Weekly Musings – Macro Quartet for the week ending September 01, 2023

4 Sep 2023 , 06:44 AM

It was another mixed week for the macro quartet for the week ended September 01, 2023. Bond yields were lower than the previous week, but for the week, the bond yields ended exactly where they started. One would have expected the higher inflation reading in India to have spiked the bond yields. However, the sober bond yields were predicated on high growth. Eventually, GDP growth in real terms for June 2023 quarter came in better than expected at 7.8% annualized. Even the core sector growth has stabilized at above 8%. With India already the fastest growing large economy in the world by a margin, the RBI may not have much of an incentive to experiment with rate hikes at this juncture. The high growth rate may have just given the RBI a longer rope to pause. Bond yields and the rupee dollar were stable during the week, but the real spike was seen in the oil prices as Brent jumped to above $88/bbl. Gold prices also rallied amidst rising global uncertainty.

HOW REAL IS THE OIL PRICE SCARE THIS TIME AROUND?

Oil prices had been subdued in the range of $70/bbl to $80/bbl for a long time as supply concerns were largely outweighed by demand worries. That concern appears to have been addressed for now. The Russian oil minister, Alexander Novak, has clearly stated that Russia would be collaborating with the OPEC for cutting supplies further. Remember, Saudi Arabia and Russia are the largest and the second largest exporters of crude oil in the world. Russia has paid the price of US sanctions for too long and now wants its pound of flesh. The OPEC also realizes that their only strategy to stay relevant is to closely collaborate with Russia. Between them, they get a supply dominance which would be hard to beat. Dominance in oil does not come just from production but from exports and that is where Saudi Arabia and Russia score in a big way. While the shortfall may not be as bad as at the peak of the Ukraine war last year, it is clear that oil prices could gradually move into the range of $90/bbl to $100/bbl in the Brent crude market. That scare was evident this week.

BOND YIELDS TAPER TO 7.18% IN WEEK TO SEPTEMBER 01, 2023

After peaking at 7.5% in April and May, the 10-year bond yields fell below 7% in the first week of June after the RBI appeared to be holding rates longer than expected. The June RBI policy had been hawkish while holding rates, but even the August policy had held status quo on rates. Effectively the last rate hike by the RBI was in February, and that market is now convinced that the RBI is prepared to pause for longer. The robust GDP data for Q1 and the smart core sector data for July 2023 only underline the fact that the RBI can afford to continue with the pause for longer. This is despite concerns over consumer inflation, which had spiked to 7.44% in India in the month of July 2023.

Date	Price (%)	Open (%)	High (%)	Low (%)
Aug 07, 2023	7.197	7.170	7.200	7.156
Aug 08, 2023	7.168	7.186	7.191	7.163
Aug 09, 2023	7.178	7.171	7.181	7.161
Aug 10, 2023	7.154	7.193	7.193	7.152
Aug 11, 2023	7.198	7.179	7.202	7.179
Aug 14, 2023	7.209	7.226	7.226	7.205
Aug 15, 2023	7.209	7.226	7.226	7.205
Aug 16, 2023	7.209	7.226	7.226	7.205
Aug 17, 2023	7.250	7.252	7.256	7.243
Aug 18, 2023	7.214	7.240	7.241	7.209
Aug 21, 2023	7.220	7.233	7.233	7.210
Aug 22, 2023	7.218	7.244	7.244	7.211
Aug 23, 2023	7.194	7.222	7.222	7.193
Aug 24, 2023	7.193	7.178	7.197	7.175
Aug 25, 2023	7.206	7.241	7.241	7.198
Aug 28, 2023	7.178	7.212	7.212	7.166
Aug 29, 2023	7.180	7.178	7.189	7.159
Aug 30, 2023	7.185	7.153	7.192	7.153
Aug 31, 2023	7.166	7.177	7.186	7.164
Sep 01, 2023	7.175	7.174	7.184	7.163

Data Source: RBI

The 10-year benchmark bond yields closed the previous week at 7.206%. However, it opened the latest week below 7.2% and stayed around the 7.17%-7.19% range through the week. Inflation remains an overhang, but the market interpretation appears to be that inflation in India is more of a temporary phenomenon and should abate once the Kharif output starts hitting the mandis. The only concern was whether the growth engine would continue to fire. The latest GDP data shows real GDP growth at 7.8% annualized for Q1FY24 and core sector growth has come in at 8.0% for July. This has given the confidence to the markets that RBI may hold rates despite higher inflation. That is reflected in tapering bond yields. Also, the surge in liquidity in the week led to treasury bill yields tapering at the short end of the curve. That also had its spillover effect on the longer term yields.

RUPEE ENDS WEEK TO SEPTEMBER 01, 2023 ABSOLUTELY FLAT

After two weeks of consistent weakening of the rupee, the Indian currency managed to strengthen against the US dollar in the previous week and that trend has been respected in the current week also. In the latest week, the rupee may not have strengthened, but held steady at Rs82.60/$ through the entire week. From a low of Rs83.16/$, the rupee jumped to Rs82.50/$ level in the previous week and closed at Rs82.63/$ levels. In the current week, it hovered around these levels for most part of the week. The oil prices would have normally pressured the rupee since Brent Crude rallied this week from $84.40/bbl to $88.10/bbl. However, the RBI did intervene during the week to help stabilize the rupee. Of course, the concern is that the FPI flows are far from attractive. At $1.48 billion in August, the FPI inflows are a far cry from $5.5 billion on an average in the previous 3 months. The sharp fall in FPI flows is likely to keep the pressure on the rupee.

Date	Price (₹/$)	Open (₹/$)	High (₹/$)	Low (₹/$)
Aug 07, 2023	82.750	82.741	82.785	82.678
Aug 08, 2023	82.853	82.760	82.984	82.748
Aug 09, 2023	82.844	82.878	82.880	82.783
Aug 10, 2023	82.616	82.840	82.861	82.590
Aug 11, 2023	82.870	82.789	82.911	82.725
Aug 14, 2023	83.170	82.895	83.301	82.895
Aug 15, 2023	83.212	83.185	83.467	83.170
Aug 16, 2023	83.209	83.240	83.443	83.085
Aug 17, 2023	83.130	83.222	83.268	82.989
Aug 18, 2023	83.157	83.099	83.276	82.983
Aug 21, 2023	83.090	83.193	83.217	83.021
Aug 22, 2023	83.040	83.113	83.122	82.909
Aug 23, 2023	82.508	83.082	83.090	82.449
Aug 24, 2023	82.580	82.579	82.646	82.359
Aug 25, 2023	82.637	82.605	82.740	82.532
Aug 28, 2023	82.600	82.585	82.662	82.527
Aug 29, 2023	82.574	82.646	82.842	82.576
Aug 30, 2023	82.607	82.593	82.819	82.568
Aug 31, 2023	82.702	82.678	82.799	82.582
Sep 01, 2023	82.689	82.647	82.784	82.576

Data Source: RBI

During the current week, the dollar index (DXY) gained 65 bps to the 104.26 levels. Despite the dollar strength, the rupee has held on during the week. Of course, the question does remain as to whether the RBI would continue to defend the rupee. However, with nearly $600 billion in its war chest, the RBI has the luxury of defending the rupee quite aggressively. At least, that is what it appears to be doing for the time being.

BRENT CRUDE RALLIES TO $88/BBL ON MAJOR SUPPLY CONCERNS

Brent Crude had fallen to $84.40/bbl in the previous week, but this week it bounced sharply to above $88/bbl. Even the WTI crude is now above $85/bbl. One factor has been the supply concerns, with the OPEC and the Russian oil minister, Alexander Novak, hinting at more supply cuts. Combined with robust demand levels, it looks like oil could be headed above $90/bbl. Also, the US crude inventories continue to fall sharply and that is not helping the crude prices to correct either. For now, the pressure on oil appears to be upward. 

Date	Price ($/bbl)	Open ($/bbl)	High ($/bbl)	Low ($/bbl)
Aug 07, 2023	85.34	86.23	86.73	85.03
Aug 08, 2023	86.17	85.79	86.34	83.32
Aug 09, 2023	87.55	86.00	87.65	85.91
Aug 10, 2023	86.40	87.39	88.10	86.20
Aug 11, 2023	86.81	86.37	87.35	85.84
Aug 14, 2023	86.21	86.53	86.71	85.50
Aug 15, 2023	84.89	86.12	86.68	84.29
Aug 16, 2023	83.45	85.20	85.36	83.13
Aug 17, 2023	84.12	83.20	84.88	83.05
Aug 18, 2023	84.80	83.88	85.08	83.33
Aug 21, 2023	84.46	84.80	85.86	84.31
Aug 22, 2023	84.03	84.46	84.66	83.85
Aug 23, 2023	83.21	83.99	84.26	81.94
Aug 24, 2023	83.36	82.95	83.62	81.97
Aug 25, 2023	84.48	83.26	84.97	82.67
Aug 28, 2023	84.42	84.87	85.23	84.11
Aug 29, 2023	85.49	84.39	85.65	83.80
Aug 30, 2023	85.86	85.62	86.23	85.11
Aug 31, 2023	86.83	85.22	86.88	85.08
Sep 01, 2023	87.80	86.22	88.19	86.15

Data Source: Bloomberg

The big question still remains on the demand side. However, the indications coming from the recent GDP numbers is that oil demand is unlikely to be impacted to any serious degree. China may be slowing down, but otherwise global demand is expected to be robust. Hence, the deciding pivot for oil would still be the supply side story and that is where the OPEC and Russia are getting together to curtail supplies. The equation in the global oil story appears to have shifted in favour of the oil suppliers for now.

GOLD PRICE PICKS UP SHARPLY IN THE WEEK TO SEPTEMBER 01, 2023

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)
Aug 07, 2023	1,936.39	1,942.59	1,946.81	1,931.53
Aug 08, 2023	1,924.82	1,936.76	1,938.15	1,922.50
Aug 09, 2023	1,914.59	1,925.16	1,932.48	1,914.05
Aug 10, 2023	1,912.06	1,914.94	1,930.11	1,911.73
Aug 11, 2023	1,913.32	1,912.65	1,921.15	1,910.94
Aug 14, 2023	1,907.90	1,913.67	1,916.55	1,902.20
Aug 15, 2023	1,901.56	1,907.40	1,912.19	1,896.15
Aug 16, 2023	1,891.76	1,901.59	1,907.90	1,891.30
Aug 17, 2023	1,888.89	1,892.20	1,903.90	1,884.50
Aug 18, 2023	1,889.42	1,891.35	1,896.87	1,886.84
Aug 21, 2023	1,893.94	1,889.40	1,899.05	1,884.50
Aug 22, 2023	1,897.00	1,895.09	1,905.05	1,888.60
Aug 23, 2023	1,914.31	1,897.80	1,920.94	1,897.23
Aug 24, 2023	1,916.60	1,914.15	1,923.94	1,911.35
Aug 25, 2023	1,914.53	1,917.80	1,923.09	1,903.40
Aug 28, 2023	1,919.66	1,916.09	1,926.19	1,912.83
Aug 29, 2023	1,937.12	1,920.23	1,938.41	1,914.00
Aug 30, 2023	1,942.24	1,937.48	1,949.04	1,934.94
Aug 31, 2023	1,939.74	1,942.61	1,948.19	1,938.86
Sep 01, 2023	1,938.80	1,940.19	1,953.44	1,934.59

Data Source: Bloomberg

After several weeks of weakening gold prices, the last two weeks have seen a spike in spot gold prices. In the previous week, gold prices bounced from $1,889/oz to $1,914/oz. In the latest week, the price of spot gold bounced further to $1,939/oz. It once again looks like gold is emerging as a hedge against event risk. A series of events like the Fitch downgrade, Moody’s downgrade and the worsening geopolitics have helped gold prices recover  meaningfully in the last 2 weeks. However, for the time being, a strong dollar (as evidenced by the dollar index DXY) and the high interest rate levels will keep a lid on the price of gold. After all, high interest rates increase the opportunity cost of holding gold.

In the coming week, the rupee strength will largely predicate on how long the RBI continues to intervene. Domestic bond yields may still stay subdued as any Fed hawkishness is likely to be neutralized by ample liquidity in India. Crude oil may still be a supply play, but gold is likely to be capped by the strong dollar and high interest rates for now!