Weekly Musings – Macro Quartet for the week ending August 11, 2023

16 Aug 2023 , 09:51 AM

It was, once again, mixed week for the macro quartet for the week ended August 11, 2023. Bond yields were flat through the week, in the absence of any fresh triggers, and closed the week almost where it began. However, bond yields are now firmly above the 7% mark. The two macros that really saw a shift during the week were crude oil and the Indian rupee. The crude oil prices where sharply  higher in the week and have now gotten close to $87/bbl in the Brent markets. In a little over 2 months, the price of Brent Crude has rallied more than 22% from $71/bbl to nearly $87/bbl. While the demand has not been too robust in the last few weeks with weakness in the Euro Zone and in China, there are concerns on the supply front. These supply concerns are keeping the brent crude prices under pressure.

Here is the story of oil on the supply front. OPEC has stuck to supply cuts while Russia is not able to supply the same quantity in the market at higher prices due to the sanctions based restrictions. The US has seen consistent drawdowns in its inventories and that has put pressure on oil prices. The weakness in oil and the downgrades by Fitch and Moody’s led to a sharp fall in the rupee, taking it almost to the doorstep of Rs83/$. Ironically, gold which normally benefits from global uncertainty, was almost static despite the downgrades and even fell sharply in the current week. But, more on that later!

BOND YIELDS INCH HAVE A FLAT WEEK TO AUGUST 11, 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 10-year bond yields traded below 7% yields in the first week of June. However, post the June RBI policy and the hawkish tone implied in the policy, the yields bounced back to above 7%, where it has stayed since. Bond yield closed the week to August 11, 2023 at 7.198%; almost exactly at the point where it started the week. While the previous week had been a week of rising yields, the latest week to August 11, 2023 was a week of static yields. The RBI holding rates in the August policy announcement also kept the bond yields in check.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Aug 07, 2023	7.197	7.170	7.200	7.156
Aug 08, 2023	7.168	7.186	7.191	7.163
Aug 09, 2023	7.178	7.171	7.181	7.161
Aug 10, 2023	7.154	7.193	7.193	7.152
Aug 11, 2023	7.198	7.179	7.202	7.179

Data Source: RBI

There were diverse factors playing on the bond yields leading to a flat closing for the week. On the hawkish side, the US inflation came in higher and India consumer inflation is likely to be elevated in July and August. Secondly, the tightening liquidity in global markets due to Moody’s downgrading US banks is also a reason for bond yields to stay higher, especially in the light of tighter liquidity. However, there were some mitigating factors too. In India liquidity is still ample and that is help yields to stay low. Also, the RBI has kept its stance neutral despite the spike in inflation in recent months. In short, the diverse factors playing on the bond yields resulted in largely flat to neutral bond yields for the week. One view also is that the higher crude oil prices may not be able to sustain unless global demand from powerful markets like the Euro Zone and China pick-up. That remains an X-factor.

Rupee weakens on downgrades and crude spike in week to August 11, 2023

This is the second week in succession that the rupee has weakened sharply. In just the last 2 weeks, the USDINR has weakened from Rs82.15/$ to a level of Rs82.87/$. That is a fairly sharp fall in just two weeks. There have been multiple reasons for the same. The spate of downgrades by Fitch and Moody’s have created a major risk-off risk for EMs. That has strengthened the dollar, which his evident from the Dollar Index (DXY) rising above the 103 mark. Secondly, the rupee has also weakened due to a spike in oil prices as that is likely to have a deep impact on the trade deficit and also the current account deficit (CAD). Lastly, the US Fed continues to be very hawkish while the RBI has maintained a dovish stance. That is likely to favour the dollar over the rupee and that is surely weakening the rupee.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Aug 07, 2023	82.750	82.741	82.785	82.678
Aug 08, 2023	82.853	82.760	82.984	82.748
Aug 09, 2023	82.844	82.878	82.880	82.783
Aug 10, 2023	82.616	82.840	82.861	82.590
Aug 11, 2023	82.870	82.789	82.911	82.725

Data Source: RBI

The big question now is whether the RBI intervenes at the 83/$ levels or would it allow the rupee to drift lower considering the high inflation levels in India? India is up against imported inflation since Brent is inching close to $87/bbl and that is putting pressure on the trade deficit and the current account deficit. Both these are not exactly salutary for rupee strength. RBI has typically intervened at regular intervals and it remains to be seen what the RBI does this time around. After all, it has just spruced up its forex reserves, which still remains well below the peak levels.

Brent Crude inches closer to $87/bbl 

In the last few weeks, Brent has decisively broken out of the range of $70/bbl to $80/bbl and is now inching close to the $90/bbl mark. Of course, for that it will have to breach above the $87 and $89/bbl mark, which could be stiff resistances for Brent Crude. This marks the 6th week in succession that the crude oil prices have been up. The equation in oil is shifting from favouring demand to favouring supply, which is where the OPEC and Russia supplies could have the upper hand. However, if the dollar strengthens from current levels, that would subdue oil prices as it is expressed in dollars by default.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Aug 07, 2023	85.34	86.23	86.73	85.03
Aug 08, 2023	86.17	85.79	86.34	83.32
Aug 09, 2023	87.55	86.00	87.65	85.91
Aug 10, 2023	86.40	87.39	88.10	86.20
Aug 11, 2023	86.81	86.37	87.35	85.84

Data Source: Bloomberg

During the week, the price of Brent Crude closed on Friday at a level of $86.81/bbl, after briefly crossing the $87/bbl mark during the day. What is more interesting is that over the last 4 months, the price of Brent crude has gone up sharply each week. With India touching peak possible imports from Russia, it has to return to Middle East oil, which would certainly put pressure on core oil prices. In addition, the trend of falling US oil inventories is continuing and that is also putting pressure on the crude oil prices. The only issue is whether demand would match up to this price and that does look tough at this point of time. For India, the concern is its disproportionate 85% dependence on imported crude to meet its aggressive refining demand. That makes the trade book the CAD and the Indian rupee very vulnerable to sudden spikes in oil prices.

Gold price still paradoxical in week to August 11, 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 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
Aug 07, 2023	1,936.39	1,942.59	1,946.81	1,931.53
Aug 08, 2023	1,924.82	1,936.76	1,938.15	1,922.50
Aug 09, 2023	1,914.59	1,925.16	1,932.48	1,914.05
Aug 10, 2023	1,912.06	1,914.94	1,930.11	1,911.73
Aug 11, 2023	1,913.32	1,912.65	1,921.15	1,910.94

Data Source: Bloomberg

This is the second paradoxical week since gold prices should have 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, while Moody’s downgraded US banks. This should have helped gold prices, but in the last 2 weeks, the price of gold has fallen from $1,959.20/oz to $1,913.32/oz. Clearly, risk off in this seems to be about moving away from EMs, but not moving towards gold. After all, high bond yields add to the opportunity cost of gold, which explains the fall in gold prices.

To encapsulate the week to August 11, 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 lowering of US debt rating by Fitch and later Moody’s downgrading US banks. Clearly, high interest rates are not favouring gold too much.