Weekly Musings – Macro Quartet for the week ending October 20, 2023

23 Oct 2023 , 07:07 AM

MACRO QUARTET THROUGH THE GLOBAL LENS

Each week we generally look at the macro quarter viz. India 10-year bond yields, USDINR equation, Brent Crude Prices and Spot Gold prices and the trends for the week. As much as the bond yields and the rupee dollar equation are domestic data points, there is a deep impact that global factors have on these data points. However, the global data points are quite wide and hard to encapsulate in parameters. Therefore, we look at two very important global parameters viz. the US 10 year bond yield movements and the dollar index movements; which essentially capture the crux of the global macros. Here is a quick look at the US-10 year bond yields for the latest week.

Date	Price (%)	Open (%)	High (%)	Low (%)
Oct 16, 2023	4.700	4.648	4.725	4.643
Oct 17, 2023	4.836	4.714	4.862	4.704
Oct 18, 2023	4.911	4.838	4.928	4.811
Oct 19, 2023	4.990	4.938	4.996	4.894
Oct 20, 2023	4.917	4.988	4.995	4.892

It is quite clear from the above table that the US bond yields continue to harden due to a mix of hawkish expectations and selling in global bonds amidst the disappointment of Fed delaying rate cuts on the back of higher inflation expectations. US bond yield spiked to a high of 4.99% during the week, before settling at 4.917%. That is a sharp rally and that is likely to put pressure on the Indian bond yields too. Let us now turn to the Dollar index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Oct 16, 2023	106.24	106.58	106.63	106.18
Oct 17, 2023	106.25	106.26	106.53	106.02
Oct 18, 2023	106.57	106.22	106.64	106.01
Oct 19, 2023	106.25	106.54	106.67	105.97
Oct 20, 2023	106.16	106.25	106.42	106.07

What do we gather from the US Dollar Index (DXY). The index is an index of dollar strength. In the last 40 years, there are only 3 occasions when this index has gone above 107 and the third occasion happened just few weeks back. For now, the US dollar index is hovering between 106 and 107, but the strength in the dollar index is unmissable. That is likely to add to the pressure on the Indian rupee. That is likely to add to the pressure on the Indian bond yields and also depress the rupee further. Here we look at how these two parameters viz. US bond yields and the US dollar index; as well as other global and domestic factors played out on the Indian bonds yields, rupee dollar equation as well as global gold prices and the global price of Brent Crude.

INDIA BOND YIELDS STAY ABOVE 7.3% ON US YIELD PRESSURE

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. In fact, the 10 year bond yields went as high as 7.38% during the week on multiple occasions.

Date	Price (%)	Open (%)	High (%)	Low (%)
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
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

Data Source: RBI

The 10-year benchmark bond yields closed the week at 7.365%. During the week, the bond yield opened at 7.33% but later stayed in the range of 7.3% to 7.4% through the entire week. The bond yields were expected to taper after the RBI MPC minutes, but the MPC members gave out a cautious commentary on inflation, which even led to the 10-year bond yields spiking all the way to 7.38%. Of course, crude above $92/bbl meant greater risk of imported inflation and the persistent strength in the dollar index added to the story. The RBI MPC minutes has not ruled out further rate hikes if inflation stayed out of control.

Like the Fed, even the RBI has hinted that it would hold rates at elevated levels for a longer period. RBI has already ruled out rate cuts for now. During the week, the US bond yields spiked to 4.99%, the highest level in 23 years, and that is also keeping the pressure on the Indian 10-year bond yields. For now, it looks like higher bond yields are here to stay, and a lot will depend on the trajectory of US bond yields from here on.

RBI DEFENDS RUPEE, BUT WEAKNESS QUITE PERCEPTIBLE

For the fourth week in a row, Indian rupee stayed above the 83/$ mark. This week, the rupee strengthened sharply to close at 83.15/$ level compared to 83.42/$ levels at the close of the previous week. During the week, the US 10-year bond yields spiked from 4.63% to 4.99%, although the dollar index remained rangebound. For the week the RBI has defended the rupee at around the 83.50/$ levels, but it is having its own repercussion in the form of falling forex reserves and tighter rupee liquidity in the Indian market.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
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
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

Data Source: RBI

There are 2 contrasting factors at play on the Indian rupee. On the positive side, the trade data for September was much better than expected. The overall deficit for September 2023 was just $4.91 billion. That means that the current account deficit (CAD) for FY24 could be held under 1.5% of GDP. This comes as a relief at a time when large brokerage houses like UBS had raised concerns that India’s current account deficit could cross 2% of GDP in FY24 amidst a weakening rupee, spike in crude prices, and rising imported inflation.

However, the spike in Brent crude prices, and the geopolitical uncertainty in West Asia could be clearly negative factors for the Indian rupee. India depends on imports to meet 85% of its daily crude oil needs. That is not going to change overnight. Experts are already worried that if the US extends sanctions to Iran then one can see a sharp spike in insurance rates for ships travelling through the Strait of Hormuz, pushing up oil prices higher.

BRENT CRUDE BOUNCES ON GEOPOLITICAL CONCERNS

Brent Crude prices had rallied 35% between the start of July and the end of September. October saw some tapering of oil prices, but the geopolitical uncertainty in the Middle East and West Asia means that crude is back to above $92/bbl. This week, the Brent Crude prices opened at around $89/bbl and closed at $92/bbl. Oil prices still look likely to get well beyond $100/bbl, as projected by Goldman Sachs. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
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
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

Data Source: Bloomberg

The crude market globally is still undersupplied by 2 million barrels per day (bpd), and any disruptions in the trade route would mean a wider gap. For now, neither Russia, nor Saudi Arabia plans to hike supplies. Therefore, the pressure on crude prices is likely to continue. 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. While there have been concerns of slowdown in growth, that is still likely to manifest as lower oil demand. For now, the suppliers are still calling the shots, even assuming that the dollar appreciates further.

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 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
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

Data Source: Bloomberg

For the second week in succession, the macro quartet narrative belonged to gold. In the last 2 weeks, the price of gold has rallied 8.13% from $1,832/oz to $1981/oz. In the last 2 weeks, gold has been the best performing asset class, and that is not surprising. Amidst geopolitical risk, it is normally gold that performs the best among asset classes due to the safe haven demand. After all, gold is not just an asset class, but also a currency. However, a fundamental rally in gold would call for interest rates to come down sharply; and that does not look likely for now. After all, low interest rates, reduce the opportunity cost of holding gold. High interest rates raise the opportunity cost of holding gold and that is not a great idea for gold prices. Apart from safe haven demand, gold rally predicates on low interest rates, weak appetite for risk assets and a weak dollar. For now, this combination is elusive.

What happens to the macro quartet next week? For now, the story seems to be of hardening US bond yields and dollar strength. That may not change too easily.