Local CPI: the peak?

FX

Local CPI data for June was released yesterday. As Kim Silberman (SBGS economist) had anticipated, headline inflation held steady at 6.6% y/y. This was slightly below consensus which had the headline figure rising to 6.7% y/y. Kim notes that the headline figure was unaffected by food inflation, which rose only marginally, from 9.1% to 9.2% y/y, adding 1.31 percentage points (ppts) to inflation versus its contribution of 1.30 ppts in May. Processed food inflation moderated marginally, from 7.9% y/y to 7.8% y/y, while unprocessed food accelerated from 10.4% y/y to 10.6% y/y. Indications are that food inflation may have peaked. Unprocessed food inflation has been driven by the sharp rise in the yellow maize price, which has now subsided and is deflating; yellow maize contracted 14% y/y in June. Unprocessed food inflation should start to fall in over the coming months. Core inflation rose slightly from 5.5% y/y to 5.6% y/y, implying that second-round effects are still subdued. Kim suspects that inflation has already peaked in Q2:14, averaging 6.5% y/y for the quarter.

Kicking off the release of a number of preliminary manufacturing PMI readings today, the HSBC/Markit indicator for China was published overnight. The number for June came in higher than the anticipated 51.0 (Bloomberg consensus), at 52.0, a strong improvement on May’s 50.7. The new orders sub-component recorded a strong pick-up, rising to 53.7 from 51.8, a reflection of improving domestic and external demand. The numbers are an encouraging sign that manufacturing activity continues to improve supported by the government’s targeted ‘stimulus’ measures. This should be good news for commodities and commodity currencies.

The rand strengthened against the dollar for the fourth consecutive day yesterday, closing at USDZAR10.51, compared with Tuesday’s close of USDZAR10.57, on the back of headline inflation holding steady at 6.6% y/y. Local currency appreciation occurred despite a strong performance from the dollar against the major crosses. The rand appreciated alongside a stronger performance from most of the commodity and EM currencies we monitor for the purposes of this report. The dollar strengthened against the pound, the euro and the yen, with the biggest move seen against the pound (-0.1%). All but one of the commodity currencies we monitor appreciated on the day, the exception was the NOK which depreciated slightly.

All but two of the EM currencies we monitor for the purposes of this report appreciated on the day. The exceptions were the THB and the BRL, both of which depreciated slightly. The rand was the second-best-performing currency in the commodity currencies category (beaten only by the AUD) and took up the third-best-performing slot in the EM currencies category (beaten only by the TRY and the IDR). The rand traded between a low of USDZAR10.4839 and a high of USDZAR10.5782. Support from where the rand opened this morning sits at 10.4850, 10.4025, 10.3300 and 10.3050. Resistance levels sit at 10.5700, 10.6500, 10.7400 and 10.8500.

Turning to commodity prices, Brent and copper rose by 0.7% and 0.1% respectively. Platinum and gold meanwhile fell by 0.2% and 0.1%, respectively. The ALSI fell by 0.1%, while the EM MSCI rose by 0.3%. The EMBI spread compressed by 6 bps and the SA CDS 5yr spread compressed by 3 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 5.9%.

Non-residents were moderate net buyers of local equities (ZAR614 million) but were aggressive net sellers of local bonds (-ZAR1 552 million) on the day. Selling was seen in the 3-7 (-ZAR1 108 million), 1-3 (-ZAR318 million) and 7-12 (-ZAR202 million) year buckets. Buying was meanwhile seen in the 12+ (ZAR76 million) year segment. Bond yields fell on the day by between 3 bps (R214) and 8 bps (R203). The 3x6, 6x9 and 12x15 FRAs fell by 4 bps, 2 bps and 7 bps respectively.

In local labour news, as an update on the strike in the metals and engineering sector, it has been reported that the Numsa executive is deliberating on a wage offer which could result in a resolution to the strike that is now in its third week. The union will meet in the next two days to pursue a mandate from their members. Meanwhile, Seifsa has accepted an offer by the Department of Labour for a three-year agreement consisting of wage increases of 10% each year for the lowest-paid workers. The deadline for accepting the offer is close of business on 25 July, which could mean workers returning to work on 28 July.

FI

With both US and SA CPI releases out the way, some of the market’s reluctance to get involved should be over. SA CPI came out at 6.6% y/y, against the consensus forecast of 6.7% and Standard Bank’s forecast of 6.6%. This release should be broadly positive for SAGBs, removing some market nervousness. We believe this print could be the near-term peak to inflation, prior to a Q3 trough in inflation, which would be further supportive of SAGBs. Inflation has now averaged 6.17% in the first six months of the year and in order to meet the SARB’s annual forecast of 6.30%, the last six months of the year would need to average 6.43%. In addition, the SARB is forecasting Q4 inflation to average 6.6%, implying a 6.26% average for Q3 inflation. The IMF has also commented that US rates may stay low for longer than investors are expecting, due to muted inflation and a slower 2014 growth. The fund recently cut their US growth forecast to 1.7%, from 2.0%, after the poor Q1 growth number.

Yesterday was another slow turnover day, with slightly below ZAR15bn traded in nominal SAGBs. Around 60% of turnover was due to the R186 (37.0%), R209 (15.8%) and R157 (13.9%). Trading was fairly quiet, though the curve bull steepened, as front-end bonds led the curve lower. The R204 strengthened by 8 bps, while the benchmark R186 moved 5.5 bps lower. The front-end and belly steepened by 1 bp, while the back-end steepened by 4 bps.

Non-residents were significant net sellers of nominal SAGBs yesterday, for a total of -ZAR1.55bn. Selling was widespread and occurred across the curve. However, the R209 in the 12+ year segment was the exception, with notable buying of +ZAR731m; this offset the selling recorded in the R213 (-ZAR310m), R214 (-ZAR216m) and R2030 (-ZAR88m) within this category. Foreigners sold -ZAR1.11bn in the 3-7 year maturity category, due primarily to selling recorded in the R207 (-ZAR735m) and R203 (-ZAR357m). The R157 in the 1-3 year segment recorded net selling of -ZAR318m and the R2023 in the 7-12 year segment recorded net selling of -ZAR202m yesterday.

In the offshore space, Senegal priced their 10yr USD bond yesterday, issuing $500m at a yield of 6.25%. The offshore space has been particularly busy for African names over the past week. We have also seen Tunisia issuing a 2.452% $500m 7yr note, guaranteed by the United States Agency for International Development, while South Africa issued their dual tranche $1bn 30yr and Eur500m 12year deal last week.

The US Treasury curve steepened yesterday, as UST yields delivered a mixed performance. The yields on the 2yr and 5yr USTs both fell by under 0.50 of a bp to 0.47% and 1.65% respectively, and at the longer-end, the yields on the 10yr and 30yr notes rose by 0.54 of a bp and 1.38 bps, to 2.47% and 3.26% respectively.

EM FI and currency markets delivered a strong performance yesterday. 5yr EM bond yields fell by 3.32 bps on average and 10yr yields fell by 1.86 bps on average. SA’s FI market recorded a good performance, outperforming relative to its EM peers, after recording particular weakness in its FI market over the previous two trading days (and against the general EM strengthening trend). The SA 5yr local currency yield fell by 5.90 bps, recording the fourth best performance in this space, and the 10yr yield fell by 4.70 bps, recording the second-best performance. Poland recorded the best performance yesterday, with the 5yr and 10yr yields falling by 11.90 bps and 9.10 bps respectively. Turkey recorded the second-best performance in the 5yr space, with the yield declining by 8.00 bps and India recorded the third-best performance in the 5yr space, with the yield declining by 6.00 bps.

EM currencies strengthened on balance yesterday. The Indonesian rupiah recorded the largest incremental strengthening yesterday (0.84%) following a particularly weak performance the day before when the Indonesian rupiah stopped trading before EM currencies appreciated on the back of the release of US CPI. The rupiah, therefore, played catch-up in early trading yesterday, closing stronger overall at the end of its trading session. The Turkish lira also appreciated substantially yesterday, by 0.83%. Other EM currencies to appreciate notably yesterday were the rand, which recorded the third-best performance (0.56%), Russian ruble (0.36%) and Indian rupee (0.24%). The exceptions to the strengthening were the Brazilian real which depreciated by 0.30% on the day and the Thai bhat which depreciated by a negligible 0.04%.

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