Weekly Musings – Macro Quartet for the week ending October 27, 2023

30 Oct 2023 , 07:22 AM

MACRO QUARTET THROUGH GLOBAL LENS

This week, the US 10-year bond yields crossed the crucial 5% mark, albeit briefly. There was some buying in bonds at that level by institutions and that allowed the bond yields in the US to taper to 4.85%, still quite high by recent trends. Bond yields in the US are up from 3.4% in June this year and clearly point to a shift in the Fed policy stance to something more actionable on the inflation front.

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 (%)
Oct 23, 2023	4.848	4.958	5.021	4.829
Oct 24, 2023	4.819	4.859	4.889	4.800
Oct 25, 2023	4.961	4.823	4.966	4.806
Oct 26, 2023	4.849	4.949	4.989	4.838
Oct 27, 2023	4.845	4.853	4.893	4.830

US bond yields, did show some correction after touching 5% during the week, but that may not hold this week if Fed gives out a hawkish commentary. The selling in US bonds, which had spiked the yields, changed to bond buying when the yields touched 5%. However, the real story will only emerge after the Fed policy statement is announced on November 01, 2023. US bond yield spiked to a high of 4.99% on a closing basis in the previous week and to 4.96% this week, after briefly cross the 5% mark. Let us now turn to the Dollar index.

Date	Price (%)	Open (%)	High (%)	Low (%)
Oct 23, 2023	105.54	106.16	106.33	105.52
Oct 24, 2023	106.27	105.61	106.32	105.36
Oct 25, 2023	106.53	106.25	106.57	106.14
Oct 26, 2023	106.58	106.56	106.89	106.53
Oct 27, 2023	106.57	106.58	106.80	106.32

What do we gather from the US Dollar Index (DXY). On Monday, there was a sharp fall to 105.54 on a closing basis, but it got back to its regular range of 106 to 107 and closed almost at the mid-point. 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 last 2 occasions were in the last 1 year. For now, the US dollar index is hovering between 106 and 107, but the strength in the dollar index would be inevitable if the Fed allows higher terminal rates as the new normal. 

That is likely to add to the pressure on the Indian rupee and also put pressure on Indian bond yields. For now, the two critical global macros of US bond yields and the Dollar index continue to be negative for FPI flows. But, first a look at the macro quartet for the week.

INDIA BOND YIELDS STAY ABOVE 7.3% ON US YIELD PRESSURE

The bond yields may not have spiked like in the first two weeks of October, but the yields were persistently above the 7.3% mark. While the 10 year bond yields went as high as 7.38% during the week, the close was also fairly elevated at around the 7.35% mark for the week.

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

Data Source: RBI

The 10-year benchmark bond yields closed the week at 7.351%. During the week, the bond yield opened at 7.38% but later stayed in the range of 7.3% to 7.4% through the entire week before closing at 7.35. The bond yields have held steady after the RBI MPC minutes in the previous week had given 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 $90/bbl meant greater risk of imported inflation and the persistent strength in the dollar index added to the story. Meanwhile, the markets are still digesting the full impact of the geopolitical crisis.

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. During the week, the US bond yields crossed 5%, albeit briefly, but some bond buying at that yield level helped the yields to taper to 4.85% by close. For now, it looks like higher bond yields are here to stay, and the next levels to watch out on the 10-year bond yields would be 7.4% and 7.5%.

DESPITE RBI SUPPORT, RUPEE WEAKENS

For the fifth week in a row, the Indian rupee stayed above the 83/$ mark. This week, the rupee strengthened to 83.07/$ levels on opening but by the end of the week, the pressure of FPI outflows pushed the rupee back to 83.41/$ levels. FPIs sold close to $1.25 billion in the last 2 days, and the entire rupee fall from 83.14 to 83.41 happened in the last 2 days of the week only. During the week, the US 10-year bond yields faced resistance at 5.00% and tapered to close around 4.84%, as bond buying picked up at the 5% yield levels. RBI has been aggressively defending the rupee in a range, but costs in the form of falling forex reserves and tighter rupee liquidity in the Indian market are also piling up.

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

Data Source: RBI

The rupee may look relatively safe from a longer term perspective as the CAD looks to be in control. However, the current situation is not about the long term but what happens in the  short term, and that is not too encouraging. In the short term, the Brent crude prices staying above $90/bbl and the geopolitical uncertainty in West Asia are clearly negative factors for the Indian rupee. India depends on imports to meet 85% of its daily crude oil needs and that reality cannot be wished away. Experts are concerned that if the US sanctions Iran then there could be another sharp spike in insurance rates for ships travelling through the Strait of Hormuz, pushing up oil prices higher. For now, that remains a major risk factor.

BRENT CRUDE BOUNCES ON GEOPOLITICAL CONCERNS

Brent Crude prices fell below $90/bbl several times during the week, but the pressure of global geopolitics triggered Brent Crude to close the week at $90.48/bbl. October had briefly seen some tapering of oil prices, but the geopolitical uncertainty in the Middle East and West Asia has pushed crude back to above $90/bbl. Oil prices look likely to get beyond $100/bbl, as projected by Goldman Sachs, if the geopolitical stand-off persists. 

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

Data Source: Bloomberg

The larger reality is that the crude market globally is still undersupplied by 2 million barrels per day (bpd), and that means the suppliers are still holding the upper hand. There have been intermittent concerns about crude demand being hit by falling demand, but such fears appear to be misplaced if you look at the US third quarter GDP growth of 4.9%, which was way above the most optimistic expectations. Saudi Arabia and Russia still control 23% of world oil output and 27% of annual oil exports and they do intend to sustain supply cuts for the time being. So, oil supply still remains an overhang.

GOLD PRICE GAINS 9.66% IN 3 WEEKS FLAT

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 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
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

Data Source: Bloomberg

In the last 3 weeks, the finest performer has been gold as an asset class. For the third week in succession, gold rallied and closed above $2,000/oz after a long gap. In the last 3 weeks, the price of gold has spiked from $1,832/oz to a peak of $2,009/oz; a gain of an impressive 9.66% in just 3 weeks. For the third week in a row, gold has been the best performing asset class, and that is not surprising since gold normally does well amidst geopolitical strife and macroeconomic uncertainty. 

However, a sustained rally in gold would call for interest rates to come down sharply; and that does not look likely for now. Low interest rates, reduce the opportunity cost of holding gold, while elevated rates (like now), raise the opportunity cost of holding gold. Even the persistent rally in the dollar will not do much good so the gold rally may once again struggle to sustain. For now, the big stories are hardening US bond yields and dollar strength.