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

8 Jul 2024 , 09:36 AM

HOW SOON WILL THE FED BE CUTTING RATES?

When the minutes of the June Fed meeting were published by the FOMC on July 03, 2024; the only thing that was evident was that the Fed continues to be ambivalent. The Fed members refused to be drawn into any debate on cutting rates, which leaves us with the Million dollar question; “how soon will the Fed cut rates?” Here is our reading of the FOMC minutes and what, we believe, it means for the trajectory of interest rates in the US.

• The Fed officials have accepted the fact that the US economy was slowing in terms of GDP growth and consumer spending. While the labour market was back in balance, the proof of the pudding lies in the PCE inflation tapering to 2.6%. However, the Fed is loath to shift out of its “wait and watch” comfort zone.
• If one looks at it more rationally, the Fed is being ambivalent, because it can afford to be ambivalent. About a year back, the big fear was that the rate hikes could trigger a hard landing for the US economy. Despite an inverted yield curve, there was no hard landing. That has given the Fed the confidence they that wait till they are absolutely sure that the only feasible option was to cut the benchmark rates.
• One positive takeaway is that the FOMC members have acknowledged multiple confirmations on tapering inflation. It is not just that consumer spending is weakening, but this low demand is also forcing producers to offer discounts on products to the customers. These price cuts to avoid a consumer demand impact, by itself, has led to tapering of price pressures in the US economy. There is a demand and supply trigger.
• The FOMC wordings this time are less sceptical and more cautious. What does that really mean? Fed members have just said that they would prefer to wait for more data points that would give them greater confidence that inflation was moving towards 2%. In short, the Fed is looking for more confirmation from a couple of months more of consumer inflation, PCE inflation, GDP data, oil reserve drawdowns, non-farm payrolls, jobs etc.
• One phrase that has been used several times in the course of the FOMC minutes is the phrase, “Modest Improvement.” Here the focus is less on improvement and more on modest. Here is the logic for the use of this term. PCE inflation has just tapered by 20 bps in the last 5 months. One can argue that inflation is just 60 bps away from the 2% target, but the problem is that it has been there for a long time.
• One important point is whether the entire inflation counter was purely an outcome of Fed hawkishness. If that is the case, then a reversal of hawkishness could lead to higher inflation. However, that is something that would only be evident once the actual rate cuts commence.

The gist of the story is that the FOMC consensus view has shifted from scepticism to caution. That is an improvement. However, there is still a long mental road to traverse, before the Fed embarks on rate cuts. The question is not whether; but when!

US BOND YIELDS  SOFTEN, AS DOES THE DOLLAR INDEX

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 (%)
Jul 01, 2024	4.471	4.412	4.493	4.386
Jul 02, 2024	4.438	4.457	4.465	4.414
Jul 02, 2024	4.355	4.426	4.445	4.339
Jul 04, 2024	4.372	4.364	4.376	4.353
Jul 05, 2024	4.278	4.374	4.404	4.269

Data Source: Bloomberg

US bond yields started the week at slightly elevated levels of 4.471%, but gradually edged lower to close at 4.278% levels towards the end of the week. Bond yields had jumped up in the previous week on expectations that there was a strong chance of Trump 2.0 in November, when the US went to elections. That price driven spike in bond yields is over and this week saw the bond yields tapering. The Fed minutes were a key trigger for the lower bond yields after the Fed refused to commit any time line on rate cuts. For now, the base case scenario is just one rate cut in 2024 and a best case scenario is 2 rate cuts. However, 2025 is expected to see more aggressive rate cuts. Let us turn to the US dollar index (DXY), a barometer of dollar strength.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 01, 2024	105.90	105.85	105.98	105.43
Jul 02, 2024	105.72	105.85	106.05	105.66
Jul 02, 2024	105.40	105.67	105.80	105.05
Jul 04, 2024	105.13	105.32	105.36	105.10
Jul 05, 2024	104.88	105.17	105.17	104.82

Data Source: Bloomberg

In a week when the bond yields fell sharply post the FOMC minutes, the dollar index was not far behind. The surge in the dollar amidst Euro weakness has already played out. For the week, the dollar index started on a steady note, opening at the 105.90 levels, and steadily tapered through the week. However, on Friday, the dollar index closed at 104.88 as the FOMC minutes did put pressure on the dollar index also. During the week, the dollar index scaled a high of 106.05 and a low of 104.82.

INDIA BOND YIELDS TAPER TO CLOSE BELOW THE 7% MARK

The India 10-year bond yields has been oscillating above and below the 7% mark. Last week, we had seen the bond yields spike to 7.008% on the back of expectations that the delayed monsoons could result in a spike in inflation. However, the tone shifted this week after clear signals that the impact on food inflation would be limited.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jun 10, 2024	7.032	7.048	7.048	7.027
Jun 11, 2024	7.014	7.055	7.055	7.012
Jun 12, 2024	7.012	7.012	7.015	7.007
Jun 13, 2024	6.986	7.003	7.003	6.985
Jun 14, 2024	6.984	6.980	6.991	6.975
Jun 17, 2024	6.984	6.980	6.991	6.975
Jun 18, 2024	6.981	6.998	6.998	6.981
Jun 19, 2024	6.974	6.981	6.981	6.964
Jun 20, 2024	6.976	6.984	6.984	6.970
Jun 21, 2024	6.973	6.984	6.984	6.972
Jun 24, 2024	6.971	6.979	6.979	6.954
Jun 25, 2024	6.983	6.972	6.989	6.969
Jun 26, 2024	6.997	6.998	7.001	6.984
Jun 27, 2024	7.000	7.006	7.009	6.987
Jun 28, 2024	7.008	6.998	7.020	6.992
Jul 01, 2024	7.013	7.023	7.024	7.010
Jul 02, 2024	7.009	7.009	7.009	7.009
Jul 02, 2024	7.001	7.009	7.009	6.999
Jul 04, 2024	6.998	6.992	7.001	6.989
Jul 05, 2024	6.993	7.016	7.016	6.987

Data Source: RBI

During the week, the bond yield opened at 7.013% and closed at 6.993%. After the initial jitters, the bond markets are now reconciling to the fact that the delayed monsoons may not have any profound negative impact on food inflation this year. During the week, India 10-year bond yields touched a high of 7.009% and a low of 6.987%. With the fiscal deficit and the current account deficit hinting at subdued yields, the big question mark would still be on the monsoon spread and intensity; as well as the impact on food prices.

RUPEE STAYS UNDER PRESSURE DESPITE GOOD TIDINGS

With the dollar index falling below 105 levels; the rupee was expected to strengthen, but it weakened to close around the 83.500/$ mark.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jun 10, 2024	83.500	83.530	83.551	83.468
Jun 11, 2024	83.600	83.521	83.639	83.480
Jun 12, 2024	83.430	83.618	83.622	83.433
Jun 13, 2024	83.540	83.507	83.575	83.487
Jun 14, 2024	83.547	83.546	83.593	83.514
Jun 17, 2024	83.500	83.523	83.567	83.503
Jun 18, 2024	83.330	83.498	83.560	83.322
Jun 19, 2024	83.460	83.394	83.491	83.340
Jun 20, 2024	83.620	83.422	83.684	83.417
Jun 21, 2024	83.568	83.630	83.631	83.498
Jun 24, 2024	83.450	83.563	83.590	83.410
Jun 25, 2024	83.403	83.439	83.510	83.394
Jun 26, 2024	83.560	83.452	83.632	83.413
Jun 27, 2024	83.438	83.579	83.596	83.408
Jun 28, 2024	83.355	83.458	83.492	83.329
Jul 01, 2024	83.438	83.380	83.479	83.349
Jul 02, 2024	83.500	83.440	83.567	83.422
Jul 02, 2024	83.520	83.497	83.564	83.435
Jul 04, 2024	83.475	83.495	83.561	83.463
Jul 05, 2024	83.500	83.503	83.532	83.458

Data Source: RBI

Just about two weeks back, we had seen the rupee weaken to a level of 83.684/$. That remains a low for the rupee, but in the latest week the rupee made several attempts to get close to that mark. In the previous, we got to see some strength in the rupee after positive tidings coming from the current account surplus in Q4 and the lower 0.7% CAD for FY24. This week, the rupee was under pressure despite the dollar index tapering. That can be attributed to a sharp spike in oil prices as Brent Crude rallied above $87/bbl on a sharp fall in US inventories. That was the key factor in rupee being under pressure during the week, despite FPI inflows of $5.91 Billion into Indian equities in the last 4 weeks. For the week, the USDINR touched a high of 83.349/$ and a low of 83.567/$.

BRENT CRUDE CROSSES $87/BBL ON ROBUST US DEMAND

After hovering below $80/bbl in the early part of June 2024, the oil prices have rallied again. This week, Brent Crude crossed $87/bbl. Even the WTI Crude is now trading above $83/bbl and this has been largely triggered by the sharper than expected drawdown in the US API oil inventories. That is indicating that US demand for oil remains very robust.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jun 10, 2024	81.63	79.38	82.17	79.34
Jun 11, 2024	81.92	81.97	82.36	81.19
Jun 12, 2024	82.60	82.08	83.34	81.96
Jun 13, 2024	82.75	82.42	83.05	81.80
Jun 14, 2024	82.62	82.05	83.39	81.92
Jun 17, 2024	83.52	82.07	83.79	81.54
Jun 18, 2024	84.53	83.62	84.70	82.97
Jun 19, 2024	84.29	84.61	84.98	84.17
Jun 20, 2024	84.86	84.40	85.14	84.19
Jun 21, 2024	84.33	84.78	85.30	83.95
Jun 24, 2024	86.01	84.99	86.16	84.71
Jun 25, 2024	85.01	86.06	86.23	84.74
Jun 26, 2024	85.25	84.89	85.81	84.47
Jun 27, 2024	86.39	85.01	86.50	84.88
Jun 28, 2024	86.41	86.56	87.22	86.24
Jul 01, 2024	86.60	84.90	86.88	84.85
Jul 02, 2024	86.24	86.71	87.46	86.16
Jul 02, 2024	87.34	86.44	87.39	85.89
Jul 04, 2024	87.43	87.09	87.59	86.51
Jul 05, 2024	86.54	87.45	87.95	86.49

Data Source: Bloomberg

Oil prices crossed the $87/bbl mark in the week, ahead of the OPEC meeting in the coming week. More than the OPEC meet, it was the sharp drawdown of -12.5 Million barrels of crude that triggered fears of supply struggling to meet robust US oil demand. In addition, there are also concerns that Russia may be forced to cut supply later this year, worsening the gap in the market. For the week, Brent crude touched a high of $87.95/bbl and a low of $84.85/bbl.

SPOT GOLD SPIKES TO $2,393/OZ DURING THE WEEK

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)
Jun 10, 2024	2,310.53	2,296.00	2,313.87	2,287.31
Jun 11, 2024	2,316.27	2,311.00	2,320.17	2,297.69
Jun 12, 2024	2,322.52	2,315.53	2,341.70	2,310.80
Jun 13, 2024	2,303.54	2,325.70	2,326.70	2,295.68
Jun 14, 2024	2,332.52	2,302.52	2,336.87	2,301.35
Jun 17, 2024	2,318.87	2,332.20	2,333.48	2,310.02
Jun 18, 2024	2,328.33	2,319.38	2,333.25	2,306.63
Jun 19, 2024	2,327.48	2,329.79	2,335.10	2,323.84
Jun 20, 2024	2,359.63	2,329.15	2,365.52	2,327.30
Jun 21, 2024	2,321.51	2,360.91	2,368.77	2,316.82
Jun 24, 2024	2,332.93	2,321.60	2,335.02	2,317.37
Jun 25, 2024	2,319.01	2,333.25	2,337.26	2,315.56
Jun 26, 2024	2,297.91	2,320.00	2,323.95	2,293.70
Jun 27, 2024	2,327.45	2,299.80	2,331.00	2,296.50
Jun 28, 2024	2,325.71	2,327.75	2,339.79	2,319.15
Jul 01, 2024	2,331.70	2,326.46	2,338.72	2,318.55
Jul 02, 2024	2,329.28	2,332.05	2,336.90	2,319.24
Jul 02, 2024	2,356.06	2,328.00	2,365.06	2,326.93
Jul 04, 2024	2,356.12	2,353.70	2,362.64	2,350.76
Jul 05, 2024	2,391.46	2,358.01	2,393.04	2,354.03

Data Source: Bloomberg

The rally in gold prices came this week largely on the back of dollar weakness ahead of the payrolls data. Gold closed the previous week at $2,326/oz, but closed sharply higher at $2,391/oz. Gold traders are also betting on rates cuts being more aggressive in 2025, which will help reduce the opportunity cost of holding gold. Gold may also do a silver catch up. During the week, gold touched a high of $2,393/oz and a low of $2,319/oz.