Weekly Musings – Macro Quartet for the week ending July 07, 2023

8 Jul 2023 , 12:52 PM

Bond  yields settled higher around the 7.16% mark towards the close of the week compared to 7.11% in the previous week. Bond yields have been trending higher after the RBI MPC had hinted at higher inflation in the aftermath of the weak monsoons. Fed minutes also added to this trend of yields hardening. It was a week when the rupee came under pressure despite very strong FPI flows in the week of more than $2.6 billion. The rupee was hit by the sharp spike in the prices of Brent crude

Crude spike in the week from $74/bbl to well above $78/bbl and this was largely triggered by warnings of supply cuts from the OPEC and Russia as well as the US oil inventories depleting faster than normal. The better than expected labour data also boosted oil prices as the fears of recession were gradually waning However, there is still concern over China demand and that can be a resistance for oil prices. Lastly, gold continues to be quiet but jumped closer to $1,925/oz during the week as China threatened another trade war with the US by banning the export of metals that go into the making of chips. After all, gold has traditionally given its best performance in terms of global financial and geopolitical uncertainty. That was partially visible during the week.

Bond yields inch higher marginally higher to 7.16% 

The table below captures the bond yields on the benchmark 10-year bond in India. After peaking at around 7.5%, the bond yields traded below 7% yields in the first week of June. However, post the RBI policy, the yields bounced back as the tone of the RBI still remained hawkish. Bond yield closed the week to July 07, 2023 at around 7.16%. Inflation also remains an X-factor for bond yields trajectory.

Date	Price (%)	Open (%)	High (%)	Low (%)
Jun 12, 2023	7.016	7.048	7.048	7.015
Jun 13, 2023	7.002	6.998	7.012	6.998
Jun 14, 2023	7.011	7.020	7.021	7.008
Jun 15, 2023	7.036	7.027	7.043	7.020
Jun 16, 2023	7.034	7.041	7.057	7.027
Jun 19, 2023	7.053	7.055	7.061	7.028
Jun 20, 2023	7.059	7.063	7.069	7.051
Jun 21, 2023	7.067	7.063	7.071	7.049
Jun 22, 2023	7.086	7.063	7.093	7.058
Jun 23, 2023	7.074	7.095	7.098	7.063
Jun 26, 2023	7.066	7.077	7.085	7.063
Jun 27, 2023	7.063	7.091	7.091	7.057
Jun 28, 2023	7.056	7.065	7.071	7.047
Jun 29, 2023	7.056	7.065	7.071	7.047
Jun 30, 2023	7.110	7.086	7.117	7.085
Jul 03, 2023	7.117	7.113	7.122	7.100
Jul 04, 2023	7.119	7.127	7.127	7.108
Jul 05, 2023	7.105	7.122	7.122	7.102
Jul 06, 2023	7.147	7.132	7.151	7.130
Jul 07, 2023	7.159	7.171	7.175	7.144

Data Source: RBI

To understand the bounce in yields, we need to quickly recap the Fed minutes announced during the week. The FOMC members were divided over the timing of rate hikes, the pace and the need to front end the rate hikes. However, there was still consensus over the fact that US rates had to go up by another 50 to 75 basis points to bring inflation under control. The hawkish tone was quite evident in the minutes. Also, the hawkish tone got reinforced by the fact that better than expected GDP numbers for Q1 and the unemployment data are now almost ruling out any hard landing. Hence that will not be a concern any longer.

The one domestic factor that drove up yields in India was the inflation expectations factor. With monsoons weaker than expected and the delayed sowing likely to hit Kharif output, the eventual impact is likely to be food inflation accretive. Hence, the higher yields indicate that a spike in inflation could still call for another round of rate hike. At least, the RBI members in the MPC have indicated that the RBI was not done with rate hikes.

Rupee closes weak on crude oil concerns

After giving positive returns in June 2023, the rupee weakened to about 82.7/$ levels in the first week of July. One factor was that the Fed minutes did hint at a continued hawkish tone by the FOMC members. That put pressure on the rupee although the dollar did not show any signs of strength during the week with the dollar index still stuck at the 102.20 levels The big positive for the rupee came from sustained FPI inflows. FPIs have already infused $11 into Indian equities in May and June combined and the first week of July saw another $2.67 billion being infused into Indian equities. 

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Jun 12, 2023	82.390	82.463	82.504	82.400
Jun 13, 2023	82.229	82.401	82.473	82.152
Jun 14, 2023	81.950	82.242	82.335	81.897
Jun 15, 2023	81.900	82.045	82.279	81.905
Jun 16, 2023	81.910	81.913	82.030	81.841
Jun 19, 2023	81.910	81.976	82.011	81.879
Jun 20, 2023	82.000	81.915	82.173	81.915
Jun 21, 2023	81.930	81.992	82.135	81.940
Jun 22, 2023	81.950	81.961	82.017	81.878
Jun 23, 2023	81.980	81.927	82.089	81.926
Jun 26, 2023	81.970	81.971	82.086	81.935
Jun 27, 2023	81.983	82.030	82.050	81.934
Jun 28, 2023	82.020	81.991	82.099	81.966
Jun 29, 2023	82.100	82.037	82.134	81.997
Jun 30, 2023	82.091	82.090	82.135	81.997
Jul 03, 2023	81.940	82.061	82.072	81.753
Jul 04, 2023	81.946	81.975	82.045	81.868
Jul 05, 2023	82.397	82.047	82.413	81.994
Jul 06, 2023	82.758	82.398	82.821	82.297
Jul 07, 2023	82.654	82.769	82.769	82.546

Data Source: RBI

After staying stronger than Rs82/$ for most of the previous 3 weeks, the latest week saw the rupee go decisively above the Rs82/$ mark. The CME Fedwatch is now assigning a 94% probability for a rate hike in July, which could strengthen the dollar. However, the real reason for the weakness in the rupee could be the sudden spike in the crude oil prices. Brent jumped from $74/bbl to $78.3/bbl and that was enough to spook the rupee. The Indian merchandise trade deficit is largely driven by oil deficit and any figure above $80/bbl starts to put direct pressure on the balance of trade and also on the rupee.

Oil prices bounce on supply and demand issues

It is now almost two months since the price of Brent Crude oil stayed in the range of $70 to $80/bbl. That is largely due to two contradicting factors at play. The Wagner rebellion in Russia may have subsided but it has raised the spectre of geopolitical uncertainty all over again. Now, the OPEC and even Russia have warned about a supply crunch. In addition, the US inventories are falling sharply and US GDP for Q12023 bounced to 2%. These factors helped crude oil prices to stay buoyant. In the latest data flow, unemployment fell from 3.7% to 3.6% indicating that the recession in the US now looked less likely. However, China demand remains a major issue and that could dampen oil prices to a large extent. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Jun 12, 2023	71.84	74.87	74.87	71.58
Jun 13, 2023	74.29	72.11	74.66	71.94
Jun 14, 2023	73.20	74.05	75.49	73.03
Jun 15, 2023	75.67	73.41	75.97	72.91
Jun 16, 2023	76.61	75.64	76.74	75.08
Jun 19, 2023	76.09	76.40	76.93	75.34
Jun 20, 2023	75.90	76.12	77.15	74.51
Jun 21, 2023	77.12	75.54	77.24	75.52
Jun 22, 2023	74.14	77.03	77.20	73.59
Jun 23, 2023	73.85	74.02	74.44	72.11
Jun 26, 2023	74.18	74.50	74.85	73.42
Jun 27, 2023	72.26	74.28	74.90	72.08
Jun 28, 2023	74.03	72.62	74.20	71.57
Jun 29, 2023	74.34	73.72	74.98	73.39
Jun 30, 2023	74.90	74.22	75.40	74.21
Jul 03, 2023	74.65	75.11	76.60	74.56
Jul 04, 2023	76.25	74.89	76.29	74.74
Jul 05, 2023	76.65	76.03	76.95	75.30
Jul 06, 2023	76.52	76.64	77.08	75.05
Jul 07, 2023	78.31	76.51	78.53	76.05

Data Source: Bloomberg

During the week, the price of Brent Crude spiked from $74.65/bbl to $78.3/bbl. It looks like the supply concerns may have just got the better of demand concerns in the previous week. India has reached peak Russian imports at 42% and further hike in Russia share looks unlikely. That means; supply pressures could come from OPEC and Russia while falling US oil inventories are also a concern. Overall, crude looks set to scale closer to $80/bbl and that would be a concern for the rupee also.

Gold prices see some uncertainty bounce

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)
Jun 12, 2023	1,956.92	1,960.25	1,967.55	1,948.80
Jun 13, 2023	1,943.33	1,957.69	1,970.74	1,939.99
Jun 14, 2023	1,942.99	1,943.49	1,960.41	1,939.73
Jun 15, 2023	1,957.65	1,943.44	1,960.34	1,925.30
Jun 16, 2023	1,957.36	1,957.68	1,968.00	1,953.42
Jun 19, 2023	1,950.12	1,957.99	1,958.93	1,947.80
Jun 20, 2023	1,935.91	1,950.90	1,956.87	1,929.77
Jun 21, 2023	1,932.26	1,935.42	1,939.55	1,919.34
Jun 22, 2023	1,913.52	1,932.09	1,935.00	1,912.34
Jun 23, 2023	1,921.36	1,913.80	1,937.10	1,910.24
Jun 26, 2023	1,922.85	1,924.30	1,933.48	1,921.59
Jun 27, 2023	1,913.35	1,923.21	1,930.85	1,911.19
Jun 28, 2023	1,907.42	1,913.59	1,917.24	1,902.84
Jun 29, 2023	1,908.15	1,908.80	1,913.15	1,893.01
Jun 30, 2023	1,919.57	1,908.53	1,922.90	1,900.56
Jul 03, 2023	1,921.43	1,919.40	1,931.09	1,910.10
Jul 04, 2023	1,925.09	1,921.78	1,930.84	1,919.90
Jul 05, 2023	1,917.32	1,925.90	1,935.17	1,914.48
Jul 06, 2023	1,910.80	1,916.05	1,927.69	1,902.68
Jul 07, 2023	1,925.30	1,911.67	1,934.76	1,909.70

Data Source: Bloomberg

In the last 2 months, spot gold struggled to sustain above $2,000/oz. Spot gold prices had crossed $2,000/oz in early May 2023, when concerns over a likely US debt default had boosted gold prices. In the last few weeks, gold remained straitjacketed in the range between $1,900/oz and $1,920/oz; but in the latest week it has broker above that after China triggered fresh trade war by banning exports of key metals that go into chips. That has helped gold prices rally a bit.

To sum up the week to July 07, 2023; brent crude rallied sharply as did the price of gold crossing above the $1,925/oz. However, the rupee weakened, largely on account of Fed hawkishness and also due to higher crude oil prices during the week. The spike in bond yields underlines the reality that rate hikes may be on hold, but not done yet.