Weekly Musings – Macro Quartet for the week ending December 15, 2023

17 Dec 2023 , 01:16 PM

OIL FLAT BUT GOLD BOUNCES BACK

This week, oil prices were in a narrow range and stayed between $75/bbl and $76/bbl. Oil is already 22% down from recent peaks; largely driven by non-OPEC supply; from countries like Canada, China, Norway, Venezuela, and Brazil. OPEC and Russia are obsessed about cutting supplies, so non-OPEC countries are the new swing producers. Today, the US and Canada export as much crude oil as Saudi Arabia. Oil prices are not just about OPEC+ supply, US inventories and Chinese demand. Non-OPEC oil supply is the new joker in the pack. After all, 7 non-OPEC countries account for 22% of supplies and 25% of global crude oil exports. 

In the midst of all this chaos over oil, gold prices once again bounced back sharply. As global asset prices get stretched and currency values again come into question, gold is back in the reckoning. Also, with the US calling an end to hawkishness, concerns about the weakness of the US dollar are also back. That is why gold prices bounced back in the current week and closed above the $2,000/oz mark. The other major factor was the interplay of interest raters and gold. With interest rates likely to head lower at an aggressive pace, it is going to be lower opportunity cost of holding gold all over again. Gold was the surprise story this week.

INDIA BOND YIELDS TAPER, RUPEE STRENGTHENS

With the US Fed trending towards a more dovish scenario, bond yields in the US trended lower and rubbed-off on Indian bond yields. Inflation in India was expected to be closer to 5.7%, so actual CPI inflation at 5.55% was better than street estimates. That also pulled down the bond yields in India. Of course, the smart recovery in the IIP growth to 12.07% helped bond yields to get a boost as it only indicates that monetary policy will stay neutral.

If the bond yields tapered in the month, the other big story was on the currency front. The USDINR closed the week very near to the 83/$ mark. This is one of the best closing levels for the Indian rupee in recent weeks. The trigger came from domestic IIP at 12.07% and subdued inflation, but the real thrust for the Indian rupee came from the weakening dollar index. The dollar index fell sharply during the week, lending strength to the Indian rupee.

US BOND YIELDS FALL SHARPLY; DOLLAR INDEX PLUMMETS?

Two macro variables that set the trend for the global macros are the US bond yields and the US dollar index (DXY). Let us first look at the US 10-year bond yields. 

Date	Price (%)	Open (%)	High (%)	Low (%)
Dec 11, 2023	4.237	4.241	4.295	4.229
Dec 12, 2023	4.210	4.239	4.251	4.153
Dec 13, 2023	4.024	4.202	4.210	4.007
Dec 14, 2023	3.921	4.016	4.024	3.885
Dec 15, 2023	3.915	3.930	3.973	3.894

Data Source: Bloomberg

US bond yields, are a full 109 bps below recent peaks of 5%. This underlines the Fed view that the spike in bond yields had less to do with Fed hawkishness and more with yield curve alignment. During the week, the US bond yields fell sharply from 4.237% to 3.915% and was largely triggered by the US Fed bidding farewell to hawkishness. Well, it almost did! That was a clear indication that high levels of US bond yields were not sustainable, especially at a time when the US Fed was intent on cutting rates by 175 basis points over the next 2 years.

Date	Price (%)	Open (%)	High (%)	Low (%)
Dec 11, 2023	104.10	103.98	104.26	103.93
Dec 12, 2023	103.86	104.03	104.10	103.49
Dec 13, 2023	102.87	103.82	104.03	102.78
Dec 14, 2023	101.96	102.78	102.80	101.77
Dec 15, 2023	102.55	102.10	102.64	101.84

Data Source: Bloomberg

The other sharp fall in the week was the dollar index (DXY). The dollar index (DXY) is an index of dollar strength against a basket of hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. While the rupee may not be part of this basket of hard currencies, the dollar index has a direct bearing on the USDINR levels. It may be recollected that just a couple of months back, the dollar index had touched a level of 107, a level seen only thrice in the last 40 years. However, the latest Fed policy displayed a distinct shift towards dovishness and that has sharply weakened the US dollar. The dollar weakness was quite sharp, with the DXY falling from 104.10 levels to 102.55 levels by close of the week. That has already reflected in the Indian rupee strengthening, but we will come back to that later.

INDIA BOND YIELDS END SHARPLY LOWER THIS WEEK

Indian bond yields for the week to December 15, 2023 fell sharply from 7.281% levels to 7.163%. It was due to a mix of strong IIP data in India and the US Fed hinting at a dovish shift in its policy stance. The table captures bond yields over last 4 weeks.

Date	Price (%)	Open (%)	High (%)	Low (%)
Nov 20, 2023	7.252	7.230	7.257	7.224
Nov 21, 2023	7.269	7.247	7.272	7.237
Nov 22, 2023	7.247	7.277	7.277	7.245
Nov 23, 2023	7.253	7.258	7.263	7.246
Nov 24, 2023	7.272	7.278	7.291	7.266
Nov 27, 2023	7.272	7.278	7.291	7.266
Nov 28, 2023	7.273	7.258	7.277	7.253
Nov 29, 2023	7.252	7.258	7.258	7.237
Nov 30, 2023	7.279	7.250	7.287	7.248
Dec 01, 2023	7.290	7.293	7.298	7.279
Dec 04, 2023	7.271	7.264	7.276	7.262
Dec 05, 2023	7.262	7.275	7.275	7.256
Dec 06, 2023	7.248	7.251	7.254	7.243
Dec 07, 2023	7.236	7.248	7.248	7.233
Dec 08, 2023	7.266	7.249	7.271	7.226
Dec 11, 2023	7.281	7.287	7.287	7.273
Dec 12, 2023	7.275	7.279	7.280	7.267
Dec 13, 2023	7.259	7.262	7.269	7.257
Dec 14, 2023	7.194	7.222	7.224	7.185
Dec 15, 2023	7.163	7.204	7.206	7.155

Data Source: RBI

During the week, the bond yield opened at 7.281% but fell sharply in the last couple of days to close the week at 7.163%. India inflation was below expectations and the IIP was better than street estimates at 12.07%. But the real thrust to lower bond yields in India came from the shift in the stance of the US Fed, as it clearly hinted at 175 bps of rate cuts in the next 2 years. That was the trigger for the Indian bond yields to fall sharply in the week. It now remains to be seen if the benchmark 10-year bond yields can really hold above the 7% mark.

RUPEE BOUNCES TO A STRONG CLOSE

For the eleventh week in a row, the Indian rupee stayed above the 83/$ mark, but there was a difference. This week, the rupee opened at 83.350/$ and closed the week at 83.020/$ levels. This is one of the best performances by the Indian rupee in recent memory.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Nov 20, 2023	83.317	83.265	83.424	83.230
Nov 21, 2023	83.308	83.321	83.380	83.228
Nov 22, 2023	83.287	83.313	83.359	83.255
Nov 23, 2023	83.305	83.276	83.368	83.265
Nov 24, 2023	83.314	83.344	83.413	83.313
Nov 27, 2023	83.330	83.324	83.433	83.309
Nov 28, 2023	83.340	83.358	83.399	83.292
Nov 29, 2023	83.352	83.292	83.383	83.260
Nov 30, 2023	83.357	83.359	83.419	83.290
Dec 01, 2023	83.260	83.356	83.375	83.240
Dec 04, 2023	83.426	83.217	83.461	83.215
Dec 05, 2023	83.320	83.431	83.439	83.317
Dec 06, 2023	83.332	83.325	83.381	83.286
Dec 07, 2023	83.343	83.337	83.398	83.311
Dec 08, 2023	83.440	83.355	83.584	83.237
Dec 11, 2023	83.350	83.409	83.451	83.349
Dec 12, 2023	83.396	83.368	83.434	83.324
Dec 13, 2023	83.350	83.399	83.438	83.346
Dec 14, 2023	83.307	83.287	83.372	83.266
Dec 15, 2023	83.020	83.308	83.332	82.927

Data Source: RBI

The level of 83.02/$ is also one of the best levels of the rupee we have seen in the last few months. Typically, the Indian rupee has been closely linked to the dollar index, which has been relatively stable in recent weeks. However, in the current week, the dollar index fell sharply to the 102.55 levels, especially after the Fed hinted that it was shifting from a hawkish stance to a dovish stance. In addition, the crude prices have also remained stable at around the $75/bbl, indicating that it is the non-OPEC supply that is now playing the role of swing producer. Of course, FPIs infusing $6 billion in last 3 weeks also helped the rupee.

BRENT CRUDE FALLS AS POWER SHIFTS TO NON-OPEC PLAYERS 

In the previous 4 weeks, Brent crude fell from $90.15/bbl to $74.05/bbl. This week, the dollar appears to have found some equilibrium in the range of $75/bbl to $76/bbl. It is now less about US inventory drawdowns or OPEC supply cuts and more about non-OPEC supply. That is keeping the crude prices under check. Oil prices may not have fallen in this week, but the stability at a new normal is good enough; since oil is already 22% below recent peaks.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Nov 20, 2023	82.32	80.30	82.94	79.58
Nov 21, 2023	82.45	82.13	82.54	81.43
Nov 22, 2023	81.96	82.47	82.65	78.41
Nov 23, 2023	81.42	81.60	81.63	80.19
Nov 24, 2023	80.58	81.40	82.20	80.13
Nov 27, 2023	79.87	80.16	81.14	79.07
Nov 28, 2023	81.47	80.17	81.97	79.70
Nov 29, 2023	82.88	81.64	82.99	80.72
Nov 30, 2023	80.86	82.62	84.61	80.01
Dec 01, 2023	78.88	80.67	81.54	78.75
Dec 04, 2023	78.03	79.50	79.72	77.52
Dec 05, 2023	77.20	78.10	79.09	77.00
Dec 06, 2023	74.30	77.12	77.65	74.11
Dec 07, 2023	74.05	74.50	75.48	73.60
Dec 08, 2023	75.90	74.63	76.36	74.21
Dec 11, 2023	76.03	75.73	76.50	75.01
Dec 12, 2023	73.24	76.17	76.66	72.86
Dec 13, 2023	74.26	73.26	74.70	72.29
Dec 14, 2023	76.61	74.76	77.35	74.44
Dec 15, 2023	76.55	76.66	77.23	75.29

Data Source: Bloomberg

There is a paradigm shift happening in oil. For a long time, strength in oil came from reserves. With fossil fuels likely to be phased out in 50-60 years, oil reserves are losing importance. That shows why OPEC has a smaller role to play in price determination. Despite OPEC supply cuts, oil is under pressure as the swing producers are elsewhere.

GOLD BOUNCES BACK TO ABOVE $2,000/OZ

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)
Nov 20, 2023	1,977.19	1,980.39	1,985.26	1,965.20
Nov 21, 2023	1,998.37	1,977.49	2,007.52	1,977.34
Nov 22, 2023	1,989.72	1,998.69	2,006.90	1,986.89
Nov 23, 2023	1,991.79	1,990.15	1,999.19	1,989.01
Nov 24, 2023	2,002.85	1,994.20	2,003.68	1,991.51
Nov 27, 2023	2,013.64	2,002.78	2,018.14	2,000.67
Nov 28, 2023	2,040.89	2,013.94	2,043.00	2,011.60
Nov 29, 2023	2,044.59	2,041.24	2,052.09	2,035.05
Nov 30, 2023	2,035.75	2,044.80	2,047.59	2,031.84
Dec 01, 2023	2,070.90	2,034.49	2,075.34	2,033.75
Dec 04, 2023	2,029.74	2,071.25	2,135.90	2,020.34
Dec 05, 2023	2,019.42	2,030.15	2,041.33	2,010.02
Dec 06, 2023	2,024.90	2,019.74	2,036.30	2,017.27
Dec 07, 2023	2,028.34	2,025.30	2,039.93	2,020.26
Dec 08, 2023	2,004.49	2,028.24	2,034.07	1,994.81
Dec 11, 2023	1,981.30	2,003.60	2,008.72	1,975.95
Dec 12, 2023	1,979.44	1,981.59	1,996.80	1,977.19
Dec 13, 2023	2,026.39	1,979.74	2,027.55	1,973.09
Dec 14, 2023	2,035.53	2,026.59	2,047.98	2,024.33
Dec 15, 2023	2,018.19	2,035.80	2,045.55	2,015.68

Data Source: Bloomberg

Gold prices resumed their rally after the fall last week. Effectively, gold rallied from $1,981/oz to $2,018/oz in the current week, indicating that prices above $2,000/oz may be the new normal. The big trigger for gold prices this week came from the Fed turning dovish and hinting at 175 bps of rate cuts by end of 2025. That means, the opportunity cost of holding gold comes down sharply, so further rally cannot be ruled out in gold. For now, gold has retained its sheen as an asset class.