Weekly Musings – Macro Quartet for the week ending November 10, 2023

13 Nov 2023 , 06:40 AM

AFTER FED POLICY COMES JEROME POWELL WARNINGS

In the global markets, a lot can change in just one week. For instance, just the previous week, the Fed decision to hold rates was seen as the ultimate dovish signal. That led to a s sharp fall in the US bond yields as well as a sharp fall in the US dollar index. All that changed in just a week. This week, speaking at the IMF conference, Jerome Powell underlined that the Fed had not done enough to tame inflation. He also stated that the Fed was disappointed that even after 20 months of persistent hawkishness, the inflation was still 150 bps away from the target level of 2%. Last week, the US bond yields and the dollar index had fallen sharply. In the current week, the US bond yields started lower, but bounced back to close flat for the week. However, the dollar index actually bounced back during the week. It was an affirmation that the Fed would eventually have its way and pave the way for more rate hikes at some time in the future.

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 (%)
Nov 06, 2023	4.647	4.589	4.668	4.576
Nov 07, 2023	4.569	4.639	4.662	4.544
Nov 08, 2023	4.492	4.579	4.614	4.488
Nov 09, 2023	4.632	4.484	4.654	4.473
Nov 10, 2023	4.646	4.640	4.654	4.567

US bond yields, had touched 5% a little over a week ago. However, after the Fed policy statement, the bond yields had fallen sharply to 4.647%. This week, the bond yields dipped as low as 4.488%, but after the stern warning issued by Jerome Powell about more hawkishness in policy, the bond yields bounced back to close flat. It closed the week at 4.646%, exactly at the same level as last week. However, the hint is that the bond yields look more likely to bounce from here, than falling back lower. Let us turn to the Dollar index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Nov 06, 2023	105.21	105.07	105.29	104.85
Nov 07, 2023	105.54	105.27	105.78	105.27
Nov 08, 2023	105.59	105.54	105.87	105.45
Nov 09, 2023	105.91	105.53	105.97	105.38
Nov 10, 2023	105.86	105.93	106.01	105.74

What do we gather from the US Dollar Index (DXY). Post the Fed statement last week, there was a sharp fall from 106.88 to 105.21 levels on a closing basis. However, this week the dollar index spiked after the speech delivered by Jerome Powell, where the hawkishness was quite evident. The dollar index closed the week at 105.86, clearly showing the signs of pressure imposed by the Powell speech. 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, it looks like the US dollar index may get back to the range between 106 and 107, but a lot will depend this week on US inflation rate.

The pressure of the bounce in the dollar index was evident in the Indian rupee as it once again weakened towards the end of the week. First, a look at the macro quartet.

INDIA BOND YIELDS TAPER TO CLOSE AT 7.30% FOR THE WEEK

The Indian bond yields did not fall too sharply in the previous week and that trend repeated this week too as the bond yields got locked around 7.3% levels. While the 10 year bond yields dipped as low as 7.255%, eventually, the speech by Jerome Powell ended up hardening bond yields that wee bit. 

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Nov 06, 2023	7.305	7.301	7.307	7.294
Nov 07, 2023	7.280	7.318	7.318	7.277
Nov 08, 2023	7.266	7.273	7.281	7.255
Nov 09, 2023	7.269	7.256	7.276	7.246
Nov 10, 2023	7.300	7.293	7.305	7.288

Data Source: RBI

The 10-year benchmark bond yields closed the week at 7.300%. During the week, the bond yield opened at 7.305% but later stayed in the range of 7.25% to 7.32% through the entire week before closing at 7.300%. The bond yields did taper to the 7.266% levels on a closing basis, but bounced on the last two days of the week after the Powell speech. 

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. Indian bond markets still largely reflect the RBI point of view and for now, the key determinants of the bond yields would continue to be domestic inflation and liquidity conditions in the domestic market. 

RUPEE WEAKENS AMIDST FPI SELLING AND GEOPOLITICAL RISKS

For the seventh week in a row, the Indian rupee stayed above the 83/$ mark. This week, the rupee opened at 83.218/$ and closed the week with some weakness at 83.309/$ levels. On a week-on-week basis, the rupee has weakened by nearly 25 paisa. The weakness in the rupee was largely on account of a revival in the dollar index, which closed the week near to the 106 levels. FPIs were net sellers of $687 million in the latest week in equities, but debt inflows have more than made up for it. The big question is whether the RBI will continue to defend the rupee around the 83.50/$ levels. Remember, defending the rupee has larger costs in the form of falling forex reserves and tighter rupee liquidity.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Nov 06, 2023	83.218	83.107	83.263	83.085
Nov 07, 2023	83.230	83.221	83.287	83.210
Nov 08, 2023	83.213	83.234	83.310	83.208
Nov 09, 2023	83.315	83.232	83.341	83.216
Nov 10, 2023	83.309	83.302	83.499	83.224

Data Source: RBI

The rupee may look relatively safe from a longer term perspective as the CAD looks to be in control, but the currency story is never about the long term, but about the short term. That is where global hawkishness, a strong dollar index and the geopolitical uncertainty are likely to keep the rupee on tenterhooks. There are also some redeeming features. Crude oil prices have fallen sharply to $81/bbl and that is likely to reduce the pressure on the balance of payments for India. The recent speech delivered by Jerome Powell indicates that the Fed will have the final call on rates, irrespective of what the market thinks. The Fed may delay its preferred response, but is unlikely to digress from it. That means, pressure on the rupee will continue for the time being. 

BRENT CRUDE FALLS SHARPLY ON DEMAND CONCERNS

In the last 2 weeks, the price of Brent crude has fallen from $90.48/bbl to $81.43/bbl. That is a sharp fall of 10% in just 2 weeks. China growth engine has been spluttering and that is putting pressure on oil demand. Also, Russia and OPEC have decided now to enhance the supply cuts, so the demand and supply are likely to balance better in the near future. That means prices of Brent Crude could remain subdued around the range of $80-$83/bbl. Geopolitical risk in West Asia is still real, but that is not really aggravating for now.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Nov 06, 2023	85.18	85.55	86.46	84.88
Nov 07, 2023	81.61	85.15	85.19	81.40
Nov 08, 2023	79.54	81.40	81.96	79.20
Nov 09, 2023	80.01	79.70	81.48	79.44
Nov 10, 2023	81.43	79.85	82.06	79.79

Data Source: Bloomberg

Crude oil has been really volatile in the last 3 months. From $71/bbl, it spiked to nearly $100/bbl and now it is back to $81/bbl. For India, that is good news and should help to curtail the current account deficit (CAD) and also hold rupee strength. With the recent demand concerns coming from China, it looks like the oil market may not remain undersupplied for too long, but we have to wait and watch. Saudi Arabia and Russia may control 23% of world oil output and 27% of annual oil exports. However, if China betrays weakness, then the equation shifts in favour of the oil buyers.

GOLD PRICES HIT BY HAWKISH POWELL LANGUAGE

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 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
Nov 06, 2023	1,977.68	1,992.30	1,993.30	1,977.52
Nov 07, 2023	1,968.40	1,978.19	1,978.75	1,956.20
Nov 08, 2023	1,949.79	1,968.84	1,971.12	1,947.48
Nov 09, 2023	1,958.19	1,950.09	1,965.69	1,944.30
Nov 10, 2023	1,936.79	1,958.40	1,960.93	1,933.18

Data Source: Bloomberg

In the three weeks to October 27, 2023, gold was the pick of the asset classes; delivering 9.66% gains. With Powell giving hawkish indications, gold prices cracked sharply to $1936.79/oz this week. Clearly, higher interest rates don’t favour gold as it raises the opportunity cost of holding gold. The focus is unlikely to be very much on gold in the coming weeks. Instead, the markets for now, will focus on the twin global macro drivers of the US 10 year bond yields and the US dollar index (DXY). With so much central bank hawkishness, gold prices are likely to be capped.