Weekly Musings – Macro Quartet for the week ending August 18, 2023

20 Aug 2023 , 08:56 AM

It was, once again, mixed week for the macro quartet for the week ended August 18, 2023. Bond yields were up marginally during the week, despite the sharply higher inflation as that was already factored into the yields over the last few weeks. However, bond yields are now firmly above the 7.2% mark. The two macros that really saw a shift during the week were crude oil and the Indian rupee and both for a different reasons altogether. The crude oil prices in the Brent market had almost gotten to the threshold of $87/bbl but this week it fell sharply to around the $84/bbl level. In a little over 2 months, the price of Brent Crude has rallied from $71/bbl to $87/bbl and is now back below $84/bbl due to demand concerns. It looks like the reality of weak demand may start to dictate supply economics once again. US oil inventories continue to fall at a very rapid rate.

In the aftermath of Fitch downgrading US debt and Moody’s downgrading US small and medium banks, there are fears of a sharp tightening of consumer credit. This is likely to constrain consumption spending and make demand weaker in an economy that is largely consumption driven. Ironically, gold which normally benefits from global uncertainty, dipped sharply below the $1,900/oz mark. The promise of higher bond yields was raising the opportunity cost of holding gold while tight credit is never too conducive to gold purchases.

BOND YIELDS STAY ABOVE 7.2% IN WEEK TO AUGUST 18, 2023

The table below captures the bond yields on the benchmark 10-year bond in India over the past 4 weeks on a rolling basis. After peaking at 7.5% in April and May, the 10-year bond yields fell below 7% yields in the first week of June. However, the June RBI policy had a hawkish undertone, despite the pause on rates. In recent weeks, the bond yields have gone up sharply due to the higher than expected inflation over the last 2 months. That is expected to make the RBI also relatively hawkish. Bond yield closed the week to August 18, 2023 at 7.214%, after touching a high of 7.25 during the week. Markets are now betting that the RBI will not be able to continue the rate pause for much longer.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Aug 14, 2023	7.209	7.226	7.226	7.205
Aug 15, 2023	7.209	7.226	7.226	7.205
Aug 16, 2023	7.209	7.226	7.226	7.205
Aug 17, 2023	7.250	7.252	7.256	7.243
Aug 18, 2023	7.214	7.240	7.241	7.209

Data Source: RBI

There were diverse factors playing on the bond yields leading to a higher closing for the week. On the hawkish side, the US inflation up 20 bps at 3.2% had its impact. But the bigger factor was the CPI inflation in India spiking to 7.44% with food inflation at over 11%. Now, inflation is expected to remain elevated in August and September also. Secondly, the tightening liquidity in global markets due to Moody’s downgrading US banks also spiked bond yields as did the faster than expected taper of the bond book by the US Fed. However, in India liquidity is still ample and that is the reason the government has now imposed incremental CRR for deposits in a certain date range to suck out the liquidity from the surrender of Rs2,000 denomination note. 

Rupee weakens on downgrades, inflation, and crude spike in the week

This is the second week in succession that the rupee has weakened sharply to an all-time low of Rs83.16/$. In just the last 3 weeks, the USDINR has weakened from Rs82.15/$ to a level of Rs83.16/$. That is a sharp fall in 3 weeks. There have been multiple reasons for the weakening of the rupee. The downgrades by Fitch and Moody’s have created a major risk-off trade in the market with funds flowing out of EMs towards US treasuries. for EMs. That has strengthened the dollar, which his evident from the Dollar Index (DXY) rising above the 103.40 mark. Secondly, the spike in oil prices has also weakened the rupee as it threatens the current account deficit (CAD). Domestic inflation at 7.44% is also subtly devaluing the current in terms of purchasing power parity..

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Aug 14, 2023	83.170	82.895	83.301	82.895
Aug 15, 2023	83.212	83.185	83.467	83.170
Aug 16, 2023	83.209	83.240	83.443	83.085
Aug 17, 2023	83.130	83.222	83.268	82.989
Aug 18, 2023	83.157	83.099	83.276	82.983

Data Source: RBI

One thing is clear; the RBI did not intervene at the 83/$ levels, which explains why the rupee fell so swiftly and with such less resistance. But weaker rupee could be structural as India also loses from a strong dollar as flows return to the US. India now faces imported inflation since Brent is around $85/bbl and that is putting pressure on the trade deficit and the current account deficit. Both these impact the rupee in a vicious cycle. RBI has typically intervened at regular intervals and it remains to be seen whether the RBI will now come in at Rs84/$ or at higher levels.

Brent Crude tapers in the week to below $85/bbl 

In the last few weeks, Brent had decisively broken out of the rather constricted range of $70/bbl to $80/bbl. It had crossed $87/bbl in the previous and was looking all set to cross $90/bbl. However, the rally was halted for multiple reasons. Firstly, there is the fear that global demand may get hit by recession fears and that is not great news for oil prices. Secondly, there has been a lot of long unwinding by traders after the 25% rally and that also brough down the crude prices. Thirdly, a strong dollar is never a great feeling for oil prices as oil is denominated in dollar terms. After 6 successive weeks of rise in crude prices, the latest week to August 18, 2023 saw a fall in oil prices. However, OPEC and Russia still appear to have the upper hand in the supply side economics.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Aug 14, 2023	86.21	86.53	86.71	85.50
Aug 15, 2023	84.89	86.12	86.68	84.29
Aug 16, 2023	83.45	85.20	85.36	83.13
Aug 17, 2023	84.12	83.20	84.88	83.05
Aug 18, 2023	84.80	83.88	85.08	83.33

Data Source: Bloomberg

During the week, the price of Brent Crude closed on Friday at a level of $84.80/bbl. Over the last 4 months, the price of Brent crude has gone up sharply each week. However, with India reaching its Russia limits, it has to now depend on the Middle East for oil and that itself is likely to be price accretive. The only issue is whether demand can really match up to this price and that does look tough at this point of time, when central banks are hawkish and there are aggressive talks of a likely slowdown in US growth. 

Gold price still paradoxical in week to August 18, 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 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
Aug 14, 2023	1,907.90	1,913.67	1,916.55	1,902.20
Aug 15, 2023	1,901.56	1,907.40	1,912.19	1,896.15
Aug 16, 2023	1,891.76	1,901.59	1,907.90	1,891.30
Aug 17, 2023	1,888.89	1,892.20	1,903.90	1,884.50
Aug 18, 2023	1,889.42	1,891.35	1,896.87	1,886.84

Data Source: Bloomberg

This is the third paradoxical week when gold prices fell at a time when the news flows justified a spike in gold prices. Spot gold in this week actually fell below $1,900/oz. Ideally, Fitch downgrading US debt a notch from AAA to AA+ and Moody’s downgrading small and medium sized US banks should have ideally helped gold prices. However, in the last few weeks the strong dollar has led to a sharp fall in price of gold. Clearly, risk-off for investors appears to be about moving away from EMs, but not about investing in gold. After all, high bond yields add to the opportunity cost of gold, which explains the fall in gold prices. 

A strong dollar is also not conducive to gold prices since gold prices are denominated in dollars. To sum it up, the Brent rally has been halted. However, the rupee weakened to all-time lows in this week while gold prices have fallen sharply. Bond yields in India remain steady, although it is veering towards the higher side.