Weekly Musings – Macro Quartet for the week ending November 24, 2023

27 Nov 2023 , 08:59 AM

OIL AND GOLD WERE IN THE NEWS THIS WEEK

When it comes to the global macro story, there were 2 factors that really moved this week. Oil prices fell sharply for two reasons. Firstly, the US has been consistently announcing higher US inventories and that is normally a price dampener. During the week, the oil prices dipped below $80/bbl in the Brent market, before ending the week just above $80/bbl. The second factor that pressured oil markets was the frequent delays in holding the OPEC meet. African members of OPEC could not agree with the GCC oil barons, leading to differences over supply cuts. That appears to have been resolved, but we await OPEC meeting outcome.

Even as the broad macros gave a picture of stability and normalcy, there is a sub-terranean shift that is playing out. Markets are of the view that uncertainty is back and that was largely contributed by the Fed minutes. In its latest minutes, the Fed underlined that rate hikes could be necessitated if inflation was not reined in. The minutes also indicated that rate cuts were not even being considered, leave alone being discussed. Apparently, the enthusiasm of the CME Fedwatch appears misplaced. If the hawkishness continues, growth could be the casualty. Already, the Atlanta Fed is projecting Q4 GDP growth to fall back to 2% from 4.9% in Q3. This uncertainty led to gold rallying by 3.5% in the last 2 weeks.

STORY OF 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 as it impacts 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 20, 2023	4.426	4.461	4.488	4.410
Nov 21, 2023	4.398	4.414	4.443	4.383
Nov 22, 2023	4.408	4.394	4.447	4.363
Nov 23, 2023	4.453	4.405	4.464	4.391
Nov 24, 2023	4.472	4.451	4.494	4.443

US bond yields, are now a full 53 bps below the recent peak of 5% scaled over two weeks back. Interestingly, the relatively hawkish tone of the Fed minutes had only a marginal impact on the US bond yields. That is because, markets don’t really expect any runaway inflation in global markets. In the coming week, the PCE inflation could be a key factor in nurturing inflation expectations and shaping outlook for interest rates. That will have a direct impact on the bond yields. Also, Powell is scheduled to speak in the coming week and that will also have an impact. Let us now turn to the Dollar index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Nov 20, 2023	103.44	103.82	103.97	103.38
Nov 21, 2023	103.57	103.47	103.71	103.18
Nov 22, 2023	103.92	103.55	104.21	103.48
Nov 23, 2023	103.92	103.86	103.88	103.54
Nov 24, 2023	103.42	103.75	103.84	103.36

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). Despite the relatively hawkish tone of the US Fed, the dollar index (DXY) was relatively flat for the week. 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. However, the dollar index has already fallen sharply from that level and looks set to stick to the range of between 102 and 104 for the near future.

INDIA BOND YIELDS MOVE UP 6 BPS TO 7.27% FOR THE WEEK

The Indian bond yields increased 6 basis points this week from 7.21% levels to close at 7.27% levels. The upward pressure on the Indian 10 year bond yields stayed through the week and the hawkish note of the Fed minutes only added to the spike in bond yields. The PCE inflation and the India GDP data will be key factors influencing the bond yields in the coming week. 

Date	Price (%)	Open (%)	High (%)	Low (%)
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
Nov 20, 2023	7.252	7.230	7.257	7.224
Nov 21, 2023	7.269	7.247	7.272	7.237
Nov 22, 2023	7.247	7.277	7.277	7.245
Nov 23, 2023	7.253	7.258	7.263	7.246
Nov 24, 2023	7.272	7.278	7.291	7.266

Data Source: RBI

The 10-year benchmark bond yields closed the week at 7.272%. During the week, the bond yield opened at 7.252% but later stayed in the range of 7.24% to 7.29% through the entire week before closing at 7.272%. While the language of the US Fed has been more hawkish than expected, it only had a marginal impact on the India bond yields. That is because, the RBI has already indicated that it would not be too keen to hike rates aggressively from these levels since it also has a growth and solvency story to worry about in the Indian context. That is correct as India cannot afford to give up its mantle of being the fastest growing large economy in the world. However, bond yields could still get impacted by higher crude prices and weaker rupee as they both can translate into higher levels of imported inflation.

RUPEE FLAT FOR THE WEEK, BUT WATCH FOR TRADE PRESSURE

For the ninth week in a row, the Indian rupee stayed beyond the 83/$ mark. This week, the rupee opened at 83.317/$ and closed the week with at 83.314/$ levels. On a week-on-week basis, the rupee was virtually flat. The dollar index was largely stable, which ensured the rupee did not budge too much.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
Nov 20, 2023	83.317	83.265	83.424	83.230
Nov 21, 2023	83.308	83.321	83.380	83.228
Nov 22, 2023	83.287	83.313	83.359	83.255
Nov 23, 2023	83.305	83.276	83.368	83.265
Nov 24, 2023	83.314	83.344	83.413	83.313

Data Source: RBI

Typically, the Indian rupee has been closely linked to the dollar index, but there are 2 more factors that impact rupee value. The first is crude oil prices. That has tapered in recent weeks to around $80/bbl. While US inventories are on the rise, the OPEC decision will hold the key to how oil prices react in the near future. During the week, the hawkish tone of the Fed minutes took the rupee as low as 83.38/$ but it managed to recover towards the end of the week. Meanwhile, the record trade deficit of $31.46 billion for October 2023 will remain an overhang for the rupee value, since it raises the risk of CAD (current account deficit) crossing 2.5% of GDP for FY24.

BRENT CRUDE FALLS ON DELAYS IN OPEC MEETING

In the last 3 weeks, the price of Brent crude has fallen from $90.15/bbl to $80.58/bbl. This week, oil bounced in the early part of the week but fell after the OPEC members could not agree upon a date for the OPEC meeting. At $80.58/bbl, Brent crude closed the week almost at the same level as the previous week. In recent weeks, the higher oil inventories reported by the US and lower refining throughput in China; were the factors that depressed oil prices. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
Nov 20, 2023	82.32	80.30	82.94	79.58
Nov 21, 2023	82.45	82.13	82.54	81.43
Nov 22, 2023	81.96	82.47	82.65	78.41
Nov 23, 2023	81.42	81.60	81.63	80.19
Nov 24, 2023	80.58	81.40	82.20	80.13

Data Source: Bloomberg

The fall in oil prices on Friday was on account of uncertainty over the OPEC meeting after the GCC members of OPEC and African members could not arrive at a consensus on supplies. The African OPEC members like Angola, Congo and Nigeria were unwilling to accept further supply cuts and want to start selling at full capacity. However, towards the end of the week, some compromise was arrived at and OPEC is finally meeting on Sunday, with the minutes expected on Monday. That holds the key to oil prices next week.

GOLD PRICES SPIKE FOR SECOND WEEK IN A ROW

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 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
Nov 20, 2023	1,977.19	1,980.39	1,985.26	1,965.20
Nov 21, 2023	1,998.37	1,977.49	2,007.52	1,977.34
Nov 22, 2023	1,989.72	1,998.69	2,006.90	1,986.89
Nov 23, 2023	1,991.79	1,990.15	1,999.19	1,989.01
Nov 24, 2023	2,002.85	1,994.20	2,003.68	1,991.51

Data Source: Bloomberg

With hawkish Fed minutes hinting at rate hikes, the growth uncertainty is back. The US economy is expected to see GDP growth fall to 2% in Q4 after growing at 4.9% in Q3. At the same time, Fed is likely to hold rates for longer, so that is also marginally positive for gold prices. With global growth concerns back, gold rallied from $1,980/oz to $2,003/oz this week. Gold has rallied 3.5% in last 2 weeks and the Fed minutes added to the allure of gold. 

At a fundamental level, gold rallies are a function of low interest rates as they reduce the opportunity cost of holding gold and are seen as positive for gold prices. That was the one factor that drove gold rallies in the past. It is not clear, how much more legs gold has, but the undertone appears to favour gold. For now, all that glitters is surely gold.