Weekly Musings – Macro Quartet for the week ending September 29, 2023

2 Oct 2023 , 08:44 AM

The week saw two major global data announcements viz. the PCE inflation and the final estimate of Q2 US GDP. But, the big driving factor for the dollar index during the week was the lag effect of the Fed policy announced in the previous week. The Fed not only gave a hawkish picture of rates but also underlined that rates would stay elevated for a much longer time. In fact, the Fed guidance is that rates would stay above the 5% mark till the end of 2024. That had two immediate effects. Firstly, it boosted the us 10 year bond yields to closer to 4.69% while the US Dollar Index (DXY) surged to 106.50, the highest level in the calendar year 2023. The rising bond yields in the US and the hardening dollar index were the two major factors impacting most of the variables in the Macro quartet in the previous week. This is how the Macro quartet of bond yields, USDINR, Crude and gold panned out.

BOND YIELDS INCH UP TO 7.23% DURING THE WEEK

After being rangebound for a number of weeks, the India 10 year bond yields showed the first signs of hardening. That was inevitable with the US bond yields spiking to 4.69% amidst the Fed still maintaining a hawkish stance. The RBI is expected to hold repo rates at 6.5% in the October MPC meet too, but the pressure on the bond yields is quite apparent. Perhaps, had it not been for the surplus liquidity in the system, the India benchmark bond yields could have risen further. Here is the bond yield story for the last 4 weeks in succession with the latest week highlighted. 

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Sep 25, 2023	7.150	7.186	7.186	7.124
Sep 26, 2023	7.146	7.178	7.180	7.144
Sep 27, 2023	7.173	7.173	7.173	7.173
Sep 28, 2023	7.238	7.214	7.241	7.148
Sep 29, 2023	7.210	7.241	7.241	7.188

Data Source: RBI

The 10-year benchmark bond yields closed the previous week at 7.150%. However, this week the bond yields came out of the narrow range to touch 7.24%, before closing the week at 7.21%. All eyes are on the RBI policy on October 06, 2023. That is not just for the rate action, but also for how the liquidity is managed. With the growth robust and liquidity abundant, the RBI is expected to maintain status quo on rates in October also. However, the RBI based members of the MPC are already talking in terms of a more hawkish stance. Consumer inflation in August tapered from 7.44% to 6.81%, but it still remains above the RBI upper tolerance limit of 6% for two months in a row. Also, the energy inflation is not fully captured in the CPI basket due to the prices being regulated in India. For now, the withdrawal of I-CRR and the Rs2,000 currency cancellation is keeping the markets liquid. But that does not answer the inflation question, so it will boil down to the RBI language.

RUPEE DECISIVELY BEYOND 83/$ DURING THE WEEK

There was not ambivalence on the currency front this week with the rupee beyond 83/$ through the week. It touched a high of 83.31/$ during the week, before RBI intervention brought it back to around the 83/$ levels. However, the pressure points cannot be missed. The US bond yields are at 4.69%, US Fed is likely to maintain rates at above 5% till end of 2024 and the dollar index has crossed 105.60 during the week. All these factors put pressure on the rupee, although the RBI intervention did manage to neutralize this hawkishness in the dollar to some extent. Here is the rupee story for the last 4 weeks, with the latest week data shaded.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Sep 25, 2023	83.130	83.057	83.179	83.029
Sep 26, 2023	83.230	83.122	83.309	83.099
Sep 27, 2023	83.181	83.297	83.312	83.153
Sep 28, 2023	83.150	83.237	83.273	83.111
Sep 29, 2023	83.030	83.209	83.209	83.012

Data Source: RBI

Apart from the US bond yields and the dollar index, there are two contrarian factors at work in the Indian context that is impacting the rupee. Firstly, it is the current account deficit that was announced during the week for the June quarter. At $9.2 billion, the CAD was just 1.1% of GDP. That is higher sequentially, but has nearly halved on a yoy basis. With the Indian CAD likely to be at less than 1.5% of GDP for the full year FY24, the overall situation looks fairly comfortable. That is positive for the rupee. The other factor is Brent crude prices, which has been hovering in the range of $92 to $94 per barrel in the last 3 weeks. With an 85% exposure to crude oil import, crude prices remain a critical factor impacting the rupee levels in India. RBI intervention is likely to be limited and calibrated for 2 reasons. Firstly, it impacts the government forex holdings. Secondly, dollar selling infuses rupee liquidity in the system, which counteracts most of the liquidity control measures adopted by the RBI.

BRENT CRUDE HOLDS ABOVE $92/BBL

After a frenetic 35% spike in crude oil prices in the last 3 months, the oil rally appears to be slowing down. The move from $70/bbl to $94/bbl was almost relentless, but it has been facing resistance in the last two weeks. However, Goldman Sachs has held on to its Brent crude price target at above $100/bbl. Even as there are no signs of demand destruction at higher levels, it is the supply story that is being closely watched. The OPEC meets on October 04, 2023 and once again Russia and the OPEC are likely to take a joint decision on sustaining the supply cuts. The oil market is already undersupplied by 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. That is a concern for Indian oil economics.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Sep 25, 2023	91.88	92.39	92.73	91.20
Sep 26, 2023	92.43	91.87	92.70	90.41
Sep 27, 2023	94.36	92.43	94.80	92.43
Sep 28, 2023	93.10	94.38	95.35	92.75
Sep 29, 2023	92.20	93.07	94.13	91.96

Data Source: Bloomberg

Recent OPEC reports suggest that the 2 million bpd gap between demand and supply of crude still exists. Falling US crude inventories is also adding to the pressure on global oil prices. Between Saudi Arabia and Russia, they control 23% of world oil output and about 27% of annual oil exports. But, the real issue that has kept down oil prices down this week had nothing to do with demand or supply. It was about the strength in the dollar index. Since crude oil is denominated in dollars, a strong dollar weakens oil prices. On the demand front, the US, China, and India still account for 42% of world oil consumption and there appears to be no let-up in demand from these three countries.

GOLD PRICES FALL SHARPLY 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)
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
Sep 25, 2023	1,915.66	1,925.24	1,927.26	1,915.00
Sep 26, 2023	1,900.49	1,916.03	1,916.89	1,899.17
Sep 27, 2023	1,874.70	1,900.69	1,903.95	1,872.47
Sep 28, 2023	1,864.56	1,875.73	1,880.15	1,857.76
Sep 29, 2023	1,848.31	1,865.43	1,880.24	1,846.34

Data Source: Bloomberg

In the latest week, the price of gold not only fell below $1,900/oz, but also decisively fell below $1,850/oz, the lowest level since late February 2023. In terms of global investment outlays, the strong US GDP numbers has led investors back to risk assets. Gold, being a safe haven asset, has been the loser on this count. For now, the strong dollar and expectations of higher interest rates have kept a cap on gold prices. With a clear preference emerging for risk assets, the safe haven demand for gold is also likely to gradually dwindle. Traders can expect more tapering in gold prices in the coming weeks. 

How do we see the macro quartet next week? There are big data announcements next week. The RBI will announce the crucial October monetary policy, where the language will matter more. The macro quartet will also be looking to cues coming from the speeches made by Jerome Powell, Michelle Bowman, and others on the trajectory of rates. For now, the story seems to be of hardening US bond yields and dollar strength. That is likely to continue to influence the macro quartet in the coming week.