Weekly Musings – Macro Quartet for the week ending November 03, 2023

6 Nov 2023 , 09:32 AM

FED POLICY SETS THE TONE FOR GLOBAL MODERATION

This week, the US 10-year bond yields fell sharply from a high of 5% to close at 4.58% for the week. The fall in US bond yields was especially sharp after Fed announced status quo on rates in its policy statement. The fall in bond yields during the week had nothing to do with bond buying but more to do with reduced expectations of future rate hikes by the Fed. Now the CME Fedwatch is betting that the Fed may be done with rate hikes and it is also betting that rate cuts could be much sharper going ahead. However, it must be noted that the bond yields in the US are up from 3.4% in June this year and current yields are still much higher.

Let us first look at the US 10 year bond yield movements which is a key macro impacting the Indian market sentiments as well as the direction of FPI flows. Here is a quick look at the US-10 year bond yields for the latest week.

Date	Price (%)	Open (%)	High (%)	Low (%)
Oct 30, 2023	4.888	4.877	4.922	4.835
Oct 31, 2023	4.926	4.892	4.933	4.803
Nov 01, 2023	4.734	4.926	4.935	4.734
Nov 02, 2023	4.661	4.717	4.749	4.626
Nov 03, 2023	4.576	4.662	4.678	4.484

US bond yields, did show some correction in the previous week after touching 5%, but this week, the US bond yields reacted to the Fed holding status quo on rates. Of course, the Fed has not given up on its hawkish tone, but the CME Fedwatch appears to have interpreted that as a signal that the Fed may be done with rate hikes. The CME Fedwatch is also betting on aggressive rate cuts in the next year and that impact is visible in a sharp fall in the US dollar index (DXY) during the week. Let us turn to the Dollar index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Oct 30, 2023	106.12	106.58	106.70	106.06
Oct 31, 2023	106.66	106.16	106.86	105.91
Nov 01, 2023	106.88	106.67	107.11	106.61
Nov 02, 2023	106.12	106.50	106.51	105.81
Nov 03, 2023	105.02	106.20	106.22	104.94

What do we gather from the US Dollar Index (DXY). Post the Fed statement, there was a sharp fall from 106.88 to 105.02 levels on a closing basis. The big level to watch is 107, since in the last 40 years, there are only 3 occasions when this index has gone above 107 and the previous 2 occasions were in the last 1 year. For now, the US dollar index has broken sharply below the range between 106 and 107, but it remains to be seen if the CME Fedwatch is correct in interpreting the Fed statement as a signal that rate hikes are done and dusted.

That is likely to ease the pressure on the Indian rupee and also release the pressure on Indian bond yields. Both these outcomes were visible in the current week, as we shall see in detail later. First, a look at the macro quartet for the week.

INDIA BOND YIELDS TAPER TO 7.31%, BUT REMAINS ELEVATED

The bond yields may not have spiked like in the previous weeks, but even after the policy statement and the sharp fall in US bond yields, the India 10-year bond yields did not dip below 7.3%. While the 10 year bond yields went as high as 7.37% during the week, the close was relatively subdued at 7.317% mark for the week.

Date	Price (%)	Open (%)	High (%)	Low (%)
Oct 09, 2023	7.386	7.366	7.395	7.340
Oct 10, 2023	7.351	7.359	7.372	7.344
Oct 11, 2023	7.307	7.337	7.337	7.301
Oct 12, 2023	7.302	7.308	7.314	7.292
Oct 13, 2023	7.320	7.322	7.337	7.305
Oct 16, 2023	7.333	7.344	7.344	7.325
Oct 17, 2023	7.328	7.349	7.349	7.309
Oct 18, 2023	7.353	7.352	7.360	7.341
Oct 19, 2023	7.369	7.381	7.381	7.365
Oct 20, 2023	7.365	7.373	7.377	7.349
Oct 23, 2023	7.382	7.377	7.391	7.360
Oct 24, 2023	7.382	7.377	7.391	7.360
Oct 25, 2023	7.343	7.343	7.349	7.333
Oct 26, 2023	7.366	7.377	7.377	7.360
Oct 27, 2023	7.351	7.359	7.359	7.341
Oct 30, 2023	7.369	7.359	7.372	7.354
Oct 31, 2023	7.351	7.365	7.366	7.346
Nov 01, 2023	7.358	7.376	7.376	7.352
Nov 02, 2023	7.322	7.323	7.335	7.318
Nov 03, 2023	7.317	7.324	7.324	7.309

Data Source: RBI

The 10-year benchmark bond yields closed the week at 7.317%. During the week, the bond yield opened at 7.369% but later stayed in the range of 7.3% to 7.4% through the entire week before closing at 7.317%. The bond yields did manage to taper in the last two days of the week after the Fed statement. Even the fall in crude prices below $85/bbl meant lesser risk of imported inflation. Meanwhile, markets are digesting the full impact of geopolitics.

Like the Fed, even the RBI has hinted that it would hold rates at elevated levels for a longer period and ruled out rate cuts for now. While the CME Fedwatch has diverged from the Fed thinking, the Indian bond markets still largely reflect the RBI point of view. For now, it looks like Indian bond yields may top out, but any sharp fall would be an optimistic expectation.

RUPEE STRENGTHENS, BUT RISKS ARE STILL SIGNIFICANT

For the sixth week in a row, the Indian rupee stayed above the 83/$ mark. This week, the rupee opened at 83.25/$ and closed the week with some strength at 83.14/$ levels. The strength in the rupee was largely led by a weaken of the dollar index from the range of 106-107 down to around the 105 levels. However, FPI selling of $2.49 billion in October 2023, is likely to be an overhang on the Indian rupee. RBI has been aggressively defending the rupee in a range, but costs in the form of falling forex reserves and tighter rupee liquidity in the Indian market are also piling up. It remains to be seen, how long it can sustain the defence.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Oct 09, 2023	83.254	83.187	83.348	83.162
Oct 10, 2023	83.162	83.266	83.282	83.170
Oct 11, 2023	83.160	83.217	83.246	83.116
Oct 12, 2023	83.263	83.075	83.416	83.049
Oct 13, 2023	83.421	83.263	83.425	83.210
Oct 16, 2023	83.190	83.264	83.296	83.183
Oct 17, 2023	83.240	83.215	83.289	83.186
Oct 18, 2023	83.290	83.255	83.310	83.211
Oct 19, 2023	83.097	83.284	83.306	83.082
Oct 20, 2023	83.150	83.150	83.216	83.012
Oct 23, 2023	83.071	83.160	83.206	83.085
Oct 24, 2023	83.010	83.031	83.102	82.956
Oct 25, 2023	83.140	83.022	83.205	83.008
Oct 26, 2023	83.243	83.163	83.269	83.131
Oct 27, 2023	83.414	83.283	83.416	83.198
Oct 30, 2023	83.250	83.280	83.305	83.212
Oct 31, 2023	83.256	83.260	83.293	83.221
Nov 01, 2023	83.237	83.278	83.337	83.225
Nov 02, 2023	83.234	83.240	83.281	83.174
Nov 03, 2023	83.140	83.247	83.311	83.134

Data Source: RBI

The rupee may look relatively safe from a longer term perspective as the CAD looks to be in control. However, the current situation is not about the long term but what happens in the  short term, and that is still cautious, despite the fall in the dollar index in the previous week. There are several headwinds that could weigh on the Indian rupee in the short to medium term. For instance, the geopolitical risks continue to be elevated and that can result in spiralling of oil prices at short notice. Also, the fall in the dollar index in the last week is on the back of CME Fedwatch expectations that the rate hikes in the US may be over. The Fed has still maintained its hawkish stance. Past experience has shown that the Fed takes its communication very seriously and it is the CME Fedwatch that has shown the tendency to gravitate towards the Fed point of view. Rupee may see some strength, but may find it tough to really sustain below the 83/$ mark.

BRENT CRUDE FALLS DESPITE DOLLAR INDEX WEAKENING

Brent Crude prices fell from $90.48/bbl last week to close at $84.89/bbl this week. The crude demand is likely to remain subdued, so the impact of supply cuts may not be too steep. Markets are veering to the view that most of the risks to crude oil prices, including the geopolitical risk in Middle East and West Asia, may already be in the price. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Oct 09, 2023	88.15	86.45	89.00	86.00
Oct 10, 2023	87.65	88.17	88.49	86.91
Oct 11, 2023	85.82	87.72	88.26	85.21
Oct 12, 2023	86.00	85.53	87.64	85.18
Oct 13, 2023	90.89	86.35	91.00	86.28
Oct 16, 2023	89.65	90.98	91.39	89.50
Oct 17, 2023	89.90	89.91	91.00	88.88
Oct 18, 2023	91.50	91.25	93.00	90.60
Oct 19, 2023	92.38	91.35	93.48	89.57
Oct 20, 2023	92.16	93.23	93.79	91.66
Oct 23, 2023	89.83	92.11	92.45	89.62
Oct 24, 2023	88.07	90.47	90.68	87.35
Oct 25, 2023	90.13	88.04	90.35	86.68
Oct 26, 2023	87.93	89.92	90.40	87.53
Oct 27, 2023	90.48	88.40	90.75	87.83
Oct 30, 2023	87.45	90.07	90.15	87.20
Oct 31, 2023	87.41	87.90	88.61	87.40
Nov 01, 2023	84.63	85.45	87.24	84.58
Nov 02, 2023	86.85	85.00	87.05	84.64
Nov 03, 2023	84.89	86.92	87.80	84.56

Data Source: Bloomberg

The real challenge for crude is that with a 30% rally in the last few months, most of the oil-specific risks are already in the price. Demand may not fall too sharply, but the current gap of 2 million bpd of crude is likely to be the worst-case scenario. Saudi Arabia and Russia still 23% of world oil output and 27% of annual oil exports. However, if the power equations shift towards demand, there is little these 2 major oil producers can do to dictate prices.

GOLD PRICES TAPER AFTER FRENETIC GAINS

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)
Oct 09, 2023	1,860.88	1,832.74	1,864.15	1,832.63
Oct 10, 2023	1,860.09	1,861.27	1,865.65	1,852.65
Oct 11, 2023	1,873.61	1,859.99	1,877.22	1,858.60
Oct 12, 2023	1,870.66	1,875.45	1,885.14	1,867.96
Oct 13, 2023	1,932.82	1,870.67	1,932.93	1,870.16
Oct 16, 2023	1,919.44	1,929.30	1,931.80	1,907.65
Oct 17, 2023	1,922.46	1,920.14	1,931.56	1,911.85
Oct 18, 2023	1,947.69	1,923.70	1,962.74	1,923.05
Oct 19, 2023	1,973.70	1,947.99	1,977.86	1,945.18
Oct 20, 2023	1,981.04	1,974.31	1,997.27	1,971.93
Oct 23, 2023	1,972.59	1,972.90	1,983.40	1,964.36
Oct 24, 2023	1,970.11	1,972.97	1,980.99	1,953.50
Oct 25, 2023	1,979.62	1,971.36	1,987.19	1,963.34
Oct 26, 2023	1,984.82	1,979.97	1,994.05	1,971.60
Oct 27, 2023	2,006.38	1,984.40	2,009.41	1,976.88
Oct 30, 2023	1,995.88	2,004.80	2,007.37	1,990.50
Oct 31, 2023	1,982.70	1,996.00	2,007.80	1,978.90
Nov 01, 2023	1,982.15	1,983.01	1,992.09	1,969.90
Nov 02, 2023	1,985.51	1,983.53	1,991.49	1,978.90
Nov 03, 2023	1,992.27	1,985.69	2,004.06	1,983.26

Data Source: Bloomberg

In the last 3 weeks, gold was the pick among the asset classes. In the 3 weeks prior to the latest week, gold had rallied nearly 9.66% from $1,832/oz to a peak of $2,009/oz. However, most of the short term gains may already be in the price of gold and while gold prices may not fall too much; bumper gains look unlikely from here. 

Typically, a sustained rally in gold can only happen if and when interest rates come down sharply. Low interest rates, reduce the opportunity cost of holding gold, while elevated rates (like now), raise the opportunity cost of holding gold. Notwithstanding the CME Fedwatch expectations of rate cuts in the US, the Fed has refused to play ball. The focus will not be so much on gold in the coming weeks, as it will be on the two key drivers of global macros viz. the US 10 year bond yields and the US dollar index (DXY).