Weekly Musings – Macro Quartet for the week ending August 25, 2023

28 Aug 2023 , 07:31 AM

It was another mixed week for the macro quartet for the week ended August 25, 2023. Bond yields were flat for the week, and closed just about 1 basis point lower than where they had closed in the previous week. However, bond yields are now firmly above the 7.2% mark. The two macros that really saw a shift during the week were the Indian rupee, which strengthened sharply on the back of RBI support, and gold prices which again bounce above the $1,900/oz mark. The crude oil prices in the Brent market had almost gotten to the threshold of $87.60/bbl a couple of weeks ago, but in the last couple of weeks, they have stabilized around the $84.40/bbl mark. Constraints are still visible on the supply side but there is also pressure on the demand side. China growth is not really picking up and the strength in the US dollar is also working against the crude oil prices.

CHINA CONSUMPTION IS THE WEAK LINK IN THE COMMODITY STORY

There is a reason why there demand concerns on the oil front. This is actually true of all commodities and obviously it has to with China. In the last couple of weeks, China has seen MOM growth falter and the bigger concern is the state of the real estate companies. Evergrande is on the verge of folding up and there are more real estate companies to follow. But the real problem in China is that credit is tightening. It is not just that banks are averse to extending credit, but also that consumers are averse to taking on credit. 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 in the US, which is likely to spill to other economies too. The heightened uncertainty in markets has led to gold bouncing back above the $1,900/oz mark, since gold normally makes hay when the global macros become difficult. However, at Jackson Hole, Jerome Powell stuck to his hawkish stance and that should put the ceiling on gold prices. After all, higher interest rates have never been conducive to gold since it raises the opportunity cost of holding gold.

BOND YIELDS STAY FLAT AROUND 7.2% IN WEEK TO AUGUST 25, 2023

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 stayed hawkish even as the RBI held rates at 6.5%. This was repeated in October monetary policy also. As a recent, the bond yields have gone up sharply and that has been worsened by higher than expected inflation. Bond yield closed the week to August 25, 2023 at 7.206%, compared to 7.214% in the previous week. Consumer inflation in India spiked to 7.44% in July and most economists are expecting the rate of inflation to stay elevated in the months of August and September also; at least till the food supplies reach the mandis. Markets are also betting that the RBI will not be able to continue the rate pause for much longer, and will have to hike the rates sooner rather than later.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Aug 21, 2023	7.220	7.233	7.233	7.210
Aug 22, 2023	7.218	7.244	7.244	7.211
Aug 23, 2023	7.194	7.222	7.222	7.193
Aug 24, 2023	7.193	7.178	7.197	7.175
Aug 25, 2023	7.206	7.241	7.241	7.198

Data Source: RBI

There were diverse factors playing on the bond yields resulting in a flat week for bond yields. On the hawkish side, the US Fed minutes has stayed hawkish and the RBI MPC minutes also saw members expressing concerns over inflation. But the bigger factor was the CPI inflation in India spiking to 7.44% with food inflation crossing 11%. To add to it, inflation is expected to stay elevated till September. All these are hawkish signals for the bond  yields. However, there are mitigating factors too. The liquidity still remains surplus in the financial system and that is keeping rates subdued in a range. The banking sector downgrade by Moody’s and the incremental CRR imposed in the monetary policy are likely to reduce the need for rate hikes. Above all, the cancellation of the Rs2,000 denomination notes, has added trillions of rupees to the liquidity. At a net level, the combined effect is that the bond yields on the benchmark paper are fighting in a narrow range.

RUPEE STRENGTHENS IN THE WEEK TO AUGUST 25, 2023 ON RBI INTERVENTION

After two weeks of consistent weakening of the rupee, the Indian currency managed to strengthen meaningfully against the US dollar. From a low of Rs83.16/$, the rupee jumped to Rs82.50/$ level in the week and closed at around the Rs82.63/$ levels. There were 2 key factors that helped the rupee strengthen during the week. The first factor was the steady to lower oil prices with Brent Crude hovering around $84.40/bbl. It has been at this level for the last 2 weeks, after touching a peak of $87.65/bbl. Since India has an 85% import content in its crude basket, this sobering of oil price has helped the rupee. The real important factor that helped the rupee strengthen was the relentless support from the RBI. The RBI normally defends the rupee by selling dollars in the spot market, which is what the RBI did aggressively in the previous week. That will impact the reserves, but that is another story.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Aug 21, 2023	83.090	83.193	83.217	83.021
Aug 22, 2023	83.040	83.113	83.122	82.909
Aug 23, 2023	82.508	83.082	83.090	82.449
Aug 24, 2023	82.580	82.579	82.646	82.359
Aug 25, 2023	82.637	82.605	82.740	82.532

Data Source: RBI

The decisive strength in the rupee is admirable for two reasons. Firstly, during the week, the dollar index (DXY) actually strengthened to above the 104 levels. That means, the actual rupee strength was a lot more and only got slightly blunted due to the strong DXY. Secondly, this rupee strength comes at a time when the Fed officials continue to remain hawkish, something that is normally positive for the dollar value.

BRENT CRUDE STEADY AT $84.40/BBL FOR THE WEEK TO AUGUST 25, 2023

Brent Crude peaked at around the $87.55/bbl levels about two weeks back and has since trended lower. The whole of this week, the price of Brent crude stayed in a range between $84/bbl and $85/bbl. It is once again a case of conflicting forces playing on the crude prices. While the supply side concerns still persist, it is demand that is worrying markets. The table below captures the gist of the crude oil story.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Aug 21, 2023	84.46	84.80	85.86	84.31
Aug 22, 2023	84.03	84.46	84.66	83.85
Aug 23, 2023	83.21	83.99	84.26	81.94
Aug 24, 2023	83.36	82.95	83.62	81.97
Aug 25, 2023	84.48	83.26	84.97	82.67

Data Source: Bloomberg

On the supply side, the supply cuts by Russia and OPEC and the sharply falling inventories in the US are signals that supply pressures remains. However, on the demand side, China has emerged as a major concern. It is not only that GDP on a MOM basis in China is one of the lowest. It is also that consumer spending in China has suddenly turned wallet-shy as people are using an uncertain environment to stash away for a rainy day. That is not helping demand; and remember China accounts for half of global demand for most commodities. 

GOLD PRICE PICKS UP IN THE WEEK TO AUGUST 25, 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 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
Aug 21, 2023	1,893.94	1,889.40	1,899.05	1,884.50
Aug 22, 2023	1,897.00	1,895.09	1,905.05	1,888.60
Aug 23, 2023	1,914.31	1,897.80	1,920.94	1,897.23
Aug 24, 2023	1,916.60	1,914.15	1,923.94	1,911.35
Aug 25, 2023	1,914.53	1,917.80	1,923.09	1,903.40

Data Source: Bloomberg

After several weeks of weakening gold prices, this week saw the gold prices bounce back from $1,889/oz to $1,914/oz. Spot gold is now once again above the $1,900/oz mark, although it is quite far from the $2,000/oz mark it had touched a few months back. A series of events like the Fitch downgrade, Moody’s downgrade and the worsening geopolitics have not really helped gold prices recover  meaningfully. One reason could be the strong dollar, since gold is always denominated in US dollars. That is keeping a lid on gold prices. Also, high bond yields threaten to raise the opportunity cost of holding gold.

In the coming week, the rupee strength will largely predicate on how long the RBI can continue to intervene. Domestic bond yields are likely to remain subdued as any Fed hawkishness is likely to be neutralized by ample liquidity in India. Regarding crude oil and gold, they will continue to be a play on the US Dollar.