FX

The overnight release of Q1:14 GDP numbers for China has offset some of yesterday’s bad news (tightening credit and liquidity conditions in China). GDP growth came in at 7.4% y/y, down versus in Q4:13’s 7.7% y/y but slightly better than the predicted slowdown to 7.3% y/y (Bloomberg consensus). This was the slowest growth since Q3:12. Capital Economics points out that, while there is often a degree of scepticism regarding the accuracy of China’s GDP data, other activity indicators appear to confirm the same overall trend, if not exactly the same pace, of economic expansion. Bloomberg consensus forecasts show quarterly growth rate forecasts remaining close to the 7.4% y/y mark over the remainder of this year. While we do not expect a hard landing for China’s economy, the risk of further bouts of stress in the country’s credit markets and associated downside for its economic growth is far from benign. Standard Bank forecasts Chinese GDP growth of 7.1% y/y and 6.9% y/y for 2014 and 2015 respectively.

US CPI numbers for March, published yesterday, showed a strong pickup, echoing the PPI data of last Friday. The rise to 1.5% y/y from 1.1% y/y in February, due largely to base effects, was slightly higher than the 1.4% y/y anticipated (Bloomberg consensus). The core inflation measure also rose, to 1.7% y/y from 1.6% y/y. Analysts had expected core inflation to remain steady. Capital Economics draws attention to the 0.2% m/m rise in medical care costs as a signal that the trend of medical care deflation – a key drag on the headline figure – is coming to an end. This would resonate with the consensus among FOMC members that softness in prices is largely owing “to factors that seem likely to prove transitory”. We reiterate our opinion that the greater risk with respect to data surprises that could potentially alter the Fed’s policy normalisation path sits in inflation indicators/drivers.

Yesterday, Fed Chair Yellen gave opening remarks to the Atlanta Fed’s financial markets conference. She did not reveal anything new regarding the Fed’s policy normalisation plans. Today Yellen speaks at the Economic Club of New York on the subject of “Monetary Policy and the Economic Recovery”. Again, given the audience, Steve Barrow (our G10 Strategist) thinks that this might turn out to be a more academic discussion of policy than one that really gives the market any more clues to her current thinking. Today also sees the release of the Fed’s Beige Book, as well as MBA mortgage applications, housing starts, building permits and industrial production data.

Retail sales numbers for February 2014 will be published today. SBGS economist Kim Silberman expects y/y growth in retail sales to decelerate to 2.5% from an elevated reading of 6.8% in January, and m/m growth to come in at a seasonally adjusted -1.0% against a January reading of 0.8% (seasonally adjusted). Consensus foresees a deceleration in y/y growth of retail sales to 3.8% in February, and a m/m contraction of -0.5%. Base effects argue for some deceleration in the y/y change. In February 2013, retail sales bounced by 2.3% m/m a seasonally adjusted basis. Softer growth of retail sales should be read as interest rate positive and thus currency negative, notwithstanding some ambiguity arising from linkages between consumer demand and the import bill. January retail sales growth published last month defied market expectations, as well as unfavourable CPI inflation trends, slowing household disposable income and credit growth, and weak consumer confidence. But, Kim notes, the shift in retail sales growth from cyclical towards non-cyclical goods continued in January, with durable goods sales, contracting 3.9% y/y. Sales of non-durables meanwhile rebounded sharply.

The rand weakened for the fourth consecutive day against the dollar yesterday, closing at USDZAR10.56 compared with Monday’s close of USDZAR10.51. This occurred into a mixed to stronger performance from the dollar against all of the major crosses, and a mostly weaker performance from commodity and EM currencies we track for purposes of this report. The dollar strengthened against the euro and the yen, while weakening just marginally against the pound. The rand weakened against all of the major crosses, with the biggest move seen against the dollar and the pound (both 0.5%). All but one of the commodity currencies and all but one of the EM currencies we track weakened on the day. The exceptions were the NOK in the former category and the IDR in the latter category. The rand took up the middle position in the commodity currencies category and a middle to higher position in the EM currencies category, in this case beaten only by the THB, the INR and the IDR. The rand traded between a low of USDZAR10.4906 and a high of USDZAR10.5892. Support from where the rand opened this morning sits at 10.4800, 10.3500 and 10.2500. Resistance levels sit at 10.5600, 10.6800 and 10.7400.

Turning to commodity prices, gold and copper both fell by 1.9%, platinum fell by 1.8% and Brent fell by 0.3%. Commodity prices weakened largely in response to softness in credit and money supply data. The ALSI fell by 0.9% and the EM MSCI fell by 1.2%. The EMBI spread widened by 5 bps while the SA’s five-year CDS spread compressed by 1 bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 3.1%.

Non-residents were net buyers of local equities (ZAR627 million) and were net buyers of local bonds (ZAR598 million) on the day. Buying of bonds was seen in the 12+ (ZAR495 million), 7-12 (ZAR224 million) and 1-3 (ZAR62 million) year buckets. Selling of bonds was meanwhile seen in the 3-7 (-ZAR182 million) year segment. Bond yields rose by between 6 bps (R203) and 10 bps (R214) into a bear curve steepening. The 3x6, the 6x9 and 12x15 FRAs rose by 4 bps, 6 bps and 5 bps respectively.


FI

The volume of bids at yesterday’s nominal government bond auction of the R2030, R2037 and R2048 improved to ZAR7.12bn from the previous week’s ZAR6.35bn, for an auction bid/cover ratio of 3.0x at yesterday’s offering. However, pricing action was weak, with all three bonds pricing at slightly higher yields compared with market levels at the time. Investor participation was strong, with a total of 124 participants at the auction compared with 105 at the previous week’s auction. Investor interest was skewed in favour of the R2030, which attracted 41% of the total volume, while the R2037 and the R2048 received the remaining 32% and 27% of bids respectively. The R2030 priced at 8.93%, 2.00 bps higher than the market, the R2037 cleared at 9.09%, 1.0 bp higher than the market, while the R2048 priced at 9.18%, marginally higher than its market trading level at the time of the auction close.

Non-residents purchased +ZAR598m of nominal SAGBs yesterday. Buying was concentrated in the longer-end of the curve, with the 12+ year maturity bucket recording foreign purchases of +ZAR495m. This was primarily due to interest in the R209 (+ZAR263m) and the R2048 (+ZAR194m), while there was relatively muted overall flows in the remaining two auction bonds. Foreigners purchased +ZAR224m in the R2023, the only bond comprising the 7-12 year segment since the R208 recently moved to the 3-7 year segment. The R208 recorded net foreign selling of -ZAR513m yesterday, with the 3-7 year segment selling-off on the day for a total of -ZAR182m.

Local government bond yields rose by between 6.00 bps and 10.00 bps across the curve yesterday. While yields drifted higher through the day, the majority of the weakening in the bond market occurred in the afternoon prior to the close of the local trading session and on the back of a weaker currency. This morning, bonds are continuing to trade at these weaker levels. Incremental weakening increased with bond tenor; SAGBs with maturities further out than 2030 all saw their yields increase by 10.00 bps on the day, with the exception of the R209 (2036) which increased by 9.50 bps. The yield on the R157 rose by 6.50 bps to 6.82%, while the R186 rose by 9.50 bps to 8.46%. Total bond market turnover was recorded at ZAR21.90bn on the day.

The spread on the R186/R157 widened by 2.50 bps yesterday, to 164.00 bps, and the spreads on the R213/R186 and the R2048/R186 widened by 1.00 bps each, to 48.50 bps and 77.00 bps respectively. SA’s CDS spread improved marginally, to 189.17 bps, from 190.16 bps on Monday. The 10-year US Treasury yield fell to 2.63% yesterday, from 2.65% the day before, while the 5-year US Treasury yield rose by close to 1.00 bp, to 1.62%.

In the EM FI space, 5-year EM bond yields rose by 3.32 bps on average yesterday, while 10-year yields rose by 4.17 bps. India’s 5-year yield declined by 2.30 bps overall, recording the best performance across the EMs we cover for the purposes of our reports, with Hungary and Indonesia also recording marginally stronger 5-year yields on the day. 10-year yields across the EMs generally recorded greater incremental increases overall, and none of the EMs we monitor recorded strengthening in these longer-tenor notes yesterday. Russia recorded the worst performance overall, with the 5-year yield rising by 14.22 bps, and the 10-year yield, by 13.46 bps.


Latest SA publications

Fixed Income Weekly: Offshore investors return to SA equities by Asher Lipson and Kuvasha Naidoo (11 April 2014)

Credit & Securitisation Weekly: Robust demand for corporate paper by Robyn MacLennan and Steffen Kriel (11 April 2014)

FX Weekly: The SARB & the rand: the new abnormal by Bruce Donald, Marc Ground and Varushka Singh (4 April 2014)

FX Flash Note: MPC meeting: “What is normal?” by Bruce Donald, Marc Ground and Varushka Singh (28 March 2014)

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