FX

Local CPI numbers for March 2014 will be published today. Consensus pins the y/y change steady against the February reading at 5.9%, which sits just under the SARB’s inflation target ceiling of 6.0%. 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. PPI numbers for March will be published tomorrow. Consensus foresees a slight acceleration in the y/y change to 7.8% from 7.7% in February.

The preliminary HSBC manufacturing PMI for China was released overnight. The number for April came in as anticipated (Bloomberg consensus) at 48.3, still below the contraction/expansion threshold but moderately higher than March’s 48.0. Capital Economics asserts that the modest improvement (that is a slowing in the pace of contraction) in manufacturing activity might be indicative of strengthening infrastructure spend. It remains to be seen to what extent such infrastructure spend (or what might be termed mini stimulus) will soften the slowdown in economic activity. Standard Bank forecasts Chinese GDP growth of 7.1% for 2014 and 6.9% for 2015. Bloomberg consensus pegs 2014 and 2015 growth at somewhat more elevated levels of 7.4% and 7.3% respectively. The final HSBC manufacturing PMI reading will be released on 5 April. Before that, on 1 April, the official PMI reading will be released. The official figure currently sits at 50.3 (for March) and, unlike the HSBC measure, has remained above the 50-threshold, albeit only just. Differences between the official and HSBC measures are largely owing to the skew in businesses surveyed; the official PMI survey is concentrated more on large firms, while the HSBC survey focuses more on small and medium sized enterprises. Preliminary PMI readings for other countries will be released as the day progresses. The Markit measure for Eurozone manufacturing activity is expected to remain steady in April at 53.0, while the US Markit reading is seen rising slightly to 56.0 from 55.5.

Australia’s CPI data for Q1 came through weaker than expected. Prices rose 0.6% in the quarter against forecasts for 0.8%. This leaves the annual rate at 2.9%, which is above the 2.7% seen in Q4 but below the 3.2% consensus. The measures that strip out some of the volatility of the data – the trimmed mean and weighted mean – were also below expectations by a tenth or two. The data provides some relief, notes SBR’s G10 FIC Strategist Steve Barrow, as Q4 headline CPI had risen a sharp 0.8% and the market feared that this could mark the start of higher inflation, which could in turn produce a rate hike from the RBA sooner rather than later. The Q1 data quashes some of those fears and the swaps market is currently priced for just 14 bps of rate hikes over the next year. The data weighed on the Aussie quite significantly, which possibly reflects the recent build-up of long positions more than the shock of the CPI data.

The rand weakened against the dollar yesterday, closing at USDZAR10.55 compared with Thursday’s close of USDZAR10.49. This occurred despite a mostly weaker performance from the dollar against the major crosses, and a mixed to stronger performance from the commodity currencies we monitor for purposes of this report. It was consistent with depreciation across most of the EM currencies we track. The dollar weakened against the pound and the euro, while remaining steady against the yen. The rand weakened against all of the major crosses, with the biggest move seen against the pound (0.6%). Two of the five commodity currencies we track – namely, the ZAR and the CAD – depreciated on the day; the remaining three (the NOK, the NZD and the AUD) strengthened. All but two of the EM currencies we track – the exceptions being the HUF and RUB – weakened on the day. The rand was the worst-performing commodity currency, and was the second-worst-performing EM currency (beating only the IDR) on the day. The rand traded between a low of USDZAR10.4827 and a high of USDZAR10.5721. Support from where the rand opened this morning sits at 10.4800, 10.3500 and 10.2500. Resistance levels sit at 10.5800, 10.6800 and 10.7400.

Turning to commodity prices, Brent, gold and platinum fell by 0.6%, 0.5% and 0.1% respectively. Copper meanwhile rose by 0.3%. The ALSI rose by 0.5%, while the EM MSCI fell by 0.2%. The EMBI spread widened by 3 bps and SA’s five-year CDS spread widened by 0.2 of a bp. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 0.5%.

Non-residents were mild net sellers of local equities (-ZAR190 million) and of local bonds (-ZAR201 million) on the day. Selling of bonds was seen in the 3-7 (-ZAR608 million), 7-12 (-ZAR320 million) and 1-3 (-ZAR100 million) year buckets. Buying of bonds was meanwhile seen in the 12+ (ZAR827 million) year segment. Bond yields rose by between 11 bps (R203 and R208) and 15 bps (R214) into a bear curve steepening. The 3x6, the 6x9 and 12x15 FRAs rose by 17 bps, 5 bps and 9 bps respectively.

In local labour unrest news, discussions between platinum producers (Amplats, Implats and Lonmin) and the AMCU regarding the companies’ revised wage offer concluded yesterday. There was no signal of urgency from the union in presenting the new offer to its members. The platinum producer CEOs met with the leaders of AMCU yesterday to deliberate their offer of monthly cash remuneration (consisting of basic wages and holiday, living out and other allowances) for entry-level underground workers which rises to R12,500 over five years. This still does not fully meet the demands by AMCU for a basic salary increase to R12,500 per month over four years, with cash allowances. Johan Theron, Implats spokesman, said “there has not been any formal feedback from AMCU by Tuesday evening, but the resumption of negotiations was an encouraging sign.” The negotiations will continue today. Charmane Russell, Chamber of mines spokeswoman, said “There is no update... the meeting is expected to continue tomorrow [Wednesday]."

Also, according to Mining Weekly Online, union Solidarity has stated the platinum belt is a “partial disaster area” and has sent assistance via its Helping-Hand organisation to its non-striking members in the towns of Rustenburg, Brits and Mooinooi. Flip Buys, Solidarity CEO, said “[n]on-strikers also lose a substantial part of their income and struggle to meet their financial obligations, without being responsible for the situation in any way whatsoever … Therefore, when production is suspended it’s not only the strikers who lose their income.” Solidarity has already placed ZAR100,000 to an emergency account that has been used to fund food and other essential provisions for 170 Solidarity members.


FI

After a poor auction yesterday and another low turnover day, we have opened up fairly unchanged this morning. We expect markets to remain fairly quiet going into the 10am CPI print.

SAGB turnover was less than ZAR17bn yesterday, despite the auction taking place. Nominal turnover was slightly over ZAR12bn, with an unusually high ZAR4.4bn in ILB turnover, with the R202 in particular, trading for ZAR1.45bn. The local FI and currency markets weakened overall yesterday. Nominal SAGB yields rose by between 9.50 bps and 15.00 bps in a bear curve steepening of the local yield curve. The yield on the R157 rose by 9.50 bps, to 6.80%, and the R186 rose by 12.00 bps to 8.48%. The R2030 and the R213 both rose by 13.00 bps on the day, while the R214 and R2048 bonds both rose by 14.50 bps. With its poor auction showing, the R2037 (31-Jan-2037) rose by the largest increment on the day, +15.00 bps, to a yield of 9.18%, the same yield as the R214. The front- and back-ends of the curve steepened by 2.50 bps each yesterday; the spread on the R186/R157 widened to 168.00 bps, and the R2048/R186 spread widened to 77.50 bps. The belly of the curve steepened by 1.00 bp, with the spread on the R213/R213 widening to 49.00 bps yesterday. SA’s 5-year CDS spread deteriorated marginally, to 181.05 bps yesterday, from 180.88 bps last Thursday.

While we had anticipated a quiet government bond auction yesterday, the results were to the poorer side of our expectations. Only ZAR4.99bn was received in bids and all bonds priced wider than the market. The R2023 cleared at 8.29%, 5.00 bps higher than market levels, the R2037 cleared at 9.25%, 18.00 bps higher, and the R2048 cleared at 9.22%, 7.00 bps higher. The auction bid/cover ratio was recorded at 2.1x, compared with 3.0x at last week’s auction, when ZAR7.12bn was received in bids. The R2048, which raised ZAR1.00bn at yesterday’s auction, attracted the majority of investor interest, with 45.74% of total bids allocated to the bond, while the R2023 and R2037 received the remaining 29.29% and 24.97% respectively. There was a decline in investor participation with an average of 35 bids placed per bond (last week: 41 bids/bond). We believe the low demand was largely due to the public holidays in SA, which could see these auctions remain quiet over the next three weeks. Following the auction, yields weakened further on the back of a weaker rand.

Non-residents were net sellers of nominal SAGBs yesterday, for a total of -ZAR201m. Net selling was recorded across the curve, with the exception of the 12+ year maturity bucket. The 3-7 year segment recorded net foreign selling of -ZAR608m due to outflows in the R203 (-ZAR396m) and R204 (-ZAR182m). Total outflows in the 7-12 year and 1-3 year segments were due to single bonds within the categories; in the 7-12 year category, the R2023 recorded net selling of -ZAR320m, and in the 1-3 year category, -ZAR100m was sold of the R157. In the 12+ year maturity bucket, notable net selling was seen in the R186 (-ZAR186m), while a substantial +ZAR626m was purchased in the R2048 and +ZAR375m in the R2037. Both these bonds were on offer at yesterday’s auction.

The 3x6 FRA increased by 17 bps, compared to the rest of the FRA curve which increased by 5 – 10 bps. The 3x6 now includes the July MPC meeting; the market is pricing in almost 100% probability of 50 bps of hikes over the May and July meetings. 75 bps of hikes is priced in by September and almost 100 bps of hikes is priced in by November. This is effectively pricing in 25 bps of hikes at each meeting this year, or 50 bps of hikes at each alternate meeting.

The March inflation print is due for release today. Consensus is for a print of 5.9%, unchanged from February’s 5.9% (median 5.9%). Standard Bank is forecasting 6.1%, with some upside pressure from food prices. 6/23 analysts are forecasting 5.8% and below, 8/23 forecasters expect 5.9% and 9/23 are forecasting 6.0%+. Any print at or above 6.0% is likely to stoke some inflation and interest rate concerns, resulting in a negative reaction from local bonds and the FRAs.

With the exception of the 2yr US Treasury, which weakened slightly, US yields strengthened. The 5yr UST yield fell by less than 0.50 of a bp to 1.73%, and the 10yr UST yield fell by 1.10 bps to 2.70%. The 30yr UST yield fell by the largest increment (-2.77 bps), to 3.49%. In EM FI, the average 5yr local currency bond yield rose by 1.63 bps, while 10yr yields rose by an average of 4.08 bps. Thailand’s 5yr yield declined by 5.00 bps, recording the best performance across the EMs we cover for the purposes of our reports, with Hungary and India recording 3.00 bps and 1.20 bps declines in their respective 5yr yields on the day. Brazil, however, recorded the largest decline in its 10yr yield (-2.50 bps), followed by Hungary and Thailand at 2.00 bps and 0.70 of a bp respectively. SA’s 5yr yield recorded the worst 5yr performance, which rose by 8.40 bps, followed by Mexico at +7.50 bps and Indonesia at +5.60 bps. Indonesia’s 10yr bond recorded the worst performance, rising by 15.50 bps, while SA’s 10yr bond rose by 12.00 bps; Turkey followed closely with its 10yr bond yield increasing by 11.00 bps.

In offshore space, Dubai issued a $750m 15yr Sukuk issue. The note priced at a coupon of 5.00%, around 227.8 bps above US Treasuries. South Africa plans to issue $1.5bn in the offshore market, of which $500 is expected to come from their debut Sukuk bond.


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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