	7.188
Apr 23, 2024	7.167	7.184	7.184	7.163
Apr 24, 2024	7.186	7.175	7.190	7.160
Apr 25, 2024	7.204	7.193	7.206	7.188
Apr 26, 2024	7.199	7.238	7.238	7.188
Apr 29, 2024	7.196	7.185	7.203	7.176
Apr 30, 2024	7.195	7.199	7.205	7.185
May 01, 2024	7.195	7.199	7.205	7.185
May 02, 2024	7.162	7.170	7.173	7.159
May 03, 2024	7.149	7.160	7.163	7.147
May 06, 2024	7.108	7.132	7.132	7.106
May 07, 2024	7.129	7.115	7.135	7.109
May 08, 2024	7.138	7.138	7.144	7.130
May 09, 2024	7.135	7.148	7.148	7.125
May 10, 2024	7.127	7.124	7.129	7.111
May 13, 2024	7.116	7.134	7.134	7.114
May 14, 2024	7.109	7.123	7.123	7.105
May 15, 2024	7.086	7.103	7.103	7.082
May 16, 2024	7.076	7.058	7.082	7.055
May 17, 2024	7.095	7.084	7.099	7.080

Data Source: RBI

During the week, the bond yield opened at 7.116% and closed at 7.095%. In the last six weeks, the benchmark Indian bond  yields spiked from 7.014% to 7.225%; but tapered in the last 4 weeks; from 7.225% levels to 7.095%. The India bond yields are approximately reflecting the fall in the US bond yield and the possibility that the Fed might consider pre-emptive rate cuts; starting from September 2024. Like the Fed, the RBI also has rate cuts on its agenda, although it is unlikely to act on it unless the election results are out and the full budget is presented. The falling bond yields are indicating that the RBI could also surprise on rate cuts, when the markets are least expecting it. During the week, the India 10-year bond yields touched a high of 7.134% and a low of 7.080%.

RUPEE SHOWS STRENGTH AT 83.302/$; DESPITE FPI OUTFLOWS

With the dollar index falling to 1.4.50 levels, and the crude oil prices edging up to $84/bbl, the rupee ended stronger. Had the FPIs not been net sellers to the tune of $1.34 Billion in the week, the rupee could have shown more strength during the week.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Apr 22, 2024	83.360	83.423	83.457	83.306
Apr 23, 2024	83.269	83.384	83.407	83.260
Apr 24, 2024	83.319	83.280	83.362	83.257
Apr 25, 2024	83.310	83.338	83.402	83.255
Apr 26, 2024	83.400	83.268	83.422	83.267
Apr 29, 2024	83.410	83.385	83.513	83.352
Apr 30, 2024	83.450	83.459	83.537	83.397
May 01, 2024	83.455	83.474	83.532	83.446
May 02, 2024	83.435	83.430	83.503	83.401
May 03, 2024	83.382	83.404	83.474	83.316
May 06, 2024	83.475	83.380	83.603	83.380
May 07, 2024	83.470	83.468	83.516	83.433
May 08, 2024	83.462	83.466	83.535	83.449
May 09, 2024	83.462	83.465	83.537	83.442
May 10, 2024	83.553	83.462	83.576	83.454
May 13, 2024	83.506	83.525	83.618	83.481
May 14, 2024	83.482	83.529	83.550	83.472
May 15, 2024	83.414	83.524	83.595	83.355
May 16, 2024	83.450	83.420	83.524	83.404
May 17, 2024	83.302	83.470	83.507	83.260

Data Source: RBI

Last week, the rupee had touched ₹83.553/$, after FPIs turned net sellers to the tune  of $2.18 Billion. This week, despite the FPI selling of $1.34 Billion in Indian equities, the rupee ended strong . It was the weakness in the dollar index and hopes of a rate cut in the US that kept the rupee stronger at ₹83.302/$. The Indian rupee has now been above 83/$ for 9 weeks in a row. FPIs have now sold $6 Billion of Indian equities in the last 5 weeks, amidst the rising tide of political uncertainty and VIX staying above 20 levels.

BRENT CRUDE EDGES HIGHER TO $83.96/BBL

In the previous 2 weeks, the price of crude came down sharply from $90/bbl to $82/bbl. In the latest week to May 17, 2024, Brent crude bounced back close to $84/bbl as the US reported drawdown of crude oil inventories after a gap of 3 weeks.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Apr 22, 2024	87.00	87.07	87.26	85.79
Apr 23, 2024	88.42	87.20	88.51	86.03
Apr 24, 2024	88.02	88.45	88.86	87.65
Apr 25, 2024	89.01	87.89	89.31	87.31
Apr 26, 2024	89.37	89.24	89.85	88.81
Apr 29, 2024	88.40	89.22	89.29	88.11
Apr 30, 2024	87.86	88.41	88.79	87.46
May 01, 2024	83.44	85.80	85.89	83.29
May 02, 2024	83.67	83.59	84.44	83.05
May 03, 2024	82.83	83.94	84.39	82.81
May 06, 2024	83.60	83.24	83.83	82.78
May 07, 2024	82.99	83.74	83.82	82.42
May 08, 2024	83.58	83.02	83.82	81.71
May 09, 2024	83.88	83.79	84.33	83.45
May 10, 2024	82.79	84.21	84.53	82.70
May 13, 2024	83.36	82.78	83.84	82.26
May 14, 2024	82.78	83.43	83.62	82.11
May 15, 2024	82.75	82.76	83.07	81.05
May 16, 2024	83.27	83.03	83.78	82.31
May 17, 2024	83.96	83.45	84.04	83.08

Data Source: Bloomberg

After the sharp fall in Brent crude in last 2 weeks, oil was steady in the current week with an upward bias. US inventories fell after 3 weeks of inventory accretion. It is a clear indication that the US inventories were being impacted by the trade restrictions, despite producing record oil output in recent months. For the week, Brent crude touched a high of $84.04/bbl and a low of $81.05/bbl.

SPOT GOLD FINALLY CLOSES ABOVE MOUNT 2.4K

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)
Apr 22, 2024	2,326.29	2,388.20	2,388.72	2,325.29
Apr 23, 2024	2,321.81	2,326.62	2,334.48	2,291.40
Apr 24, 2024	2,315.82	2,322.19	2,337.16	2,311.90
Apr 25, 2024	2,331.78	2,316.20	2,344.86	2,305.28
Apr 26, 2024	2,338.72	2,332.16	2,352.62	2,326.30
Apr 29, 2024	2,334.44	2,337.50	2,346.85	2,320.08
Apr 30, 2024	2,284.57	2,335.10	2,336.54	2,284.94
May 01, 2024	2,317.88	2,285.91	2,328.40	2,281.66
May 02, 2024	2,303.29	2,319.89	2,326.57	2,285.58
May 03, 2024	2,301.89	2,304.27	2,320.52	2,277.60
May 06, 2024	2,326.15	2,293.98	2,331.98	2,291.91
May 07, 2024	2,315.20	2,326.31	2,329.98	2,310.10
May 08, 2024	2,309.05	2,315.40	2,321.43	2,303.74
May 09, 2024	2,345.88	2,309.04	2,347.59	2,306.67
May 10, 2024	2,360.14	2,346.26	2,378.45	2,345.25
May 13, 2024	2,338.45	2,360.38	2,364.56	2,332.38
May 14, 2024	2,355.88	2,338.39	2,359.66	2,334.94
May 15, 2024	2,386.04	2,358.20	2,390.36	2,351.82
May 16, 2024	2,377.90	2,391.93	2,397.40	2,371.10
May 17, 2024	2,414.89	2,376.81	2,422.87	2,373.96

Data Source: Bloomberg

The price of gold has bounced by 5% in the last 2 weeks from $2,301/oz to $2,415/oz. This has been more of a contra-dollar trade; even as central bank demand remains robust. During the current week, gold touched a high of $2.423/oz and a low of $2,332/oz. For now, gold looks to be on a long term uptrend.