Weekly Musings – Macro Quartet for the week ending October 13, 2023

16 Oct 2023 , 09:37 AM

BENCHMARK BOND YIELDS STAY ABOVE 7.3%

It was a data heavy week in the US and in India. Let us talk about what triggered hawkishness in the US markets. The Fed minutes indicated that rate hikes would be calibrated and only undertaken if essential. However, the minutes also said that rates would be on pause mode at elevated levels for longer than originally expected. That also mean back-ending of rate cuts. Incidentally, bond yields in the US tapered during the week from a high of 4.81% to 4.63%. 

However, the bond yields in India stayed above the 7.3% mark through the week. India saw robust data on the IIP front at 10.3% growth in August 2023. In addition, the September CPI inflation also came in lower than expected at 5.02%, indicating that the RBI had the necessary support to keep rates static. However, what kept bond yields higher was the sell-off in bonds by investors who had bought these bonds on hopes of more rate hikes. The sell-off in bonds kept bond yield sat above 7.3% on the 10-year benchmark.

OIL PRICES HARDEN, EVEN AS THE INDIAN RUPEE WEAKENS

The previous week had seen a sharp fall in the oil prices on the back of a stronger dollar and OPEC not deepening supply cuts. However, the recent week saw Brent crude bouncing back from $84/bbl to $90/bbl This came on the back of rising geopolitical strife in the Middle East and West Asia as the war between Israel and Hamas intensified, with a strong possibility of the US reimposing sanctions on Iran. That is not good news for crude oil prices.

The week also saw the rupee weakening sharply to the 83.42/$ levels. The spike in oil did play a part but the bigger worry was the strength in the dollar index. During the week, the dollar index (DXY) rallied from 106.13 to 106.67 levels, putting further pressure on the Indian rupee. The persistent selling by FPIs only added to the pressure on the currency.

 

BOND YIELDS STAY ELEVATED IN THE WEEK

The bond yields may not have spiked like in the previous week, but the week saw the yields persistently at above the 7.3% mark, as captured in the table below.

Date	Price (%)	Open (%)	High (%)	Low (%)
Sep 18, 2023	7.149	7.193	7.193	7.139
Sep 19, 2023	7.149	7.193	7.193	7.139
Sep 20, 2023	7.153	7.171	7.171	7.143
Sep 21, 2023	7.136	7.207	7.207	7.129
Sep 22, 2023	7.150	7.110	7.164	7.086
Sep 25, 2023	7.150	7.186	7.186	7.124
Sep 26, 2023	7.146	7.178	7.180	7.144
Sep 27, 2023	7.173	7.173	7.173	7.173
Sep 28, 2023	7.238	7.214	7.241	7.148
Sep 29, 2023	7.210	7.241	7.241	7.188
Oct 02, 2023	7.210	7.241	7.241	7.188
Oct 03, 2023	7.235	7.239	7.240	7.210
Oct 04, 2023	7.238	7.257	7.261	7.236
Oct 05, 2023	7.214	7.214	7.226	7.205
Oct 06, 2023	7.339	7.221	7.365	7.218
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

Data Source: RBI

The 10-year benchmark bond yields closed the week at 7.32%. During the week, the bond yield opened much higher at 7.39% but later stayed in the range of 7.3% to 7.4%. What triggered the pressure on bond yields was the spike in crude prices, the risk of imported inflation and the persistent strength in the dollar index. The RBI policy had expressed concerns over inflation, although the CPI inflation for September fell sharply to 5.02%. However, WPI inflation is continuously on the way up and that poses a risk to yield.

To be fair, RBI did not hike the repo rates in October, as was widely expected. However, the RBI did implement hawkishness without bothering the rates. Going ahead, the RBI is likely to hold rates at elevated levels for a longer period. Remember, the RBI has ruled out rate cuts for now. It must be also remembered that the RBI members within the MPC are inclined towards a more hawkish approach, so this modified approach to hawkishness will keep members happy. For now, it looks like higher bond yields are here to stay, and a lot will depend on how the US bond yields pan out in the coming days.

RUPEE WEAKENS SHARPLY DURING THE WEEK

For the third week in a row, Indian rupee stayed above the 83/$ mark. This week, the rupee weakened sharply to close at 83.42/$ mark, which is one of the weakest ever close for the Indian rupee. During the week, US bond yields tapered from 4.81% to 4.63%, but the dollar index spiked from 106.13 to 106.67 levels. Hawkishness hopes in the rupee are keeping the dollar strong, putting further strain on the rupee value. The persistent selling by the FPIs in Indian equities during the week only added to the pressure on the rupee. Also, with falling reserves, the RBI would be wary of intervening in the rupee market, beyond a point.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Sep 18, 2023	83.270	83.106	83.360	83.085
Sep 19, 2023	83.310	83.250	83.344	83.170
Sep 20, 2023	82.920	83.261	83.297	82.924
Sep 21, 2023	83.102	83.193	83.222	83.005
Sep 22, 2023	82.970	82.876	82.993	82.769
Sep 25, 2023	83.130	83.057	83.179	83.029
Sep 26, 2023	83.230	83.122	83.309	83.099
Sep 27, 2023	83.181	83.297	83.312	83.153
Sep 28, 2023	83.150	83.237	83.273	83.111
Sep 29, 2023	83.030	83.209	83.209	83.012
Oct 02, 2023	83.174	83.165	83.234	83.123
Oct 03, 2023	83.214	83.233	83.271	83.127
Oct 04, 2023	83.250	83.235	83.346	83.173
Oct 05, 2023	83.200	83.214	83.305	83.178
Oct 06, 2023	83.118	83.218	83.303	83.121
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

Data Source: RBI

There are 2 contrasting factors at play on the Indian rupee. Let us look at the positive side first. The trade data reported for September was much better than expected. The overall deficit for September (merchandise trade deficit plus services trade surplus) for the month was just $4.91 billion. That raises the hope that current account deficit for FY24 could be held under 1.5% of GDP. This is in sharp contrast to the view of brokers like UBS, who are pegging the CAD at above 2% of GDP. That will be a big positive for the rupee. 

However, the spike in Brent crude prices, and the rising level of geopolitical uncertainty would be a negative factor for the rupee. India has an 85% exposure to crude oil imports, which is a major overhang for the rupee markets. The geopolitical situation is worsening and that is likely to keep the pressure on the rupee. RBI intervention may be a response to FPI selling, but it is never a long term solution. The pressure on forex reserves and the risk of too much rupee liquidity are the downsides. Rupee pressure looks likely to persist.

BRENT CRUDE BOUNCES ON GEOPOLITICAL CONCERNS

In the last 3 months, Brent Crude prices rallied by 35%. Having tapered in the previous week, the latest week has seen a bounce in oil prices. Last week, the oil prices fell sharply from $94/bbl to $84/bbl on the back of OPEC not announcing further supply cuts and a strong dollar. However, even at this stage, the geopolitical risks in the Middle East and West Asia and the possibility of stiffer US sanctions remain a major risk factor. Oil prices still look likely to get above $100/bbl, as projected by Goldman Sachs. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Sep 18, 2023	94.43	94.28	94.95	93.79
Sep 19, 2023	94.34	94.66	95.96	94.16
Sep 20, 2023	93.53	94.49	94.72	92.76
Sep 21, 2023	93.30	93.08	94.60	92.20
Sep 22, 2023	93.27	93.37	94.64	92.80
Sep 25, 2023	91.88	92.39	92.73	91.20
Sep 26, 2023	92.43	91.87	92.70	90.41
Sep 27, 2023	94.36	92.43	94.80	92.43
Sep 28, 2023	93.10	94.38	95.35	92.75
Sep 29, 2023	92.20	93.07	94.13	91.96
Oct 02, 2023	90.71	92.18	93.33	90.35
Oct 03, 2023	90.92	90.40	91.56	89.50
Oct 04, 2023	85.81	91.04	91.21	85.75
Oct 05, 2023	84.07	85.88	86.52	83.84
Oct 06, 2023	84.58	84.49	84.95	83.44
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

Data Source: Bloomberg

The crude market globally is still undersupplied by 2 million barrels per day (bpd), so the pressure on crude prices will continue. However, oil has the tendency to overstretch on both sides and that is likely to continue. Supply may be more distributed today, but one must not forget that even today Saudi Arabia and Russia control 23% of world oil output and 27% of annual oil exports. Hence, their influence on oil price is going to be significant. On the other side, there is also greater bargaining power on the demand side. For instance, the US, China, and India account for 42% of world oil consumption, and that strength cannot be wished away. For now, it looks like the undertone of crude oil prices will remain strong.

GOLD PRICES SPIKE ON SAFE HAVEN DEMAND

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)
Sep 18, 2023	1,933.14	1,924.19	1,934.61	1,922.15
Sep 19, 2023	1,930.94	1,933.68	1,937.94	1,929.71
Sep 20, 2023	1,929.68	1,931.69	1,947.80	1,927.90
Sep 21, 2023	1,919.57	1,930.99	1,931.74	1,913.40
Sep 22, 2023	1,924.99	1,920.08	1,929.65	1,919.58
Sep 25, 2023	1,915.66	1,925.24	1,927.26	1,915.00
Sep 26, 2023	1,900.49	1,916.03	1,916.89	1,899.17
Sep 27, 2023	1,874.70	1,900.69	1,903.95	1,872.47
Sep 28, 2023	1,864.56	1,875.73	1,880.15	1,857.76
Sep 29, 2023	1,848.31	1,865.43	1,880.24	1,846.34
Oct 02, 2023	1,827.40	1,848.13	1,849.06	1,826.60
Oct 03, 2023	1,822.81	1,827.96	1,833.36	1,814.70
Oct 04, 2023	1,821.08	1,824.30	1,831.05	1,816.15
Oct 05, 2023	1,820.01	1,820.49	1,829.30	1,812.70
Oct 06, 2023	1,832.26	1,820.40	1,834.97	1,810.10
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

Data Source: Bloomberg

In a sense the latest week belonged to gold. After touching a low of $1,820/oz in the previous week, it bounced back to $1860/oz early this wake and closed the week at $1,933/oz. This is largely on the back of safe haven demand for gold as the overall geopolitical situation in the global markets is worsening. However, for gold to really rally, the interest rates have to come down sharply. High interest rates raise the opportunity cost of holding gold and that is not a great idea for gold prices. Going ahead, any bounce back in the demand for risk assets like equities, is not great news for gold. Also, since gold is expressed in dollars, the spike in the dollar index is also hurting gold prices. This looks like a flash bounce and may be hard to sustain.

How do we see the macro quartet next week? Most data points are done and dusted. For now, the story seems to be of hardening US bond yields and dollar strength. That does not look to be changing in the short run.