Weekly Musings – Macro Quartet for the week ended May 26, 2023

29 May 2023 , 07:31 AM

In the Macro quartet, we look at the daily trend of 4 very important macros that capture the financial markets outside of equities. The focus is on the trend of the 10-year bond yields, crude oil prices, price of gold and the Dollar rupee equation. While the thrust will be on the latest week, we shall look at the data for the month to get a broader perspective.

How the bond yields behaved in the latest week

The table below captures the bond yields on the benchmark 10-year bond in India. After peaking at around 7.5%, the bond yields have fallen sharply to below the 7% mark as can be seen in the table below.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 02, 2023	7.106	7.135	7.138	7.092
May 03, 2023	7.011	7.085	7.085	7.006
May 04, 2023	7.014	7.011	7.052	6.991
May 08, 2023	7.047	7.049	7.050	7.021
May 09, 2023	7.046	7.070	7.070	7.030
May 10, 2023	7.036	7.056	7.061	7.034
May 11, 2023	7.023	7.021	7.033	7.016
May 12, 2023	6.995	7.027	7.030	6.992
May 15, 2023	7.001	7.042	7.042	6.978
May 16, 2023	6.963	7.028	7.028	6.961
May 17, 2023	6.972	6.992	6.992	6.947
May 18, 2023	6.983	6.985	6.989	6.968
May 19, 2023	7.004	7.013	7.016	6.967
May 22, 2023	6.985	6.989	7.001	6.976
May 23, 2023	7.016	7.005	7.020	6.995
May 24, 2023	6.990	7.009	7.023	6.982
May 25, 2023	7.007	7.013	7.015	6.996
May 26, 2023	7.003	7.026	7.026	6.996

Data Source: RBI

When the US Fed had been very hawkish about a couple of months back and the RBI had also maintained a hawkish stance, the bond yields had touched a high of 7.5%. However, bond yields have gradually drifted lower since the RBI decided not to hike rates in early April. In the Fed policy announced in May 2023, while the Fed did hike rates by 25 bps, it has hinted at a strong possibility that the Fed may pause in June. During the week, the 7% mark remained the resistance for the benchmark 10-year bond yields. Had it not been for the uncertainty of the debt ceiling in the US, the bond yields would have tapered a lot more.

 

How the USDINR panned out in the latest week

The rupee showed a distinct weak trend during the latest week. That is rather surprising because in the month of May 2023, the FPI flows into India have been above $4.5 billion.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
May 01, 2023	81.770	81.795	81.814	81.715
May 02, 2023	81.750	81.795	81.961	81.715
May 03, 2023	81.755	81.788	81.872	81.670
May 04, 2023	81.710	81.762	81.829	81.652
May 05, 2023	81.700	81.718	81.827	81.652
May 08, 2023	81.770	81.711	81.836	81.659
May 09, 2023	82.100	81.787	82.162	81.771
May 10, 2023	81.900	82.105	82.114	81.875
May 11, 2023	82.090	81.926	82.195	81.901
May 12, 2023	82.173	82.120	82.244	82.095
May 15, 2023	82.237	82.244	82.388	82.182
May 16, 2023	82.264	82.239	82.317	82.160
May 17, 2023	82.400	82.272	82.460	82.260
May 18, 2023	82.720	82.453	82.797	82.348
May 19, 2023	82.878	82.767	82.953	82.623
May 22, 2023	82.840	82.809	82.903	82.725
May 23, 2023	82.830	82.835	82.890	82.749
May 24, 2023	82.670	82.880	82.897	82.570
May 25, 2023	82.733	82.680	82.821	82.666
May 26, 2023	82.570	82.745	82.748	82.542

Data Source: RBI

What explains the dichotomy of the rupee weakening against the dollar despite robust FPI flows. It has a lot to do with the global uncertainty engendered by the debt ceiling in the US. Ironically, the exorbitant privilege of the dollar means that in any global crisis, the US automatically becomes the preferred safe haven for investors. The dollar index (DXY) has strengthened in the last week and that is showing off on the dollar value. In the last couple of weeks, RBI has bene aggressively defending the rupee, as evidenced from fall in reserves. 

Brent crude oil prices in the latest week

For a long time, the OPEC dominated the global oil markets and set the tone for pricing of oil. In the last few years, the focus has shifted to the demand side. Concerns over weak economic recovery and a likely recession in advanced economies kept oil prices in check.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
May 01, 2023	79.31	80.11	80.24	78.13
May 02, 2023	75.32	79.28	79.78	75.07
May 03, 2023	72.33	75.31	75.58	71.70
May 04, 2023	72.50	71.28	73.72	71.28
May 05, 2023	75.30	72.69	75.75	72.41
May 08, 2023	77.01	75.23	77.43	74.95
May 09, 2023	77.44	76.71	77.50	75.07
May 10, 2023	76.41	77.36	77.60	75.68
May 11, 2023	74.98	76.62	77.41	74.61
May 12, 2023	74.17	75.35	75.85	74.03
May 15, 2023	75.23	74.15	75.75	73.49
May 16, 2023	74.91	75.55	75.95	74.50
May 17, 2023	76.96	74.67	77.31	74.10
May 18, 2023	75.86	76.78	76.99	75.50
May 19, 2023	75.58	76.03	77.50	75.12
May 22, 2023	75.99	75.63	76.46	74.55
May 23, 2023	76.84	76.15	77.74	75.65
May 24, 2023	78.36	77.70	78.66	77.03
May 25, 2023	76.26	78.22	78.50	75.10
May 26, 2023	76.95	76.09	77.35	75.73

Data Source: Bloomberg

Brent Crude remained under $80/bbl through the week and even went as low as $75/bbl. It may be recollected that Brent Crude had touched a peak of $130/bbl last year when the Ukraine war had just started. The biggest concern today is not about OPEC cutting supplies. There is enough of slack in the market that will ensure that the price of Brent Crude does not surge too sharply. For now, it is weak demand that has kept brent crude oil prices under check. In the latest week, the strength in the dollar has also pulled down crude oil prices since oil is denominated in dollars and there is an inverse relationship between dollar strength and crude oil prices.

How spot gold prices looked 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. Here is a gist of gold prices in the week.

Date	Price ($/oz)	Open ($/oz)	High ($/oz)	Low ($/oz)
May 01, 2023	1,982.05	1,991.34	2,006.05	1,977.05
May 02, 2023	2,016.28	1,982.81	2,019.54	1,978.38
May 03, 2023	2,051.11	2,036.86	2,080.72	2,030.34
May 04, 2023	2,051.11	2,036.86	2,073.29	2,030.34
May 05, 2023	2,016.54	2,051.73	2,053.13	1,999.30
May 08, 2023	2,021.39	2,015.95	2,029.63	2,014.10
May 09, 2023	2,034.17	2,022.24	2,037.70	2,019.50
May 10, 2023	2,029.51	2,034.19	2,048.22	2,021.57
May 11, 2023	2,015.55	2,030.56	2,041.44	2,011.19
May 12, 2023	2,011.15	2,015.19	2,022.56	2,001.05
May 15, 2023	2,018.41	2,011.72	2,022.20	2,007.28
May 16, 2023	1,988.60	2,015.90	2,018.94	1,985.47
May 17, 2023	1,981.72	1,988.94	1,993.13	1,974.80
May 18, 2023	1,958.05	1,981.52	1,986.12	1,951.97
May 19, 2023	1,976.56	1,957.40	1,984.09	1,954.05
May 22, 2023	1,969.43	1,977.80	1,982.66	1,968.40
May 23, 2023	1,974.73	1,971.99	1,977.80	1,954.29
May 24, 2023	1,957.01	1,975.19	1,985.30	1,956.51
May 25, 2023	1,940.34	1,958.13	1,964.95	1,938.86
May 26, 2023	1,946.33	1,940.69	1,957.40	1,936.84

Data Source: Bloomberg

Gold prices had decisively crossed the $2,000/oz during the early part of May 2023. However, in the current week the price of spot gold has decisively dropped below the $2,000 mark and traded as low as $1940/bbl during the week. Gold is normally a safe haven investment that works best when there is macroeconomic or geopolitical uncertainty. That is not the case any longer. Dollar strength also has played into weakening the price of gold during the latest week. 

Gold is also facing other headwinds. Gold consumption demand from the traditional markets of India and China are slowing. However, even as consumption demand for gold remains week the positive impact of central bank reserve demand is likely to help gold stabilize. Also, as rates come down, the opportunity cost of holding gold reduces and that makes gold a more attractive investment. 

The week has shown diverse trends. The bond yields have tapered below 7% while the USDINR has weakened beyond the 82.50/$ mark. Crude oil and gold remained under pressure due to demand concerns. The big trigger for the macro quartet in the coming week will predicate on how smoothly the debt ceiling impasse gets resolved.