Flash PMIs: China slowdown continued?

FX

There is not much in terms of noteworthy international data flow today. For the US, we have existing home sales numbers and the Richmond Fed’s measure of manufacturing activity. Existing home sales for March are expected to fall 0.9% m/m (Bloomberg consensus), largely owing to another bout of severe weather in the early part of the month. The Richmond Fed manufacturing index is seen rising to 2.0 in April, after falling to -7.0 in March (attributed to the weather). Former Fed Chairman Bernanke will address the Economic Club of Canada later today on “Eight Years of Crisis Management at the Federal Reserve and the Way Forward”. This might be of limited interest, especially regarding any views he might express regarding the “way forward”. However, since he no longer has a direct impact on Fed policy, it is unlikely that his views will be market-moving.

Tomorrow sees the release of preliminary manufacturing PMI readings for April. Overnight, the preliminary HSBC manufacturing PMI for China will be released. It is expected to climb modestly, remaining below the contraction/expansion threshold at 48.3 (Bloomberg consensus) from 48.0. This is among the first of China’s economic activity readings for Q2:14. Analysts will likely be watching monthly data prints for Q2 closely to discern if the slowdown evidenced in Q1:14 is continuing. GDP growth for Q1:14 (published last week) came in at 7.4% y/y, down versus Q4:13’s 7.7% y/y but slightly better than the predicted slowdown to 7.3% y/y. Jeremy Stevens (our China-based Economist) feels that Q2:14 GDP growth will decelerate further. Standard Bank forecasts Chinese GDP growth of 7.1% y/y and 6.9% y/y for 2014 and 2015 respectively.

Local CPI numbers for March 2014 will be published tomorrow. Consensus pins the y/y change steady against the February reading at 5.9%. SBGS economist Kim Silberman expects that y/y CPI inflation will accelerate to 6.1%. There are several surveys in March: bus (weight: 0.08%), taxi (2.67%) and train fares (0.09%); motor insurance (0.54%); actual rent (3.49%); owner’s equivalent rent (12.21%); crèche fees (0.21%); primary (0.64%), secondary (0.65%) and tertiary (0.9%) school fees; toll fees; and domestic worker wages (2.0%). Whereas the results should reflect second-round effects of rand weakness in Q2:13, during which the currency depreciated 18.2% y/y, there is very little evidence of exchange rate pass through as yet. That said, we expect vehicle prices could place some upward pressure on CPI inflation going forward as a result of exchange rate pass-through.

The petrol price rose by 36 cents in March 2014, but this compares with an 81 cent increase in March 2013, which means that fuel prices will act downwards on the y/y change in the CPI via base effects. Most of the upward pressure on CPI inflation is seen coming from food prices; Kim expects that the y/y change in food prices could pick up to 6.3% in March from 5.6% in February, driven by higher maize prices. A higher than expected CPI inflation reading would be interest rate negative and could as a consequence be rand-supportive.

Note: Friday (18 April 2014) and Monday (21 April 2014) were SA public holidays

The following commentary refers to Thursday (17 April 2014) closes, and to changes relative to Wednesday (16 April 2014) closes. The rand strengthened against the dollar on Thursday after five consecutive days of weakness, closing at USDZAR10.49 compared with Wednesday’s close of USDZAR10.57. This occurred despite a strong performance from the dollar against the major crosses, and a mixed to weaker performance from the commodity currencies we monitor for purposes of this report. It was consistent with appreciation across all of the EM currencies we track. The dollar strengthened against the pound, the euro and the yen, with the biggest move seen against the yen (0.2%). The rand strengthened against all of the major crosses, with the biggest move seen against the yen (0.9%). The rand was the best-performing commodity currency, and was the second-best-performing EM currency (beaten only by the RUB) on the day. The rand traded between a low of USDZAR10.4720 and a high of USDZAR10.5690. 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. The rand opened this morning slightly weaker at USDZAR 10.49.

Turning to commodity prices, platinum, gold and Brent fell by 1.8%, 0.6% and 0.1% respectively. Copper meanwhile rose by 0.5%. The ALSI rose by 0.6% and the EM MSCI by 0.7%. The EMBI spread compressed by 11 bps and SA’s five-year CDS spread compressed by 1 bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 5.8%.

Non-residents were net buyers of local equities (ZAR539 million), but were mild net sellers of local bonds (-ZAR263 million) on the day. Selling of bonds was seen in the 7-12 (-ZAR305 million), 1-3 (-ZAR71 million) and 3-7 (-ZAR0.15 million) year buckets. Buying of bonds was meanwhile seen in the 12+ (ZAR113 million) year segment. Bond yields fell by between 8 bps (R203 and R208) and 12 bps (R214) into a bull curve flattening. The 3-month Jibar rate increased by 1 bp from 5.77% to 5.78% on Thursday. The 3x6 FRA rose by 1 bp, while the 6x9 and 12x15 FRAs fell by 3 bps and 7 bps respectively.

FI

Thursday’s turnover stats are possibly a sign of things to come over the next 2.5 weeks as we enter a public-holiday filled period. Turnover was fairly paltry, at ZAR11.18 in SAGBs, over 30% of which was due to the R186. Today’s auction should cause turnover to be boosted, but we are not expecting any fireworks from the auction. The auction does have a slightly wider maturity spread, with ZAR550m of R2023, ZAR800m of R2037 and ZAR1bn of R2048 on offer. However, with all the public holidays, we do not expect large local participation, and the most likely outcome is either a fairly benign, at-market yield, auction, or a more negative, large-tail auction. Bonds today are expected to take direction from the currency, while post-auction we could see some activity, as the market reacts to the auction. The afternoon should be relatively quiet.

Over the past five trading days, foreign interest in the R2037 and R2048 bonds has been positive, with inflows of +ZAR134m in the R2037 and +ZAR289m in the R2048, while the R2023 recorded net selling of -ZAR466m in this time. Demand picked up at last Tuesday’s offering of the R2030, R2037 and R2048, with total bids recorded at ZAR7.12bn for an auction bid/cover of 3.0x; however, pricing was uncompetitive, with all three bonds clearing at higher yields compared with the market at the time.

Local government bond yields fell by between 7.50 bps and 11.50 bps across the curve on Thursday, following the strengthening trend of the currency. The incremental strengthening increased with bond tenor. The yield on the R157 declined by 8.00 bps to 6.71%, while the R186 declined by 10.00 bps to 8.36%. The yields on the R2030 and the R213 fell by 11.00 bps each, while the remaining longer-dated bonds (R209, R2037, R214 and R2048) fell by 11.50 bps each. The front-end of the curve flattened, with the spread on the R186/R157 compressing by 2.00 bps to 165.50 bps, while the belly R213/R186 spread flattened by half a bp to 48 bps. The spread on the R2048/R186 declined by 1.50 bps to 75.00 bps. SA’s CDS spread remained relatively unchanged on Thursday, at 180.88 bps, from Wednesday’s 180.63 bps.

Foreigners sold -ZAR263m of nominal SAGBs on Thursday. Notable net selling at the short-end was recorded in the R203 (-ZAR104m) in the 3-7 year maturity bucket, while the R2023 (the only bond comprising the 7-12 year category) recorded net selling of -ZAR305m. In the 12+ year segment, the only SAGBs to record notable net selling were the R214 (-ZAR199m) and the R2048 (-ZAR119m), while meaningful net buying was recorded in the R186 (+ZAR189m), R213 (+ZAR187m) and the R2037 (+ZAR110m) in this category.

EM FI traded well on Thursday; 5-year local currency bond yields fell by an average of 5.85 bps, while 10-year yields fell by an average of 4.73 bps. India’s 5-year yield declined by 11.10 bps overall, recording the best performance across the EMs we cover for the purposes of our reports, with Turkey and Brazil recording 11.00 bps declines in their respective 5-year yields on the day. Brazil, however, recorded the largest decline in its 10-year yield (-11.30 bps), followed by India and SA at 10.80 bps and 8.70 bps respectively. Russia also delivered a strong performance, with the 5-year yield declining by 9.25 bps and the 10-year yield declining by 7.39 bps. Indonesia was one of the only EMs that saw local yield rise on the day, albeit marginally; the 5-year yield rose by 0.60 of a bp and the 10-year yield, by 2.80 bps.

Latest SA publications

FX Weekly: ZAR risk more symmetrical near term by Bruce Donald, Marc Ground and Varushka Singh (17 April 2014)

Credit & Securitisation Weekly: SANRAL returns to the bond market by Robyn MacLennan and Steffen Kriel (17 April 2014)

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

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