Weekly Musings – Macro Quartet for the week ending July 28, 2023

31 Jul 2023 , 09:47 AM

It was not a great week for the macro quartet for the week ended July 28, 2023. In fact, 3 out of the 4 macro data points moved higher during the week. Bond  yields ended higher; the rupee turned weaker while the oil prices also spiked sharply during the week. The spike in the dollar and the bond yields could be attributed to the 25 bps hike by the Fed and its unwillingness to commit on the peak or terminal rates. Bond yields also hardened as the outlook for food inflation in India appears to be under pressure.

Oil was the big story of the week at it just got to the threshold of $85/bbl in the Brent market. Even WTI crude is now above $81/bbl. The spike in Brent has been driven by supply cuts proposed by the OPEC and Russia combined with sharply fall in oil inventories in the US. However, gold remained in a narrow range through the week as it eventually closed below $1,960/oz. In India, the crude oil prices and the USDINR are closely linked as India still relies on imported crude oil to meet more than 85% of its daily requirements.

BOND YIELDS SPIKE DURING THE WEEK

The table below captures the bond yields on the benchmark 10-year bond in India over the past 4 weeks. After peaking at around 7.5% in April and May, the bond yields traded below 7% yields in the first week of June. However, post the RBI policy and the hawkish tone, the yields bounced back to above 7%, where it has stayed. Bond yield closed the week to July 28, 2023 at around 7.161%; which is sharply higher than the level reported in the previous week. For the week, the bond yield spiked from 7.071% to 7.161%. This 9 bps hike in yields in a single week is the sharpest spike in yields in a single week since early February 2023.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jul 03, 2023	7.117	7.113	7.122	7.100
Jul 04, 2023	7.119	7.127	7.127	7.108
Jul 05, 2023	7.105	7.122	7.122	7.102
Jul 06, 2023	7.147	7.132	7.151	7.130
Jul 07, 2023	7.159	7.171	7.175	7.144
Jul 10, 2023	7.149	7.168	7.168	7.138
Jul 11, 2023	7.095	7.120	7.123	7.088
Jul 12, 2023	7.118	7.091	7.122	7.087
Jul 13, 2023	7.071	7.099	7.099	7.064
Jul 14, 2023	7.089	7.060	7.095	7.060
Jul 17, 2023	7.074	7.110	7.110	7.071
Jul 18, 2023	7.058	7.084	7.084	7.047
Jul 19, 2023	7.072	7.062	7.076	7.054
Jul 20, 2023	7.083	7.081	7.088	7.074
Jul 21, 2023	7.087	7.099	7.107	7.076
Jul 24, 2023	7.071	7.082	7.087	7.066
Jul 25, 2023	7.100	7.091	7.105	7.088
Jul 26, 2023	7.096	7.106	7.106	7.089
Jul 27, 2023	7.120	7.089	7.122	7.078
Jul 28, 2023	7.161	7.154	7.179	7.148

Data Source: RBI

There were several data points that led to the hardening of bond yields in India. Firstly, the US Fed hiked the Fed benchmark rates by 25 bps to the range of 5.25% to 5.50%. While the market is expecting the rates to top out at these levels, the bond yields would only believe a clear indication coming from the Fed. That is not yet forthcoming and any inferences are only based on reading between the lines of the Fed statement. The second factor that has boosted bond yields in this week is the spike in bonds yields in the US markets. For instance, the US 10-year bond yields spiked during the week from 3.83% to 4.02% and this was largely driven by heavy selling in bonds. That also had an impact on Indian bond yields.

However, the big risk that is seen is the inflation risk, which has a direct bearing on the long bond yields in India. The domestic risk to interest rates comes in the form of weak monsoons followed by a deluge destroying crops. For the month of June 2023, CPI inflation in India spiked from 4.25% to 4.81%. Food inflation is just one part of the story. In addition, there are fears that higher crude prices may result in imported inflation for the Indian economy. During the last 3 weeks, we have seen Brent Crude prices spiking from $71/bbl to $85/bbl. With the markets likely to remain undersupplied, this could only tighten.

Rupee weakens as the dollar strengthens

During the week, the fall in the rupee had less to do with the rupee and more to do with the strength in the dollar. For example, the dollar index (DXY) spiked sharply from around the 100.5 levels to close to the 102 levels after the Fed hiked rates by 25 bps. Rate hikes normally makes US bonds more attractive and that strengthens the dollar as more portfolio flows are expected into dollar assets. The strength in the dollar index (a benchmark against global hard currencies) led to a weakening of the USDINR. During the week to July 28, 2023, the USDINR sharply weakened from 81.79/$ to a level of 82.23/$. This largely came about after the dollar spiked sharply in the light of the Fed rate hike and the better than expected GDP data first-advance estimate for the June 2023 quarter at 2.4%.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jul 03, 2023	81.940	82.061	82.072	81.753
Jul 04, 2023	81.946	81.975	82.045	81.868
Jul 05, 2023	82.397	82.047	82.413	81.994
Jul 06, 2023	82.758	82.398	82.821	82.297
Jul 07, 2023	82.654	82.769	82.769	82.546
Jul 10, 2023	82.520	82.665	82.689	82.520
Jul 11, 2023	82.390	82.550	82.563	82.324
Jul 12, 2023	81.980	82.405	82.421	81.962
Jul 13, 2023	82.040	82.001	82.146	81.948
Jul 14, 2023	82.049	82.010	82.203	81.926
Jul 17, 2023	82.040	82.127	82.209	81.988
Jul 18, 2023	82.060	82.062	82.114	81.961
Jul 19, 2023	82.050	82.087	82.166	82.024
Jul 20, 2023	82.083	82.062	82.160	81.912
Jul 21, 2023	82.007	82.083	82.114	81.942
Jul 24, 2023	81.790	82.035	82.052	81.786
Jul 25, 2023	81.850	81.815	81.918	81.666
Jul 26, 2023	81.950	81.899	82.078	81.863
Jul 27, 2023	82.150	81.938	82.248	81.880
Jul 28, 2023	82.225	82.155	82.354	82.155

Data Source: RBI

It remains to be seen if the RBI intervenes or not, since it has typically intervened above 82.5/$. The bigger risk for the Indian rupee, as evidenced by the sharp fall in the INR during the week stems from the spike in global oil prices. Brent touched a level of $85/bbl and, as we have seen in the past, any level above $80/bbl puts a lot of pressure on the trade deficit and the current account deficit of the Indian economy. Also, India has already touched the peak levels of oil that it can import from Russia and further imports from Russia may not be economically or even diplomatically feasible. That is likely to keep the pressure on the INR.

Brent Crude spikes and closes at $85/bbl 

After being the range of $70/bbl to $80/bbl, Brent crude closed the previous week above $80/bbl. In the current week to July 28, 2023, the oil prices spiked further and closed at $85/bbl. This marks the 4th week in succession that the crude oil prices have been on the way up. The equation in oil is shifting from favouring demand to favouring supply, which is where OPEC and Russia are likely to have an upper hand. However, at the end of the day, a lot would still depend on the dollar since a strong dollar does not help higher oil prices.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jul 03, 2023	74.65	75.11	76.60	74.56
Jul 04, 2023	76.25	74.89	76.29	74.74
Jul 05, 2023	76.65	76.03	76.95	75.30
Jul 06, 2023	76.52	76.64	77.08	75.05
Jul 07, 2023	78.31	76.51	78.53	76.05
Jul 10, 2023	77.69	78.60	78.77	77.36
Jul 11, 2023	79.40	77.82	79.50	77.63
Jul 12, 2023	80.11	79.32	80.55	79.21
Jul 13, 2023	81.36	80.19	81.75	79.88
Jul 14, 2023	79.87	81.64	81.70	79.53
Jul 17, 2023	78.50	79.36	80.64	78.25
Jul 18, 2023	79.63	78.52	79.99	78.19
Jul 19, 2023	79.46	79.84	80.93	79.17
Jul 20, 2023	79.59	79.33	80.23	78.67
Jul 21, 2023	81.03	79.75	81.09	79.66
Jul 24, 2023	82.74	80.95	83.16	80.42
Jul 25, 2023	83.64	82.85	83.87	82.22
Jul 26, 2023	82.92	83.19	83.85	82.58
Jul 27, 2023	84.24	82.93	84.50	82.93
Jul 28, 2023	84.99	83.71	85.09	83.22

Data Source: Bloomberg

During the week, the price of Brent Crude closed on Friday at a level of $84.99/bbl, as it decisively broke out of the range of $70 to $80. India has touched peak Russian imports at 42% of the basket and higher imports look unlikely. India will return to Middle East oil, so it is back to putting pressure on the core oil markets. The trend of falling US oil inventories continued in the latest week also. For India, with 85% imported crude dependence, the impact on trade deficit and on CAD is likely to be direct.

Gold prices were flat in the week to July 28, 2023

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)
Jul 03, 2023	1,921.43	1,919.40	1,931.09	1,910.10
Jul 04, 2023	1,925.09	1,921.78	1,930.84	1,919.90
Jul 05, 2023	1,917.32	1,925.90	1,935.17	1,914.48
Jul 06, 2023	1,910.80	1,916.05	1,927.69	1,902.68
Jul 07, 2023	1,925.30	1,911.67	1,934.76	1,909.70
Jul 10, 2023	1,924.99	1,925.19	1,928.31	1,912.68
Jul 11, 2023	1,931.99	1,925.40	1,938.69	1,924.40
Jul 12, 2023	1,957.09	1,932.59	1,959.82	1,932.18
Jul 13, 2023	1,960.19	1,957.44	1,963.69	1,952.71
Jul 14, 2023	1,954.93	1,961.58	1,963.81	1,951.00
Jul 17, 2023	1,954.74	1,954.90	1,959.91	1,945.82
Jul 18, 2023	1,978.71	1,954.59	1,984.39	1,954.44
Jul 19, 2023	1,976.74	1,978.97	1,981.05	1,969.75
Jul 20, 2023	1,972.24	1,977.81	1,987.51	1,965.39
Jul 21, 2023	1,963.39	1,972.26	1,973.86	1,956.87
Jul 24, 2023	1,954.51	1,962.09	1,967.97	1,953.42
Jul 25, 2023	1,964.58	1,955.20	1,966.03	1,953.21
Jul 26, 2023	1,972.10	1,964.99	1,978.31	1,961.99
Jul 27, 2023	1,944.99	1,972.08	1,982.24	1,942.61
Jul 28, 2023	1,959.20	1,943.30	1,963.71	1,943.30

Data Source: Bloomberg

It was a stable week for spot gold which closed the week at $1,959.20/oz. In the last 2 months, spot gold struggled to sustain above $2,000/oz despite several attempts. It looks like geopolitical and trade risks are back and that is positive news for spot gold prices, which is normally a safe haven asset. In addition, the prospects of lower bond yields after the 3% PCE inflation data in the US, has also reduced the opportunity cost of holding gold.

To encapsulate the week to July 28, 2023; brent crude rallied sharply while bond yields hardened post the Fed rate hike and the rupee weakened against the dollar. Some key triggers to watch this week will be long build up in crude oil futures, API stocks, India core sector growth data and PMI composite. That will give a quick picture of how the macro quartet will pan out next week.