Weekly Musings – Macro Quartet for the week ending June 16, 2023

19 Jun 2023 , 07:25 AM

Our weekly macro quartet captures the 4 very critical macro points for markets, outside of equity triggers. These include the 10-year bond yield, the USDINR exchange rate, Brent Crude oil prices and the spot prices of gold and are tracked on a weekly basis. In a way, all these tend to be related to each other, but most importantly, they are the high frequency indicators of macroeconomic stability. For instance, higher crude prices weaken the rupee but a strong dollar weakens crude and gold prices. Similarly, fall in rates enhance the value of gold as it reduces the opportunity cost of holding gold. These linkages can go on. While the thrust here is on the latest week, a 4 week perspective will help us to understand the trends much better.

Bond yields above 7% for 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 tested the 7% level through the last few weeks before decisively falling below the 7% mark. However, in the previous week, it bounced above the 7% mark again and this week it has held above that level of 7% consistently.

Date	Price (%)	Open (%)	High (%)	Low (%)
May 22, 2023	6.985	6.989	7.001	6.976
May 23, 2023	7.016	7.005	7.020	6.995
May 24, 2023	6.990	7.009	7.023	6.982
May 25, 2023	7.007	7.013	7.015	6.996
May 26, 2023	7.003	7.026	7.026	6.996
May 29, 2023	7.024	7.020	7.031	7.002
May 30, 2023	7.011	7.034	7.034	7.010
May 31, 2023	6.989	7.027	7.027	6.982
Jun 01, 2023	6.979	7.019	7.019	6.963
Jun 02, 2023	6.984	6.992	6.992	6.966
Jun 05, 2023	6.997	7.005	7.009	6.994
Jun 06, 2023	6.977	6.999	6.999	6.974
Jun 07, 2023	6.982	6.984	6.986	6.972
Jun 08, 2023	7.021	7.006	7.023	6.990
Jun 09, 2023	7.039	7.012	7.044	7.012
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

Data Source: RBI

Ideally, the bond yields had a lot going for it. The inflation for the month of May 2023 was down to 4.25%. that is juts about 25 bps away from the RBI target for inflation at 4%. That should give a lot of comfort to yields. Also, the RBI paused on rates for the second policy statement in succession. However, the bounce in the bond yields to well above 7% cold be attributed to the hawkish tone of the RBI. With delayed monsoons, there are fears of weak Kharif output resulting in a spike in food inflation. That is something the bond yields had not bargained for. Hence, the spike in yields during the latest week reflects the possibility that the RBI may not be entirely done with rate hikes and may have to again resort to a hawkish strategy if food inflation tends to slip out of control later this year.

Rupee strengthens on Fed pause

The rupee showed a lot of strength during the week. Of course, the strength could be seen as a proxy for the tepidness in the dollar. With the Fed calling for a pause on rates, the dollar index started to taper and that allowed the rupee to strengthen. During the week, it strengthened from 82.39/$ to 81.90/$.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
May 22, 2023	82.840	82.809	82.903	82.725
May 23, 2023	82.830	82.835	82.890	82.749
May 24, 2023	82.670	82.880	82.897	82.570
May 25, 2023	82.733	82.680	82.821	82.666
May 26, 2023	82.570	82.745	82.748	82.542
May 29, 2023	82.586	82.591	82.682	82.511
May 30, 2023	82.665	82.557	82.794	82.548
May 31, 2023	82.680	82.648	82.777	82.620
Jun 01, 2023	82.266	82.666	82.668	82.268
Jun 02, 2023	82.398	82.277	82.447	82.262
Jun 05, 2023	82.520	82.456	82.697	82.398
Jun 06, 2023	82.510	82.511	82.663	82.483
Jun 07, 2023	82.500	82.510	82.587	82.454
Jun 08, 2023	82.488	82.628	82.628	82.475
Jun 09, 2023	82.440	82.515	82.525	82.404
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

Data Source: RBI

There were two factors that led to the strength in the rupee this week. If you look at the lats one month, the rupee has strengthened by nearly Rs1/$. To an extent, the RBI has been using its currency management to manage the rupee in a tight range. But the big boost came from a less hawkish Fed. Of course, the Fed is not done with rate hikes and it has also hinted at another 50 bps rate hikes, but then markets are based on data. For now, the USDINR believes that the Fed has enough reasons to stay on paus mode.

Oil prices see a sharp recovery in the week

In the last few weeks, the concerns over a global slowdown and contraction of oil demand from China have been the main issues. Even the decision by Saudi Arabia to unilaterally cut oil supply by 1 million bpd, did not have any significant impact on the oil prices. However, as the Fed turned neutral this week, oil prices saw a sharp spike towards the close of the week.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
May 22, 2023	75.99	75.63	76.46	74.55
May 23, 2023	76.84	76.15	77.74	75.65
May 24, 2023	78.36	77.70	78.66	77.03
May 25, 2023	76.26	78.22	78.50	75.10
May 26, 2023	76.95	76.09	77.35	75.73
May 29, 2023	77.07	77.39	77.75	76.15
May 30, 2023	73.54	76.98	77.57	73.20
May 30, 2023	72.66	73.60	73.81	71.39
Jun 01, 2023	74.28	72.15	75.25	72.03
Jun 02, 2023	76.13	74.28	76.50	74.18
Jun 05, 2023	76.71	77.68	78.73	76.31
Jun 06, 2023	76.29	76.55	76.75	74.72
Jun 07, 2023	76.95	76.22	77.64	75.51
Jun 08, 2023	75.96	76.80	77.68	73.58
Jun 09, 2023	74.79	75.53	76.57	74.71
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

Data Source: Bloomberg

During the week, the price of Brent Crude bounced from $71.84/bbl to $76.61/bbl. The bounce was after the US Fed outlook hinted that growth concerns may not be a major issue. Also, the OPEC in its latest outlook expected much better demand coming from China. Of course, one must not forget that oil is also an anti-dollar trade, so a weakening of the dollar index (DXY) also helped oil prices trend higher during the week.

Gold prices continue to trade in a narrow range

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)
May 22, 2023	1,969.43	1,977.80	1,982.66	1,968.40
May 23, 2023	1,974.73	1,971.99	1,977.80	1,954.29
May 24, 2023	1,957.01	1,975.19	1,985.30	1,956.51
May 25, 2023	1,940.34	1,958.13	1,964.95	1,938.86
May 26, 2023	1,946.33	1,940.69	1,957.40	1,936.84
May 29, 2023	1,942.84	1,944.09	1,949.75	1,940.30
May 30, 2023	1,959.14	1,944.19	1,963.63	1,932.08
May 31, 2023	1,962.30	1,959.30	1,975.34	1,953.67
Jun 01, 2023	1,977.88	1,962.80	1,983.27	1,953.43
Jun 02, 2023	1,947.63	1,978.14	1,983.52	1,947.67
Jun 05, 2023	1,961.45	1,947.59	1,964.13	1,938.14
Jun 06, 2023	1,962.85	1,962.11	1,966.85	1,954.00
Jun 07, 2023	1,939.63	1,963.59	1,970.26	1,939.80
Jun 08, 2023	1,967.76	1,940.59	1,970.50	1,939.81
Jun 09, 2023	1,960.60	1,968.10	1,973.09	1,956.73
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

Data Source: Bloomberg

In the last 3 weeks, 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, with the debt deal signed, and unlikely to be a concern for another 2 years, gold has taken a back seat as an asset class. That is likely to sustain for now.

To sum up the week to 16-June 2023, brent crude saw a bounce as did the 10-year bond yields in India. However, the rupee has strengthened and gold remains lacklustre. The action now shifts to the Jerome Powell testimony in the coming week.