Weekly Musings – Macro Quartet for the week ending June 23, 2023

26 Jun 2023 , 09:59 AM

These include 10-year bond yield, the USDINR exchange rate, Brent Crude oil prices and the spot prices of gold. On a rolling basis, these data points are tracked for 4 rolling weeks to get a good idea of the short term trend. In a sense, they are the high frequency indicators of macroeconomic stability and most of them are very closely inter-related to one another. Higher crude prices weaken the rupee but a strong dollar weakens crude and gold prices. Similarly, fall in interest rates enhances the value of gold as it reduces the opportunity cost of holding gold. Higher rates in the US also boost the dollar. Here is a 4 week perspective on these 4 critical macro parameters.

Bond yields consolidate 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 traded below 7% yields in the first week of June, but have since bounced back. As of the close of June 23, 2023, the 10-year benchmark bond yields are trading at 7.07% and in a narrow range during the week.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
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

Data Source: RBI

To begin with, the bond yields have a lot in its favour. For instance, inflation for the month of May 2023 was down to 4.25% and WPI inflation was down at -3.48%. Now, consumer inflation in India is just about 25 bps away from the RBI inflation target of 4%. That should give a lot of comfort to yields. Also, the RBI paused on rates in June, exactly the same way it had done in April; making February the last rate hike. However, the bounce in the bond yields to well above 7% cold be attributed to the ambivalence evident in the minutes.

If you read the fine print of the MPC minutes, the 3 RBI members supported higher rates but the 3 non-RBI members were sceptical that it could hit growth. Also, 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 really prepared for. Also, the 50 bps rate hike by the Bank of England and the persistently hawkish tone of the FOMC members have been keeping Indian bonds yields above 7%. Surplus liquidity is being sucked out of the system.

Rupee spends the week below 82/$

In the last 4 weeks, this is the first full week when the USDINR has been under 82/$ on a closing basis. The combination of RBI intervention, rate pause by the Fed and the hawkish tone of the RBI have allowed the rupee to strengthen. The rupee showed a lot of strength during the week due to the robust portfolio flows. The previous week itself saw FPI flows of over $1.74 billion with FPIs infusing nearly $4 billion in the first 3 weeks of June 2023. 

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
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

Data Source: RBI

This is the first full week the USDINR spent under 82/$ on a closing basis. RBI has been using its currency management to manage the rupee in a tight range and that has helped give confidence to the markets and toned down expectations of further weakening of the rupee. But the big boost came from a less hawkish Fed. The US Federal Reserve may not yet be done with rate hikes and has hinted at another 50 bps to go. However, the INR gets solace from the fact that the US Fed rates are close to the top, if not at the very top.

Oil prices take a hit on return of hawkishness

In the last few weeks, two contrarian factors have played in the Brent Crude market and the price movement depending on which is more dominant. The supply cuts by the OPEC were threatening to disrupt the supply of oil and push up prices. On the other hand, the recession fears on the back of rate hikes, remained a major challenge for the oil prices. Oil was once again moving from being in a seller’s market to a buyer’s market.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
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

Data Source: Bloomberg

During the week, the price of Brent Crude fell from a high of $77.24/bbl to a low of $72.11/bbl, before closing the week at $73.85/bbl. The bounce was after the Fed talked hawkish, Powell testimony was hawkish and the Bank of England hiked rates by 50 basis points. OPEC in its latest outlook, has expected much better demand coming from China but that did not help. Incidentally, 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 gradually losing its lustre

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 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
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

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. However, with the debt deal signed, and unlikely to be a concern till after the next US elections, gold has taken a back seat as an asset class. Gold prices slid to as low as $1,910/oz before closing the week at $1,921/oz.

To sum up the week to June 23, 2023, brent crude saw a sharp cut as did the price of gold. However, the rupee remained strong under 82/$ while the bond yields are now settled above the 7% mark. The next event would be the US GDP and Powell speech next week.