Weekly Musings – Macro Quartet for the week ending August 04, 2023

5 Aug 2023 , 06:23 PM

It was, once again, not a great time for the macro quartet for the week ended August 04, 2023. Bond yields continued to inch higher during the week and moved closer to the 7.2% mark, a far cry from the sub-7% level a few weeks back. The two macros that really saw a shift were crude oil and the rupee. The crude oil prices where sharply  higher in the week and have now gotten close to $86/bbl in the Brent markets. In a little over a month, the price of Brent Crude has rallied more than 20% from levels of $71/bbl. While the demand has not been too robust in the last few weeks, there are concerns on the supply front; and that is keeping the brent crude prices under pressure.

For instance, the OPEC has stuck to its supply cuts while Russia is not able to supply the same quantity in the market at higher prices due to the sanctions based restriction. The US, on the other hand, has been seeing consistent drawdowns in its inventories and that has also put pressure on oil prices. With India having exhausted its Russia quota and likely to shift to OPEC oil once again, the cartel surely has an upper hand. But, the real surprise factor in the week was gold. After Fitch downgraded US debt by a notch from AAA to AA+, it was expected that a rush to safe havens would spur the price of gold. However, gold has been surprisingly subdued during the week; but more about that later!

BOND YIELDS INCH CLOSER TO 7.20% MARK IN WEEK TO AUGUST 04, 2023

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 implied in the policy, the yields bounced back to above 7%, where it has stayed. Bond yield closed the week to August 04, 2023 at 7.193%; which is about 3.20 bps higher than the level reported in the previous week. For the week, the bond yield spiked from 7.161% to 7.193%. Last week , the bond yields had spiked by 9 bps; the sharpest spike in a week since February. That has led to the spike moderating in the latest week, although the undertone is higher.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Jul 31, 2023	7.172	7.179	7.185	7.162
Aug 01, 2023	7.156	7.186	7.186	7.147
Aug 02, 2023	7.154	7.185	7.185	7.152
Aug 03, 2023	7.194	7.178	7.214	7.173
Aug 04, 2023	7.193	7.201	7.219	7.190

Data Source: RBI

There were several factors that led to the 3.2 bps hardening of bond yields in India. Firstly, the US Fed hiked the benchmark rates by 25 bps to the range of 5.25% to 5.50%. The market had expected the Fed to either pause in July or hike and give an indication of yields topping out. The Fed did neither, except hinting that the Fed may prefer to hold yields higher for a longer period. The other global factor was the downgrade in the US debt by a notch from AAA to AA+, it was expected that the US yield spike would get transmitted to India also. However, yields in the US did not react, instead falling sharply from 4.18% to 4.04% on Friday. It looks like the rating downgrade impact would be very peripheral.

The real reason bond yields in India are a little jittery is the food inflation. That has been pushing up bond yields in the recent past. The domestic risk to interest rates comes in the form of weak monsoons followed by a deluge destroying crops. For June 2023, CPI inflation in India spiked from 4.25% to 4.81%. The villain of this spike in inflation was the food basket with cereals and vegetables bearing the brunt. India inflation concerns are more valid as even the Brent Crude prices have spiked from $71/bbl to $86/bbl. With the markets likely to remain undersupplied, crude prices could only harden. With food inflation on one side and fuel inflation on the other, the markets are expecting CPI inflation in India to bounce back to the 6% levels for the July and August data. That will keep Indian yields higher.

Rupee weakens as US downgrade concerns weigh

There are two times the rupee weakens. It weakens when the dollar index strengthens or it weakens when the US macros weakens. The US debt downgrade by Fitch from AAA to AA+ was the last thing that markets wanted. That was an event risk and led to weakening of the rupee. What worsened the weakness in the rupee was that the dollar index hardly reacted and stayed around the 102 levels. That put further pressure on the rupee. The dollar index had spiked from 100 to 102 levels but post the Fitch downgrade, the dollar hardly reacted. That put additional pressure on the Indian rupee, pushing all the way to Rs82.75/$.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Jul 31, 2023	82.240	82.227	82.313	82.205
Aug 01, 2023	82.340	82.240	82.357	82.222
Aug 02, 2023	82.730	82.352	82.811	82.321
Aug 03, 2023	82.750	82.719	82.826	82.665
Aug 04, 2023	82.668	82.740	82.893	82.674

Data Source: RBI

Going ahead, a lot will depend on whether the RBI intervenes at the 83/$ levels as that would be the first sign of support from the RBI. However, the bigger risk for the INR stems from the spike in global oil prices. Brent is inching close to $86/bbl and. That, not only, means a lot of imported inflation into India, but also means a lot of pressure on the trade deficit and the current account deficit. Both are not salutary ideas for rupee strength. India is close to 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 would bring India back into the mainstream oil market, putting further pressure on oil demand and the rupee.

Brent Crude gets closer to $86/bbl 

In the last few weeks, Brent has decisively broken out of the range of $70/bbl to $80/bbl, Brent crude, closing this week to August 04, 2023 at the threshold of $86/bbl. This marks the 5th 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 the OPEC and Russia are likely to have an upper hand. However, at the end of the day, a lot still depends on the dollar, as a strong dollar does not support higher oil prices.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Jul 31, 2023	85.56	84.95	85.80	84.40
Aug 01, 2023	84.91	85.24	85.91	84.21
Aug 02, 2023	83.20	85.86	85.99	82.74
Aug 03, 2023	85.14	83.46	85.41	82.36
Aug 04, 2023	85.78	84.84	86.16	84.60

Data Source: Bloomberg

During the week, the price of Brent Crude closed on Friday at a level of $85.78/bbl, after briefly crossing the $86/bbl mark during the day. India has touched peak Russian imports at 42% of the basket and higher imports look unlikely. As India returns to Middle East oil, it is likely to put pressure on core oil markets. The trend of falling US oil inventories continued in the latest week also. For now, the oil market still remains undersupplied and the OPEC appears to be very positive about a recovery in China. For India, the concern is its 85% dependence on imported crude to meet its aggressive refining demand. 

Gold price trend paradoxical in week to August 04, 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 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
Jul 31, 2023	1,964.19	1,959.49	1,972.44	1,951.00
Aug 01, 2023	1,944.08	1,965.10	1,966.24	1,941.20
Aug 02, 2023	1,933.56	1,945.74	1,955.40	1,933.00
Aug 03, 2023	1,933.74	1,934.66	1,939.03	1,929.55
Aug 04, 2023	1,941.62	1,934.12	1,947.19	1,929.75

Data Source: Bloomberg

We call it a paradoxical week since gold prices should have ideally surged as a reaction to the rating cut on US debt. Fitch had dropped US debt a notch from AAA to AA+ to reflect its worsening fiscal outlook and governance issues. However, gold prices actually fell from $1,959.20/oz to $1,941.62/oz during the week. As the Treasury Secretary, Janet Yellen, suggested, the markets are not taking the rating cut too seriously. 

To encapsulate the week to August 04, 2023; brent crude rallied sharply while the rupee weakened against the dollar. But the big paradox was that a safe haven asset like gold hardly reacted to a lowering of US debt rating by Fitch. It was, perhaps, the wrong timing by Fitch when the US economy is showing buoyancy, but that is a separate debate altogether.