Weekly Musings – Macro Quartet for the week ending June 30, 2023

2 Jul 2023 , 11:56 AM

Bond  yields settled around the 7.11% mark towards the close of the week. Bond yields have been trending higher after the RBI MPC had hinted at higher inflation in the aftermath of the weak monsoons. It was a positive week for the rupee which closed the month flat marginally higher; the best performance in a month since January 2023. Rupee was buoyed by strong FPI flows during the month. 

On the other hand, crude stayed in a tight range due to the diverse pulls of contradictory factors. The US inventories have been falling and GDP growth is picking up, which is positive for oil prices. However, there is also the concern over China demand and that is depressing oil prices. Lastly, gold continues to be tepid at closer to $1,900/oz. With GDP growth starting to look a little more promising, the lure of the yellow metal has automatically faded. After all, gold has traditionally given its best performance in terms of global financial and geopolitical uncertainty. That is now missing for gold

Bond yields inch higher towards 7.1% in 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, the yields bounced back. It has closed the week to January 30, 2023 at around 7.11%. Inflation also remains an X-factor for bond yields trajectory.

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

Data Source: RBI

To understand the bounce in yields, we need to quickly recap the minutes of the RBI MPC, which was published in the previous week. 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. The markets believes that the RBI view would eventually prevail, which means higher rates cannot be ruled out. 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. 

There are also other factors contributing to the bounce in bond yields. Just a little over a week back, the Bank of England had raised rates by 50 bps. In recent speeches, Jerome Powell of the US Fed also remains extremely hawkish. The CME Fedwatch is now hinting at the possibility of anywhere between 2 hikes and 3 hikes in the current year, with the probability of 3 hikes gradually increasing. In the Indian markets, the RBI has been sucking out excess liquidity from the system through variable reverse rate repos (VRRR) and that has also been hardening yields. The good news is that the government has confirmed it will not hike the borrowing target and that should act as a cap for bond yields.

Rupee closes June 2023 with gains; best since January

To be fair, the returns on the rupee were positive in June and it also delivered the best returns since January 2023. To be fair, the last week did see some weakening of the rupee as the dollar gained strength due to consistent hawkish talks by the FOME members. However, the big positive for the rupee in the month came from persistent FPI flows. FPIs infused $5.7 billion in June on top of infusing $5.3 billion into Indian equities in the month of May 2023. This comes on top of an additional $2 billion infused into Indian debt paper.

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

Data Source: RBI

After remaining below Rs82/$ for most of the previous week, the latest week saw the rupee go above the Rs82/$ mark, but only marginally. The dollar saw some strength in the DXY (dollar index) due to Fed hawkishness. Also, the CME Fedwatch is now assigning an 86% probability for a rate hike in July, underlining the Fed stance on staying hawkish. With a surge of liquidity coming into the system, the RBI has also sought to neutralize some of these flows through repos. That has also pushed the rupee beyond 82 levels.

Oil prices close on the threshold of $75/bbl

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 contrarian factors playing on oil prices. Firstly, the brief Wagner rebellion raised the fear of geopolitical uncertainty again. By the time the Wagner rebellion subsided, US inventories fell sharply and US GDP for Q12023 bounced to 2%. These factors helped crude oil prices. However, concerns over China remain and a global recession is still not ruled amidst all the hawkishness that is prevalent in the developed world. Also, India buying 42% of its oil from Russia is reducing the demand pressure on the mainstream oil suppliers, making the oil price movement a lot smoother and in a tight range.

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

Data Source: Bloomberg

During the week, the price of Brent Crude stayed in a very tight range between $74/bbl and $75/bbl. For now, it is the demand concerns that are overriding because the decision of Saudi Arabia to cut supply has had little impact. Also, with Russia supply 42% of India’s oil needs, one of the biggest buyers has cut purchases from the OPEC. That is also putting downward pressure on oil prices. Above all, the situation of crude oil being in a tight range actually suits India as it keeps the trade deficit under check for the time being.

Gold prices continue to be lacklustre

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 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
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

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 latest week, gold has remained straitjacketed in the range between $1,900/oz and $1,920/oz. The gold buying from investors and ETFs has reduced as has the accumulation from central banks. Also, gold prices have been tepid on fears that a global recession could impact the consumption demand for gold. There are very few triggers for gold in the near future.

To sum up the week to June 30, 2023; brent crude stayed in a tight range of $1/bbl while price of gold stayed in a tight range of $20/oz. However, the rupee strengthened in the month of June 2023 on the back of robust FPI flows of $11 billion in the last two months. However, bond yields continue to reflect the possibility that hawkishness is not done yet.