Weekly Musings – Macro Quartet for the week ending July 21, 2023

22 Jul 2023 , 08:03 PM

It was a mixed week for the macro quartet for the week ended July 21, 2023. In fact, 3 out of the 4 macro data points were lacklustre during the week, with only the crude oil prices surging. We will come back to crude oil prices later. For the week to July 21, 2023, the benchmark 10-year bond yields stayed in a very narrow range between 7.05% and 7.08%. Bond yields had trended lower in the previous week after the US inflation came in at a multi-year low of 3%. 

However, due to higher domestic inflation and fears of monsoons playing truant with food inflation, the bond yields remained range bound instead of tapering. The dovish indications coming from inflation data weakened the US dollar but the dollar index (DXY) bounced from below the 100 mark to just above the 101 mark. That has helped the rupee to be stable, if not strengthen in value versus the dollar. Gold continued to be range bound after the rally of the previous week as lower interest rates reduces the opportunity cost of holding gold.

SPIKE WAS ACTUALLY VISIBLE IN CRUDE OIL PRICES

In the previous week, the Brent crude prices had made several attempts to break above the $80/bbl mark. This week, the Brent Crude closed above $81/bbl. The spike in crude was largely driven by supply cuts by the OPEC, likelihood of reduced supplies from Russia and sharper than expected fall in US crude oil inventories as reported by the American Petroleum Institute (API). That has kept the upward pressure on oil prices. 

However, the stronger than expected China growth data is likely to boost demand for oil and keep oil prices elevated for some more time. Both demand and supply factors are combining to create a bullish scenario for crude oil. That remains a major X-factor for the Indian economy since it depends on oil imports for close to 85% of its daily crude oil needs. As per macro estimates, any price of $80/bbl of Brent Crude is likely to put pressure on the trade deficit and also on the fiscal deficit of the Indian economy.

BOND YIELDS REMAIN IN A TIGHT RANGE DURING THE WEEK

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 21, 2023 at around 7.09%; which is almost the same level at which we had found bond yields at the close of last week. Inflation remains an X-factor for yields trajectory, especially after the MOSPI reported a spike in consumer inflation for June 2023 to a level of 4.81%.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Jul 17, 2023	7.074	7.110	7.110	7.071
Jul 18, 2023	7.058	7.084	7.084	7.047
Jul 19, 2023	7.072	7.062	7.076	7.054
Jul 20, 2023	7.083	7.081	7.088	7.074
Jul 21, 2023	7.087	7.099	7.107	7.076

Data Source: RBI

The data point that actually led to softening of the bond yields in the last two weeks was the lower than expected consumer inflation announced by the US for June 2023. US consumer inflation fell to 3%, a fall of 190 bps in just 2 months. Inflation in the US is now well below the estimates of Reuters.  Now there are strong expectations that the Fed may hike rates by 25 basis points in its upcoming July 26, 2023 meeting but call a halt on rates after that. That would come as a major relief for bond yields, although domestic inflation and fiscal deficit would still be the key driving factors for India 10-year bond yields.

Currently, the domestic risks to the interest rates remain in the form of weak monsoons followed by a deluge destroying crops. For the month of June 2023, India inflation spiked from 4.25% to 4.81%. In addition to food inflation, there are fears that even higher crude price may result in imported inflation for the Indian economy. The situation remains in a state of flux for bond 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 last couple of weeks to July 14, 2023 and July 21, 2023. That was hardly surprising as the dollar index weakened sharply during the period to below the 100 mark before marginally bouncing to around the 101 levels on the DXY. The FPI flows of over $16 billion in less than 3 months has kept the rupee robust in India. The rupee may not have gained substantially but closed near the 82/$ mark for the week. While FPI flows and low US inflation are positives, higher crude prices remain a major risk factor for the USDINR value.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Jul 17, 2023	82.040	82.127	82.209	81.988
Jul 18, 2023	82.060	82.062	82.114	81.961
Jul 19, 2023	82.050	82.087	82.166	82.024
Jul 20, 2023	82.083	82.062	82.160	81.912
Jul 21, 2023	82.007	82.083	82.114	81.942

Data Source: RBI

The latest week to July 21, 2023 saw the rupee stable in a range between 82/$ and 82.10/$, which is an extremely narrow range. It is basically about contrasting factors playing on the rupee. On the one hand, the tepid rate guidance of the Fed members and the surge in FPI flows are positive for the Indian rupee. On the other hand, the big risk factor for the USDINR remains the crude prices, which is already above $85/bbl. In between these two contrasting factors, the rupee has been stuck in a very tight range.

Brent Crude spikes and closes above $81/bbl 

It is more than 2 months since the price of Brent Crude oil stayed in the range of $70 to $80/bbl. However, for the larges 4 weeks in succession, the crude oil prices have been on the way up. There are concerns over weak China demand and possible recession in the US and Europe. However, these fears are gradually receding. What matters is that the oil prices may now spike as the demand supply situation appears to favour the suppliers once again, rather than the buyers. In between, there is the geopolitical risk that is also building up due to a likely China trade war and that is keeping oil on the boil. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Jul 17, 2023	78.50	79.36	80.64	78.25
Jul 18, 2023	79.63	78.52	79.99	78.19
Jul 19, 2023	79.46	79.84	80.93	79.17
Jul 20, 2023	79.59	79.33	80.23	78.67
Jul 21, 2023	81.03	79.75	81.09	79.66

Data Source: Bloomberg

During the week, the price of Brent Crude closed on Friday at a level of $81.03/bbl, as it breaks out of the range of $70 to $80 after a long struggle. There are some key trends. India has reached peak Russian imports at 42% and further hike in Russia share looks unlikely. India may now rely more on Middle East oil, so it is back to the core oil markets. 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 in last few weeks. For the Indian economy, which still depends on imports for 85% 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 see sustained strength in the week to July 21, 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 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
Jul 17, 2023	1,954.74	1,954.90	1,959.91	1,945.82
Jul 18, 2023	1,978.71	1,954.59	1,984.39	1,954.44
Jul 19, 2023	1,976.74	1,978.97	1,981.05	1,969.75
Jul 20, 2023	1,972.24	1,977.81	1,987.51	1,965.39
Jul 21, 2023	1,963.39	1,972.26	1,973.86	1,956.87

Data Source: Bloomberg

It was a strong week for spot gold which closed the week at $1,963/oz. In the last 2 months, spot gold struggled to sustain above $2,000/oz despite several attempts. However, since the debt default issue got resolved, the price of gold has been straitjacketed in the range between $1,900/oz and $1,970/oz. Risks are returning to the gold market and that is good news for gold prices. 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 data in the US, has reduced the opportunity cost of holding gold.

To sum up the week to July 21, 2023; brent crude rallied sharply even as price of gold stayed robust in the range of $1,960/oz to $1,970/oz. However, the rupee and the bond yields on the 10-year benchmark remained in a very narrow range. For now, all eyes are on the July 26, 2023 FOMC meeting outcome.