Weekly Musings – Macro Quartet for the week ending July 14, 2023

17 Jul 2023 , 11:00 AM

Bond  yields tapered lower to around the 7.09% mark towards the close of the week compared to 7.16% in the previous week. Bond yields trended lower this week after the US consumer inflation for June came in lower than expected at 3%. The dovish indications coming from the inflation data also weakened the US dollar as the dollar index (DXY) dipped below the 100 mark during the week. That gave strength to the Indian rupee as it hovered between 81.5/$ and 82.2/$ in the current weak. In addition, the strong FPI flows also helped prop up the rupee. In fact, foreign portfolio investors have infused nearly $15 billion into Indian equities in the last 75 days, which has given some support to the Indian rupee.

However, it was also a week when crude oil spiked. In fact, Brent Crude closed for 2 days in the week above the $80/bbl mark and even towards the end of the week Brent Crude remained tantalizing close to $80/bbl. The spike in crude was largely driven by supply cuts by the OPEC and sharper than expected fall in US crude oil inventories as reported by the American Petroleum Institute (API). However, the stronger than expected China growth data is likely to boost demand for oil and keep oil prices elevated during the week. Lastly, gold prices bounced sharply during the week, although it still stays well below the $2,000/oz mark. China threatened another trade war with the US by banning the export of metals that go into the making of chips. Apart from this geopolitical risk, the lower inflation also hinted at lower bond yields, which would reducing the opportunity cost of holding gold. That helped the rally in gold prices during the week. 

Bond yields taper during the week to 7.09% 

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 and the hawkish tone, the yields bounced back to above 7%, where it has stayed. Bond yield closed the week to July 14, 2023 at around 7.09% after closing at 7.16% in the previous week. Inflation remains an X-factor for yields trajectory.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Jul 10, 2023	7.149	7.168	7.168	7.138
Jul 11, 2023	7.095	7.120	7.123	7.088
Jul 12, 2023	7.118	7.091	7.122	7.087
Jul 13, 2023	7.071	7.099	7.099	7.064
Jul 14, 2023	7.089	7.060	7.095	7.060

Data Source: RBI

The data point that actually led to softening of the bond yields in the week was the lower than expected consumer inflation announced by the US for June 2023. At 3%, the inflation is down 190 bps in just 2 months and it was well below the Reuters consensus estimates. While this may not change the rate hike decision in the July meeting of the FOMC, the CME Fedwatch is betting that it may put an earlier cap on rate hikes and also extend the rate cuts for longer in 2024. That is what the lower yields were indicating.

However, domestic risks to the interest rates remain in the form of weak monsoons followed by a deluge destroying crops. India inflation spiked from 4.25% in May to 4.81% in June 2023. Also, higher subsidies may put pressure on the government to expand its borrowings and that could also put pressure on the yields. Hence, any fall in yields would be limited due to the domestic risks to yields.

Rupee gains from weakness in the US dollar

After weakening sharply in the week to July 07, 2023, the rupee showed strength in the latest week to July 14, 2023. That was hardly surprising as the dollar index weakened sharply during the week while the FPI flows kept the rupee robust in India. The rupee gained and closed near the 82/$ mark for the week. Of course, the week ahead will not just be about rupee strength but also about dollar index performance.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Jul 10, 2023	82.520	82.665	82.689	82.520
Jul 11, 2023	82.390	82.550	82.563	82.324
Jul 12, 2023	81.980	82.405	82.421	81.962
Jul 13, 2023	82.040	82.001	82.146	81.948
Jul 14, 2023	82.049	82.010	82.203	81.926

Data Source: RBI

The latest week to July 14, 2023 saw the rupee stronger than 82 on Wednesday but then closed just around the 82/$ mark. The first trigger for the dollar came from lower than expected US inflation at 3%, which led to weakness in the dollar index (DXY). In fact, the DXY dipped below 100 for the week. Additionally, the rupee also strengthened due to the FPIs infusing nearly $15 billion in the last 75 days and that has boosted the currency. India inflation spiked to 4.81% and that also raised hopes of one more rate hike by the RBI, strengthening the rupee further. However, the strength in the rupee was curtained by the spike in crude oil prices, which got very close to the $80/bbl mark over the weekend.

Oil spikes closer to the $80/bbl mark

It is almost two months since the price of Brent Crude oil stayed in the range of $70 to $80/bbl. That is largely on account of 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. Meanwhile, China putting a ban on metals going into batteries has also raised the hackles of geopolitical risk. In addition, the US inventories are falling sharply and China growth numbers have been better than expected. That is positive for oil prices and that led oil to $80/bbl mark. The coming week will be critical in testing which side of the $80/bbl mark Brent Crude sustains at.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Jul 10, 2023	77.69	78.60	78.77	77.36
Jul 11, 2023	79.40	77.82	79.50	77.63
Jul 12, 2023	80.11	79.32	80.55	79.21
Jul 13, 2023	81.36	80.19	81.75	79.88
Jul 14, 2023	79.87	81.64	81.70	79.53

Data Source: Bloomberg

During the week, the price of Brent Crude spiked to $81.36/bbl before closing the week just around the $80/bbl mark. It looks like the supply concerns may have just got the better of demand concerns in the previous week and that explains why the oil prices rallied so sharply in the last 3 weeks. India has reached peak Russian imports at 42% and further hike in Russia share looks unlikely. That means, the pressure on global oil prices should be palpable now. US oil inventories announced by the API would hold the key and it has been showing heavy drawdowns on inventories in the last few weeks. Overall, crude looks set to scale above $80/bbl and that would be a concern for the rupee also. For the Indian economy, which still depends on imports for 80% of its crude oil requirements, any price above $80/bbl is likely to have a direct impact on trade deficit and also on corporate bottom lines.

Gold prices bounce in the latest week to July 14, 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)
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
Jul 10, 2023	1,924.99	1,925.19	1,928.31	1,912.68
Jul 11, 2023	1,931.99	1,925.40	1,938.69	1,924.40
Jul 12, 2023	1,957.09	1,932.59	1,959.82	1,932.18
Jul 13, 2023	1,960.19	1,957.44	1,963.69	1,952.71
Jul 14, 2023	1,954.93	1,961.58	1,963.81	1,951.00

Data Source: Bloomberg

It was a strong week for spot gold which closed the week at $1,955/oz. 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. However, since the debt default issue got resolved, the price of gold has been straitjacketed in the range between $1,900/oz and $1,950/oz. However, in the latest week, crude oil broke above that range after China triggered fresh trade war by banning exports of key metals that go into chips. Also, prospects of lower bond yields after the 3% inflation, has raised prospects of reduction in the opportunity cost of holding gold.

To sum up the week to July 14, 2023; brent crude rallied sharply as did the price of gold crossing above the $1,960/oz level during the week. However, the rupee strengthened, largely on account of robust FPI flows and lower than expected US inflation. The same aspect of lower US inflation also led to bond yields tapering during the week. It has been a mixed week for the macro quartet.