Weekly Musings – Macro Quartet for week ending September 06, 2024

9 Sep 2024 , 02:07 PM

US HARD LANDING RISKS – WHAT IS EMPLOYMENT DATA SHOWING?

The August unemployment data announced by the US on September 06, 2024 was always going to be a crucial data point ahead of the FOMC meeting on September 18, 2024. The consumer inflation data is also expected on September 11, 2024; but the jobs data had been the bone of contention last month, triggering off hard landing apprehensions. Here is a quick update on the jobs data put out by the US Bureau of Labour Statistics (BLS). The unemployment rate at 4.3% in July and 4.2% in August, may not be a sign of a slowdown. However, it is a warning signal that conditions could worsen rapidly if monetary tightness in the economy continued for longer. The Fed would, most likely, read this message and act on it, as has already been confirmed by Jerome Powell. The jobs data is 10 bps better than last month at 4.2%, but the absolute jobless numbers are still a major challenge.

That begs the question; whether the rate cut would just be 25 bps in September or 50 bps? A rather eloquent answer to this question has come from Governor Christopher Waller, who in a recent speech, confirmed that the time was ripe for a rate cut. In fact, Waller went a step ahead and suggested that the rate cuts should be front-loaded at this juncture so that the impact would be immediately felt. Incidentally, Waller had suggested front-loading rate hikes in late 2021, but the Fed had dragged its feet much longer before actually getting aggressive on rate hikes. Chris Waller has suggested that the Fed should not repeat that mistake and actually front-load rate cuts this time. That could be interesting.

LOOK AT GDP GROWTH AND YIELD SPREADS TOO

However, a slowdown in growth will not be only about labour data. Three more critical data points will also go into that decision.

1. The first data point will be the GDP growth. For Q2-2024, the second estimate for GDP was upped by 20 bps to 3.0%. Already, the first estimate at 2.8% had doubled from the first quarter growth of 1.4%. This comes on the back of 4.9% in Q3-2023 and 3.4% in Q4-2023. In that context, the slowdown in growth looks more like an aberration. However, the Fed will have to take the final call on that data.
2. The second data point is the yield spread between the 2-year bond yield and the 10-year bond yield. The normal situation is a positive spread where 10-year yields exceed 2-year yield. However, when there is heightened uncertainty, investors remain concentrated at the short end of the yield curve, leading to negative spreads. In the first week of September 2024, yield curve turned back to positive at 0.06%. This is better than the previous year average of -0.67%, but still lower than the long term average of 0.86%. Yield spreads may not be alarming, but the hints are already there.
3. The practical side of recession is that it is not a recession till the Business Cycle Dating Committee of the National Bureau of Economic Research actually says it is. In the year 2022; there was an inverted US yield curve, but the NBER did not declare a recession as jobs data was comfortable.

For now, the focus will be less on the definition of a slowdown or hard landing and more on how the Fed looks at it. The Fed will take its final call in September based on a combination of jobs data, retail inflation, GDP growth and the yield spreads. The Fed action may, or may not, correspond with the expectations of the CME Fedwatch; but one cannot miss the sense of urgency about preventing a hard landing when the FOMC meets in September.

US BOND YIELDS LOWER AND DOLLAR INDEX TAPERS

Two macro variables set the tone for global markets; 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 (%)
Sep 02, 2024	3.926	3.909	3.941	3.905
Sep 03, 2024	3.837	3.928	3.931	3.812
Sep 04, 2024	3.753	3.836	3.841	3.751
Sep 05, 2024	3.733	3.752	3.774	3.720
Sep 06, 2024	3.716	3.732	3.778	3.642

Data Source: Bloomberg

The US bond yields have been trending lower ever since the inflation tapered and Jerome Powell gave a clear indication at Jackson Hole that the time was ripe for rate cuts. In the latest week, the bond yields slid further through the week on expectations that the Fed would front-load rate cuts. That looks very likely, especially after governor Chris Waller gave a clear indication in his recent speech that the time was apt for front-loading rate cuts; and that the Fed must not miss the opportunity as it did in late 2021 on hiking rates.

The 10-year bond yields opened the week at 3.926% and closed the week at 3.716%, steadily falling through the week. During the week, the US 10-year bond yields touched a high of 3.941% and a low of 3.642%. The lower bond yields were on expectations of lower consumer inflation for August. Bloomberg consensus estimates peg US consumer inflation for August at 2.6%, compared to 2.9% in July. That would bring the CPI inflation and the PCE inflation close to each other. The Fed still considers the PCE inflation as the benchmark, but the tone for the PCE inflation is set by the CPI inflation. In the coming week, the CPI inflation will be announced on September 11, 2024; which will be the last major data point before the Fed announces the monetary policy statement on September 18, 2024.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 02, 2024	101.624	101.650	101.725	101.505
Sep 03, 2024	101.766	101.615	101.855	101.460
Sep 04, 2024	101.301	101.645	101.725	101.180
Sep 05, 2024	101.074	101.235	101.335	100.915
Sep 06, 2024	101.143	101.010	101.365	100.525

Data Source: Bloomberg

Structurally, the dollar index has fallen from a high of 106 to the range of 100-101. In the latest week, the dollar index opened at 101.624 but closed lower at 101.143 for the week. The dollar index is a measure of dollar strength, but it also largely moves in tandem with the bond yields in the US. With talks of front-loading of rate cuts gaining ground, the dollar has come under pressure. In the last few weeks, China has been hinting at converting its dollar assets into domestic currency assets; something that has also spooked the dollar. The trajectory of the dollar will depend on how aggressively the Fed front-loads rate cuts. The dollar index scaled a weekly high of 101.855 and low of 100.525 levels.

INDIA BOND YIELDS CLOSES FLAT AT 6.854%

For the second week in a row, the India 10-year benchmark bond yields closed flat. In fact, if you look at the trajectory of the bond yields in India; it has moved from 6.851% to 6.854% in the last 2 weeks. A lot will depend on how the RBI reacts to the Fed rate cuts and if the Fed shows aggressive dovishness, then the RBI may not be able to stay quiet for too long. Interest costs have been rising in India and interest coverage has been falling. It is expected that the RBI will have to take cognisance to avoid distorting the growth engine.

Date	Price (%)	Open (%)	High (%)	Low (%)
Aug 12, 2024	6.879	6.881	6.881	6.870
Aug 13, 2024	6.880	6.869	6.887	6.869
Aug 14, 2024	6.858	6.871	6.874	6.857
Aug 15, 2024	6.858	6.871	6.874	6.857
Aug 16, 2024	6.867	6.880	6.880	6.864
Aug 19, 2024	6.864	6.871	6.871	6.860
Aug 20, 2024	6.856	6.874	6.874	6.850
Aug 21, 2024	6.853	6.849	6.859	6.846
Aug 22, 2024	6.852	6.861	6.861	6.843
Aug 23, 2024	6.859	6.855	6.862	6.849
Aug 26, 2024	6.851	6.854	6.854	6.848
Aug 27, 2024	6.861	6.863	6.863	6.854
Aug 28, 2024	6.861	6.858	6.866	6.856
Aug 29, 2024	6.864	6.870	6.870	6.862
Aug 30, 2024	6.863	6.872	6.872	6.862
Sep 02, 2024	6.876	6.877	6.878	6.865
Sep 03, 2024	6.870	6.885	6.885	6.869
Sep 04, 2024	6.859	6.861	6.863	6.857
Sep 05, 2024	6.855	6.853	6.856	6.851
Sep 06, 2024	6.854	6.852	6.855	6.846

Data Source: RBI

During the week, the bond yield opened at 6.876% and closed lower at 6.854%. In the last 2 weeks, the bond yield have hardly budged. For now, the bond markets are keeping their fingers crossed, awaiting the inflation data in the coming week from the Indian and the US markets. Kharif details will also provide clarity on bond yield direction. During the week, India 10-year bond yields touched a high of 6.885% and a low of 6.846%. Food inflation continues to be the overhang on bond yields, and once the food inflation shows signs of tapering, we could see bond yields coming down.

RUPEE WEAKENS DESPITE A CRASH IN CRUDE PRICES

In the last 2 weeks, the RBI had been consistently intervening to defend the rupee from weakening beyond ₹84.$. This week, RBI support was needed once again.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Aug 12, 2024	83.930	83.915	83.985	83.899
Aug 13, 2024	83.910	83.949	83.983	83.911
Aug 14, 2024	83.960	83.920	83.985	83.896
Aug 15, 2024	83.940	83.963	84.007	83.936
Aug 16, 2024	83.880	83.945	83.979	83.887
Aug 19, 2024	83.850	83.865	83.952	83.826
Aug 20, 2024	83.780	83.877	83.927	83.406
Aug 21, 2024	83.892	83.780	83.970	83.628
Aug 22, 2024	83.941	83.892	84.007	83.889
Aug 23, 2024	83.814	83.941	83.942	83.800
Aug 26, 2024	83.840	83.806	83.923	83.787
Aug 27, 2024	83.910	83.870	83.965	83.870
Aug 28, 2024	83.900	83.963	83.988	83.910
Aug 29, 2024	83.880	83.944	83.956	83.839
Aug 30, 2024	83.872	83.893	83.956	83.813
Sep 02, 2024	83.880	83.875	83.946	83.850
Sep 03, 2024	83.950	83.919	83.991	83.897
Sep 04, 2024	83.960	83.994	84.020	83.940
Sep 05, 2024	83.961	83.979	84.004	83.957
Sep 06, 2024	83.985	83.988	83.990	83.906

Data Source: RBI

Ideally, this should have been a week when the rupee should have strengthened with so many favourable triggers. For instance, the Brent Crude prices cracked to $71/bbl, the US dollar index tapered further and FPI flows were robust at $1.31 Billion during the week. However, despite all these positive factors, the rupee weakened and almost closed at the brink of ₹84/$. Had it not been for the late RBI intervention, the rupee would have, most likely, closed beyond ₹84/$. Despite the FPIs infusing $12.5 Billion since June, rupee is weak and that can be attributed to a global rush to safety. For the week, the USDINR touched a high of 83.850/$ and a low of 84.020/$. It remains to be seen, how long the RBI will support the rupee at the 84/$ levels.
BRENT CRUDE CRACKS SHARPLY AFTER CITI REPORT
The discussion on the crude prices has now shifted from the resistance levels to the support levels. The big question now is whether Brent Crude can h old $70/bbl in the coming week.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Aug 12, 2024	82.30	79.56	82.40	79.46
Aug 13, 2024	80.69	81.88	82.30	80.55
Aug 14, 2024	79.76	81.00	81.44	79.60
Aug 15, 2024	81.04	79.96	81.43	79.61
Aug 16, 2024	79.68	80.86	81.02	78.62
Aug 19, 2024	77.66	79.60	79.81	77.48
Aug 20, 2024	77.20	77.66	78.35	76.55
Aug 21, 2024	76.05	77.13	78.21	75.65
Aug 22, 2024	77.22	75.96	77.70	75.77
Aug 23, 2024	79.10	77.24	79.27	77.03
Aug 26, 2024	81.43	79.35	81.58	79.24
Aug 27, 2024	79.55	81.26	81.59	79.47
Aug 28, 2024	78.65	79.87	80.01	77.95
Aug 29, 2024	79.94	78.52	80.78	78.12
Aug 30, 2024	78.80	79.92	80.60	78.57
Sep 02, 2024	77.52	76.95	77.63	76.21
Sep 03, 2024	73.75	77.16	77.55	73.51
Sep 04, 2024	72.70	73.67	74.80	72.35
Sep 05, 2024	72.69	72.76	74.20	72.37
Sep 06, 2024	71.06	72.81	73.53	70.61

Data Source: Bloomberg

The big news in the week was reports from Citi and BOFA indicating a price target of $60/bbl. That forced rapid long closures and short build-up in crude futures. With Libya likely to get back into normal production mode, OPEC will have a real challenge supporting the oil prices. For the week, Brent crude touched a high of $77.63/bbl and a low of $70.61/bbl.

SPOT GOLD BOUNCES ON AGGRESSIVE RATE CUT HOPES

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)
Aug 12, 2024	2,472.25	2,431.21	2,473.48	2,423.84
Aug 13, 2024	2,465.03	2,472.64	2,477.02	2,458.50
Aug 14, 2024	2,447.64	2,467.40	2,478.49	2,438.12
Aug 15, 2024	2,456.10	2,448.15	2,470.25	2,432.19
Aug 16, 2024	2,507.28	2,456.57	2,509.89	2,450.76
Aug 19, 2024	2,503.92	2,508.40	2,510.45	2,485.83
Aug 20, 2024	2,513.74	2,501.55	2,532.05	2,497.33
Aug 21, 2024	2,511.95	2,512.82	2,520.09	2,494.15
Aug 22, 2024	2,487.66	2,512.94	2,514.69	2,470.91
Aug 23, 2024	2,512.41	2,487.60	2,518.36	2,486.56
Aug 26, 2024	2,516.89	2,511.43	2,527.76	2,508.71
Aug 27, 2024	2,524.57	2,518.30	2,526.27	2,503.41
Aug 28, 2024	2,502.25	2,522.74	2,529.15	2,493.66
Aug 29, 2024	2,521.18	2,504.65	2,528.77	2,503.65
Aug 30, 2024	2,503.45	2,519.62	2,526.80	2,494.34
Sep 02, 2024	2,499.29	2,502.74	2,507.50	2,490.14
Sep 03, 2024	2,492.76	2,500.50	2,506.44	2,473.25
Sep 04, 2024	2,494.19	2,492.94	2,500.19	2,471.95
Sep 05, 2024	2,516.32	2,495.50	2,523.55	2,493.77
Sep 06, 2024	2,516.36	2,497.33	2,529.28	2,485.22

Data Source: Bloomberg

Spot Gold opened the week subdued at $2,499.29/oz but bounced back and closed the week at $2,516.36/oz amidst volatility. This week, gold stayed above $2,500/oz for better part of the week after indications that the rate cuts could be front-loaded by the Fed. That should reduce the opportunity cost of holding gold. Even the geopolitical strife is triggering safe-haven demand for gold. During the week, gold touched a high of $2,529.28/oz and a low of $2,471.95/oz.