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Weekly Musings – Macro Quartet for the week ending September 22, 2023

25 Sep 2023 , 07:05 AM

The big event during the previous week was the Fed policy announcement. As expected the Fed did not hike rates. However, the Fed did give out a very hawkish picture suggesting that they would continue to stay hawkish till the time the inflation came down meaningfully and in a sustained manner. However, the Fed also indicate that the focus of the Fed would now be less on rate hikes and more on holding rates at higher levels for longer. In addition, the Fed also cut its forecast of number of rate cuts for 2024 from four rate cuts to just two rate cuts. That will keep the rates at above 5.1% in the US even by the end of 2024. Despite this churn in global macro guidance, the macro quartet stayed in a range. We shall look at each of these items of tine Macro Quartet separately and also why there was ambivalence in each of these parameters, despite an openly hawkish stance by the Fed.

BOND YIELDS STAY FLAT AT IN THE 7.14% TO 7.15% RANGE

The bond yields remained flat to marginally lower during the week. The 10-year benchmark bond yields oscillated between 7.14% to 7.15% with the yields largely gravitating towards the top of the range towards close. This trend of flat yields has now been the story for the last 4 weeks in succession. Ideally, the Fed hawkishness should have led to higher bond yields, but that was not the case. The table below captures the bond yield story for the last 4 weeks in succession with the latest week highlighted. 

Date Price (%) Open (%) High (%) Low (%)
Aug 28, 2023

7.178

7.212

7.212

7.166

Aug 29, 2023

7.180

7.178

7.189

7.159

Aug 30, 2023

7.185

7.153

7.192

7.153

Aug 31, 2023

7.166

7.177

7.186

7.164

Sep 01, 2023

7.175

7.174

7.184

7.163

Sep 04, 2023

7.204

7.192

7.206

7.186

Sep 05, 2023

7.206

7.210

7.211

7.195

Sep 06, 2023

7.210

7.217

7.232

7.209

Sep 07, 2023

7.173

7.229

7.229

7.158

Sep 08, 2023

7.199

7.183

7.207

7.165

Sep 11, 2023

7.209

7.188

7.214

7.183

Sep 12, 2023

7.203

7.222

7.222

7.194

Sep 13, 2023

7.172

7.190

7.190

7.171

Sep 14, 2023

7.101

7.157

7.157

7.096

Sep 15, 2023

7.158

7.117

7.166

7.105

Sep 18, 2023

7.149

7.193

7.193

7.139

Sep 19, 2023

7.149

7.193

7.193

7.139

Sep 20, 2023

7.153

7.171

7.171

7.143

Sep 21, 2023

7.136

7.207

7.207

7.129

Sep 22, 2023

7.150

7.110

7.164

7.086

Data Source: RBI

The 10-year benchmark bond yields closed the previous week at 7.158%. However, it opened the latest week at 7.149% and closed the week at 7.150%. This is as narrow and rangebound as the yield can be. What explains this ambivalence in the bond yields despite the overly hawkish stance taken by the Fed. Firstly, the markets believe that the RBI may not hike rates in a hurry, despite the risk of higher inflation. RBI also has a growth story to worry about. Also, the Fed maintaining status quo this policy, would enthuse the RBI to hold on to rates for longer. Secondly, there is still a huge surplus liquidity in the system that got a boost with the phased withdrawal of the I-CRR. With such a surplus liquidity in the system, it is pulling down the yields at the short end of the curve and that is also getting transmitted to the long end. Thirdly, bond yields are tied to a range since markets are confident that the RBI would not allow the cost of funds for Indian corporates to go up too much, since it risks solvency risk for Indian corporates. That explains flat yields despite the overt hawkishness shown by the US Federal Reserve.

RUPEE ENDS WEEK MARGINALLY STRONGER BELOW 83/$

The last two weeks of August and the first two weeks of September had seen the rupee consistently above 83/$. However, the RBI intervention helped the rupee to recover to below 83/$. The RBI support was evident in the current week also. However, there is also a global story helping the rupee to appreciate. In the last few weeks, the US dollar index (DXY) had spiked to above 105.50 on the back of Fed hawkishness. However, in the latest policy, the Fed has changed its definition of hawkishness. Going ahead, hawkishness by the Fed will not mean rate hikes. Instead, it would mean a longer pause at higher levels and fewer rate cuts in the coming year. That has helped the dollar index to slightly weaken and that, in turn, has helped the rupee to also gain some heft.

Date 

Price (₹/$)

Open (₹/$)

High (₹/$)

Low (₹/$)

Aug 28, 2023

82.600

82.585

82.662

82.527

Aug 29, 2023

82.574

82.646

82.842

82.576

Aug 30, 2023

82.607

82.593

82.819

82.568

Aug 31, 2023

82.702

82.678

82.799

82.582

Sep 01, 2023

82.689

82.647

82.784

82.576

Sep 04, 2023

82.715

82.670

82.785

82.650

Sep 05, 2023

83.033

82.753

83.097

82.712

Sep 06, 2023

83.197

83.075

83.258

82.986

Sep 07, 2023

83.150

83.220

83.271

83.076

Sep 08, 2023

83.004

83.133

83.184

82.902

Sep 11, 2023

82.900

82.955

83.068

82.815

Sep 12, 2023

82.850

82.905

83.015

82.853

Sep 13, 2023

82.934

82.873

83.039

82.855

Sep 14, 2023

83.010

82.915

83.101

82.913

Sep 15, 2023

83.069

83.063

83.202

82.981

Sep 18, 2023

83.270

83.106

83.360

83.085

Sep 19, 2023

83.310

83.250

83.344

83.170

Sep 20, 2023

82.920

83.261

83.297

82.924

Sep 21, 2023

83.102

83.193

83.222

83.005

Sep 22, 2023

82.970

82.876

82.993

82.769

Data Source: RBI

The pressure on the rupee is on two fronts. Firstly, the higher Brent Crude prices are putting pressure on the rupee through imported inflation. The trade deficit in August has widened by 16% and all eyes will be on the current account deficit (CAD) to be announced by the RBI next week. In the US, the bond yields are showing signs of tiring after touching a 16-year high. The dollar index has also topped out in response and that is directly helping the rupee to strengthen. However, with the overhang of imported inflation and dollar strength, the chances of the rupee appreciating meaningfully are quite low. With the FOMC decision done and dusted, the focus for the Indian rupee will shift to other key global data points like the US GDP and the US PCE inflation. At the same time, the domestic data points like the current account deficit (CAD), fiscal deficit levels and the core sector growth will also have an impact on the rupee levels. Going ahead, the rupee could be a lot more data driven. That also explains the ambivalence in the rupee value.

BRENT CRUDE FACES RESISTANCE AROUND $94/BBL ON DEMAND DOUBTS

Brent Crude may have hardened by 35% in the last 3 months, but the run from here does not look to be too easy. Goldman Sachs may have spoken about crude at $100/bbl, but the journey from here is going to be a lot tougher. India would still be concerned even at current levels of crude since India imports close to 85% of its daily crude requirements. The signals on the supply side continue to be hawkish. In recent weeks, Russian oil minister, Alexander Novak, has hinted that supply cuts would continue to be coordinated with the OPEC. According to OPEC estimates, the shortfall in oil supply is around 2 million barrels per day (bpd), which is where the OPEC and Russia want to keep it in order to defend oil prices at remunerative levels. However, elevated oil price forces the Indian government into tough policy choices. That is a concern from India’s macro perspective.

Date 

Price ($/bbl)

Open ($/bbl)

High ($/bbl)

Low ($/bbl)

Aug 28, 2023

84.42

84.87

85.23

84.11

Aug 29, 2023

85.49

84.39

85.65

83.80

Aug 30, 2023

85.86

85.62

86.23

85.11

Aug 31, 2023

86.83

85.22

86.88

85.08

Sep 01, 2023

87.80

86.22

88.19

86.15

Sep 04, 2023

89.00

88.95

89.22

88.26

Sep 05, 2023

90.04

88.91

91.15

88.06

Sep 06, 2023

90.60

90.12

91.10

89.25

Sep 07, 2023

89.92

90.81

90.89

89.46

Sep 08, 2023

90.65

89.79

91.02

89.30

Sep 11, 2023

90.64

90.83

91.45

90.11

Sep 12, 2023

92.06

90.62

92.40

90.52

Sep 13, 2023

91.88

92.04

92.84

91.63

Sep 14, 2023

93.70

92.04

94.21

92.02

Sep 15, 2023

93.93

94.02

94.63

92.67

Sep 18, 2023

94.43

94.28

94.95

93.79

Sep 19, 2023

94.34

94.66

95.96

94.16

Sep 20, 2023

93.53

94.49

94.72

92.76

Sep 21, 2023

93.30

93.08

94.60

92.20

Sep 22, 2023

93.27

93.37

94.64

92.80

Data Source: Bloomberg

The final word is still not out on whether the demand for oil has picked up, but several indicators are hinting at improved demand for oil. ECB hinted at peaking of rates and China and Japan continue to be dovish. Also, the US GDP growth still remains buoyant at 2.1% and that is likely to keep oil demand on the boil. Then, where does the ambivalence stem from causing the tight range of oil prices this week. Markets still believe that recession in the US will happen in the last quarter and that is not good news for oil. Also, China’s problems with its real estate sector and the debt problem are far from over. This could still keep a lid on oil demand and that is making it tougher for oil prices to travel higher.

GOLD PRICES TAPER REMAIN LACKLUSTRE

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)

Aug 28, 2023

1,919.66

1,916.09

1,926.19

1,912.83

Aug 29, 2023

1,937.12

1,920.23

1,938.41

1,914.00

Aug 30, 2023

1,942.24

1,937.48

1,949.04

1,934.94

Aug 31, 2023

1,939.74

1,942.61

1,948.19

1,938.86

Sep 01, 2023

1,938.80

1,940.19

1,953.44

1,934.59

Sep 04, 2023

1,938.19

1,940.49

1,946.42

1,936.15

Sep 05, 2023

1,925.81

1,938.59

1,939.13

1,925.22

Sep 06, 2023

1,916.28

1,926.16

1,929.80

1,914.80

Sep 07, 2023

1,919.19

1,916.86

1,923.67

1,916.10

Sep 08, 2023

1,917.81

1,919.57

1,930.19

1,917.36

Sep 11, 2023

1,921.66

1,919.16

1,930.90

1,916.90

Sep 12, 2023

1,913.26

1,922.90

1,925.05

1,907.15

Sep 13, 2023

1,906.30

1,913.55

1,916.30

1,905.50

Sep 14, 2023

1,910.32

1,906.68

1,912.99

1,900.95

Sep 15, 2023

1,923.57

1,910.90

1,930.84

1,909.74

Sep 18, 2023

1,933.14

1,924.19

1,934.61

1,922.15

Sep 19, 2023

1,930.94

1,933.68

1,937.94

1,929.71

Sep 20, 2023

1,929.68

1,931.69

1,947.80

1,927.90

Sep 21, 2023

1,919.57

1,930.99

1,931.74

1,913.40

Sep 22, 2023

1,924.99

1,920.08

1,929.65

1,919.58

Data Source: Bloomberg

In the last couple of weeks, the gold prices have held above $1,900/oz but gold has found it very tough to defend rallies. Gold has been struggling in a range for a long time and it looks unlikely that it can effectively break out either ways, in the absence of strong reasons. For now, the strong dollar and expectations of higher interest rates have kept a cap on gold prices, while uncertainty is offering a floor support to gold. This has been the story of the last few months and not much has changed on this front. 

How do we see the macro quartet next week? There are several big data announcements next week. The RBI will announce the current account deficit number and that is likely to have an immediate impact on the rupee value. The government will also release data on core sector and fiscal deficit, which his likely to have a bearing on the bond yields. At a global level, the US GDP and PCE inflation will be announced and both these data points will impact the crude prices and gold. The next week should be more interesting.

Related Tags

  • crude
  • crude oil
  • Crude oil prices
  • FED
  • gold prices
  • USD-INR
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