Weekly Musings – Macro Quartet for the week ending November 17, 2023

20 Nov 2023 , 06:50 AM

THREE WEEKS OF SEE-SAW IN MACRO VARIABLES

It has been three diverse weeks in the global markets. Two weeks back, the US Fed announced its monetary policy and the decision to hold rates at the range of 5.25% to 5.50% was seen as a positive for the markets. However, things had changed in the next week after Jerome Powell had used a very hawkish tone during his speech at the IMF conference. That had led to the CME Fedwatch converging with the Fed point of view. However, in the latest week, the lower inflation data changed all that.

US consumer inflation for October 2023 fell sharply to 3.2% from 3.7% in the months of August and September 2023. This sharp fall in inflation was seen by the market as an affirmation of the view that the Fed may be done with its rate hikes. The Fedwatch has gone a step ahead and even factored aggressive rate cuts by the Fed before end of 2024, after the sharply lower inflation data in the US. Even though the Fed remained concerned that inflation was far from the target of 2%, the markets are fairly pleased and have been led to believe that the Fed may be done with rate hikes. We have to wait and watch!

HOW US BOND YIELDS AND DOLLAR INDEX FARED THIS WEEK?

Two macro variables that set the trend for the global macros are the US bond yields and the US dollar index (DXY). 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 13, 2023	4.638	4.654	4.696	4.624
Nov 14, 2023	4.453	4.644	4.656	4.432
Nov 15, 2023	4.537	4.445	4.559	4.426
Nov 16, 2023	4.441	4.523	4.527	4.432
Nov 17, 2023	4.439	4.439	4.469	4.381

US bond yields, had touched 5% a little over a week ago and has since fallen sharply. However, after the inflation data in the latest week coming in lower at 3.2%, the US bond yields fell sharply from 4.64% to 4.44%. Even as Jerome Powell has continued to talk tough, the CME Fedwatch has built in lower rates and also the end of rate hikes. That had an impact on bond yields, pushing them lower. Of course, the pressure of bond selling is unlikely to come back for now. Let us now turn to the Dollar index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Nov 13, 2023	105.63	105.80	105.96	105.59
Nov 14, 2023	104.06	105.65	105.73	103.99
Nov 15, 2023	104.38	104.22	104.51	103.98
Nov 16, 2023	104.37	104.36	104.56	104.01
Nov 17, 2023	103.82	104.40	104.55	103.81

The dollar index is an index of dollar strength against a basket of global hard currencies like the Pound, Euro, Yen, Chinese Yuan etc. What do we gather from the US Dollar Index (DXY). After the US inflation for October 2023 came in sharply lower at 3.2%, there was a sharp fall from 105.63 to 103.82 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, it looks like the US dollar index may get back to the range between 102 and 104, but we must see the Fed minutes expected this week.

This week, although the US dollar index weakened, the rupee was under pressure due to record high merchandise trade deficit. First, a look at the macro quartet.

INDIA BOND YIELDS TAPER TO CLOSE AT 7.21% FOR THE WEEK

The Indian bond yields fell rather sharply in the previous week and that trend repeated this week too as the bond yields got locked around 7.21% levels. The 10 year bond yields dipped as low as 7.21%, and closed the week at the lowest point. The weak US inflation, lower India inflation and negative WPI inflation led the India bond yields lower this week.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Nov 13, 2023	7.283	7.316	7.316	7.281
Nov 14, 2023	7.283	7.316	7.316	7.281
Nov 15, 2023	7.225	7.262	7.262	7.220
Nov 16, 2023	7.232	7.236	7.236	7.220
Nov 17, 2023	7.212	7.226	7.230	7.194

Data Source: RBI

The 10-year benchmark bond yields closed the week at 7.212%. During the week, the bond yield opened at 7.283% but later stayed in the range of 7.23% to 7.28% through the entire week before closing at its lowest level of the week at 7.212%. After the weaker than expected inflation in the US, the bond yields were continuously trending lower in India.

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. That explains why the Indian bond yields have not fallen too sharply. The relatively elevated bond yields in India also show the risk of imported inflation amidst rising global commodity prices and a weak rupee.

RUPEE WEAKENS AS TRADE DATA RAISES NEW RISKS FOR RUPEE

For the eighth week in a row, the Indian rupee stayed above the 83/$ mark. This week, the rupee opened at 83.180/$ and closed the week with some weakness at 83.294/$ levels. On a week-on-week basis, the rupee was slightly stronger, but there were actually a number of contrarian forces playing on the rupee. The inflation numbers were positive for the Indian rupee, but the higher trade deficit has kept the pressure on the Indian rupee.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Nov 13, 2023	83.180	83.309	83.343	83.201
Nov 14, 2023	83.023	83.187	83.338	82.914
Nov 15, 2023	83.186	83.023	83.221	82.942
Nov 16, 2023	83.140	83.186	83.270	82.994
Nov 17, 2023	83.294	83.140	83.296	83.140

Data Source: RBI

Typically, the Indian rupee has been closely linked to the dollar index, but there are two key factors that impact the rupee value. The first is crude oil prices. That has tapered in the recent days down to $77/bbl, before closing the week at $80/bbl. However, crude is just one side of the story. The bigger concern has been the sharply higher trade deficit on the merchandise account in October 2023. For the month, India reported $31.46 billion of merchandise trade deficit, the highest level of trade deficit ever in any month in history. 

This was driven by a surge in gold imports, which is worse as gold is an unproductive item of import. The overall deficit for India in October stood at $17.5 billion and that raises the risk that the current account deficit (CAD) in FY24 could be much higher than 1.5% of GDP that economists were anticipating. That kept the rupee under pressure during the week, despite positive cues from inflation and crude oil.

BRENT CRUDE FALLS ON HIGHER US INVENTORIES

In the last 2 weeks, the price of Brent crude has fallen from $90.48/bbl to $81.43/bbl. In the latest week, the price of Brent fell to as low as $77/bbl, before settling at $80/bbl for the week. Crude has now fallen more than 14% in the last one month. Even as the OPEC and Russia had not increased their supply cuts, there is pressure on oil coming from two fronts. Firstly, the US inventories of crude have been consistently rising, indicating that the major pressure item is tapering. However, the real reason for the fall has been sharply lower refining throughput in China, which is indicative of lower crude demand from China.

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Nov 13, 2023	82.52	81.43	82.84	80.41
Nov 14, 2023	82.47	82.71	83.97	82.06
Nov 15, 2023	81.18	82.39	83.04	80.79
Nov 16, 2023	77.42	80.98	81.17	76.60
Nov 17, 2023	80.60	77.60	80.81	77.28

Data Source: Bloomberg

Crude oil has been very volatile in last 3 months. From $71/bbl, it spiked to nearly $100/bbl and now it is back to $80/bbl. For India, lower crude prices have the potential to curb current account deficit (CAD) and also hold rupee strength. However, a lot of the crude advantage has been frittered away this month via higher gold imports. But that is a different story altogether. For now, oil promises to be in a narrow range.

GOLD PRICES SPIKE AS MARKET HINTS AT LOWER INTEREST RATES

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 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
Nov 13, 2023	1,945.89	1,937.05	1,949.27	1,931.73
Nov 14, 2023	1,962.54	1,946.61	1,970.91	1,943.83
Nov 15, 2023	1,960.46	1,962.59	1,975.24	1,955.47
Nov 16, 2023	1,982.70	1,960.40	1,988.04	1,956.51
Nov 17, 2023	1,980.87	1,982.62	1,993.49	1,978.65

Data Source: Bloomberg

With global growth concerns back, gold rallied from $1,936/oz to $1,981/oz this week. Gold gained after the market interpreted the Fed language as an indication that rate cuts could be aggressive in 2024. Lower interest rates reduce the opportunity cost of holding gold and are hence positive for gold prices. That was the one factor that drove the rally in gold. Also, the geopolitical uncertainty stays and there are slowdown concerns that are back. It has clearly been a positive week for gold prices.