Local data flow: a full week

FX

This week sees a flurry of local data releases. Money supply and private sector credit numbers, as well as the results of the Quarterly Labour Force Survey (QLFS) for Q2:14, will be released on Tuesday. Government budget balance numbers will be published on Wednesday, followed by the preliminary trade balance and PPI data on Thursday. Finally, the manufacturing PMI release is scheduled for Friday.

Most important among these from a currency market perspective is the trade balance. The preliminary trade balance narrowed to -ZAR6.6 billion in May, from a downwardly revised -ZAR12.4 billion (-ZAR13.0 billion previously) in April. At the time of writing, consensus had the trade deficit for June narrowing only slightly to -ZAR6.3 billion, with the impact of PGM industry strikes still likely to weigh on export numbers for that month. The preliminary trade numbers for Q2:14 so far are slightly worse than the cumulative April and May readings of last year (-ZAR19.0 billion and -ZAR18.5 billion respectively). Consequently, from a purely trade balance perspective, the current account as a percentage of GDP looks set to push above -6.0% in Q2:14 – the reading for Q2:13 was -6.2%, with a marginal trade deficit of -ZAR1.0 billion recorded in June of that year). Renewed widening of the current account shortfall could once again cause the market to question whether the currency has done enough work to deliver the necessary current account compression that might be required by more challenging external financing conditions. Such uncertainty would leave the rand in a vulnerable position.

Unfavourable base effects could result in a mild deceleration in y/y PSCE growth in June; although this could be offset in growth of credit extended to corporates if recent strength in this category is maintained. In m/m (seasonally adjusted) terms, PSCE growth was 0.8% in June 2013. Consensus has PSCE growth falling slightly to 8.06% y/y in June. PSCE growth climbed marginally to 8.34% y/y in May from 8.27% y/y in April. The mild acceleration in the headline numbers was driven by credit extended to corporates. Growth of credit extended to households dipped to 4.3% y/y in May from 4.6% y/y in April, extending a path of deceleration broadly in place since late 2012. There is some ambiguity in terms of the currency implications due to the linkages between PSCE, domestic demand, import demand and the current account. However, we feel that the consequences of these numbers for the currency should be understood largely via their implications for interest rates, in particular what they signal regarding household borrowing. Softer y/y growth of credit extended to households could – to our minds – be viewed as favourable for interest rates and thus negative for the rand.

Local PPI numbers for June will offer a signal on the severity of any pipeline inflationary pressures – and an elevated level of producer inflation might also be a harbinger of escalating pass-through. The Bloomberg consensus forecast is for headline PPI inflation to fall to 8.4% y/y from 8.7% y/y in May. Since a lower-than-expected PPI inflation reading would be interest-rate-positive, it could as a consequence be rand-negative.

The local manufacturing PMI for July is expected to remain below the key expansion/contraction threshold of 50.0, as the metals and engineering strike casts a shadow over the sector. Bloomberg consensus has it pegged at 45.0. Market participants will be looking to measures of local manufacturing sector performance for indications as to what extent local industry has gained any competitive edge from material and sustained cheapening of the currency.

This week the FOMC meets, with the official policy statement released on Wednesday (30 July). No major changes to the Fed’s current policy path are anticipated, with the market expecting another USD10 billion reduction in the Fed’s asset purchases. This meeting is not accompanied by a press conference, and consequently without the opportunity to explain its decisions, we doubt that there will be any explicit indications in the official statement released after the meeting regarding the policy normalisation measures that might follow the conclusion of the Fed’s bond-buying programme. The minutes of the meeting, to be released 20 August, might be more telling in this regard. This week also sees the release of the July Employment Situation Report and June PCE deflator data, both on Friday. Payrolls growth is anticipated to continue its strength, with consensus predicting a 231k gain. The unemployment rate is expected to hold steady at 6.1%. Headline PCE inflation is seen falling slightly to 1.7% y/y, from 1.8% y/y. The core inflation reading is also expected to come off slightly, from 1.5% y/y to 1.4% y/y. As we saw with last week’s consumer inflation data, a drop in inflation numbers could ease any lingering concerns that accelerating inflation might prompt the Fed to tighten policy sooner than currently anticipated, which could be to the benefit of risky assets.

The rand strengthened against the dollar on Friday, closing at USDZAR10.51, compared with Thursday’s close of USDZAR10.53. Local currency appreciation occurred despite a strong performance from the dollar against the major crosses. The rand appreciated despite a weaker 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 euro (-0.3%). All of the commodity currencies we monitor, with the exception of the rand, depreciated on the day. All but three of the EM currencies we monitor for the purposes of this report depreciated on the day. The exceptions were the ZAR and the MXN, both of which appreciated; as well as the INR which remained unchanged. The rand was the best-performing currency in both categories. The rand traded between a low of USDZAR10.4866 and a high of USDZAR10.5483. Support from where the rand opened this morning sits at 10.4850, 10.4560, 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, gold and platinum rose by 1.2%, 1.0% and 0.7% respectively. Copper meanwhile fell by 0.6%. The ALSI and the EM MSCI both fell by 0.2%. The EMBI spread widened by 10 bps and the SA CDS 5yr spread widened by 6 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, rose by 7.2%.

Non-residents were modest net buyers of local equities (ZAR531 million) but were moderate net sellers of local bonds (-ZAR641 million) on the day. Selling was seen in the 12+ (-ZAR795 million), 7-12 (-ZAR239 million) and 1-3 (-ZAR2 million) year buckets. Buying was meanwhile seen in the 3-7 (ZAR395 million) year segment. Bond yield performance was mixed on the day. The R208, R186 and R214 yields rose by 1 bp, 4 bps and 3 bps, respectively; while the R203 yield fell by 3 bps. The 3x6, 6x9 and 12x15 FRAs all rose by 2 bps.

In local labour news, as an update on the strike in the metals and engineering sector (which began on 1 July), Numsa has said the strike will continue while “members still consider the new offer on the table”. Numsa’s national executive members met yesterday afternoon to deliberate. Seifsa agreed to a salary increase between 7% and 10%, contingent on the skill level of the worker. Karl Cloete, Numsa’s deputy general secretary, said, “[f]eedback to membership and the mandate from membership is continuing tomorrow, and then at 4 pm on Monday, we’ll convene a press conference to communicate Numsa’s decision on a settlement or discontinuation of the strike.” Seifsa recommended an amendment to a section in the main agreement to prevent workers from raising issues with cost implications. Numsa believes if the amendment is made, it will only lead to more frequent wage negotiations and employers will ultimately have more disruptions. A resolution of the current strike action would be viewed as rand-positive in that it might serve to ease any anxieties regarding trade deficit compression, as well as perhaps allay rising concerns over the country’s growth prospects.

FI

The local FI market weakened overall as yields rose by between 1 bp and 4.50 bps across the local yield curve on Friday; this initially occurred on the back of rising US Treasury yields and a weaker local currency. However, unlike SAGB, UST yields and the rand strengthened in the (local) afternoon trading session. The exception to the broad-based weakening across the local curve, were bonds at the very short-end, which fell on the day. The yield on the R157 fell by 1.00 bp to 6.63% and the yields on the R203 and R204 fell by 2.50 bps and 1.50 bps to 7.05% and 7.33% respectively. SAGBs in the mid-region of the curve rose by the largest increments; the yield on the R186 rose by 4.50 bps to 8.18%. The longest-dated R2048 rose by 3.50 bps to a yield of 8.99%. USDZAR appreciated on Friday, by 2c to 10.51. US Treasury yields strengthened in a bull flattening of the curve on Friday. At the short-end, the yields on the 2yr and 5yr USTs fell by 0.41 of a bp and 2.31 bps respectively, to 0.49% and 1.67%. At the longer-end, the yields on the 10yr and 30yr notes fell by the largest increments of 3.70 bps and 5.69 bps, to 2.47% and 3.24% respectively.

The front of the yield curve steepened on Friday, while the belly and the back-end of the curve flattened marginally. At the front-end, the spread on the R186/R157 widened by 5.50 bps to 155.00 bps; the spread on the R213/R186 at the belly compressed by 0.50 of a bp ending the day at a spread of 45.50 bps; and at the back-end, the spread on the R2048/R186 compressed by 1.00 bp, to 81.00 bps. Total SAGB turnover was recorded at ZAR12.34bn on Friday from ZAR14.90bn on Thursday. ZAR9.93bn of Friday’s turnover was due to nominal SAGBs, with a relatively large proportion of the turnover (ZAR2.41bn) recorded in ILBs due to the government ILB auction on the day. Considering nominal turnover, 47% of the turnover was recorded in the R186, and 10% was in the R207.

Non-residents were net sellers of nominal SAGBs on Friday, for a total of -ZAR641m. However, meaningful inflows and outflows were recorded across the curve on the day. -ZAR795m was sold in the 12+ year segment, due to outflows recorded in the R186 (-ZAR663m) and R2030 (-ZAR97m). Foreigners sold -ZAR239m in the R2023 in the 7-12 year segment. In contrast, foreigners purchased +ZAR395m in the 3-7 year segment, due to inflows recorded in the R207 (+ZAR350m).

Friday’s government ILB auction of the I2025, I2038 and I2046 saw bids remain relatively unchanged from the previous week’s auction. While pricing was in line with Thursday’s closing MTM levels, real yields repriced to a higher level last week after both the increase in the repo rate and last week’s inflation print. The I2025 priced at 1.70%, in line with Thursday’s MTM closing yield, but 8.50 bps higher compared with the previous week’s auction clearing level. The I2038 cleared at 1.90%, 1.00 bp weaker than its MTM level, and 4.50 bps higher than the previous week’s auction level. The I2046 cleared in line with its MTM level at 1.94%, but 3.50 bps above its clearing level at the previous auction. Auction bids were recorded at ZAR1.23bn, similar to the prior week’s ZAR1.22bn, resulting in a bid/cover ratio of 1.54x at Friday’s auction (prior week: 1.53x). The I2046 attracted the largest proportion of the bid volumes, with 43% of bids going to the bond, followed by the I2025, which received 33% of bids, while the I2038 received the remaining 24%.

Compared with the EM FI and currency markets that we monitor for the purposes of our reports, SA performed poorly in the FI space, but delivered a strong performance on the currency front. 5yr EM bond yields rose by 1.89 bps on average, and 10yr yields rose by 1.39 bps on average. However, these results were skewed by the large sell-off recorded in Russia’s FI (and currency) market on the day, as its 5yr yield rose by 19.17 bps and its 10yr yield rose by 17.06 bps. The moves weaker in Russia were on the back of an unexpected hike in its key interest rate which we discuss below. Other EM FI moves, both stronger and weaker, were incrementally more marginal in comparison. SA’s 5yr yield rose by 0.10 of a bp on Friday (performing better than the EM average), and the 10yr yield rose by 4.70 bps (performing worse than the EM average). SA recorded the second-worst performance in the 10yr space and fell in the middle of the EM performance range in the 5yr space. EM FI markets to strengthen on Friday, were Poland, Hungary, Mexico, China, Brazil and Indonesia.

The rand appreciated by 0.14% on Friday, delivering the strongest EM currency performance for the day. The only other EM currency we monitor for the purposes of our reports to appreciate on the day, was the Mexican peso (0.11%). The Russian ruble led the moves weaker, recording a 0.49% depreciation on the day, followed by the Hungarian forint, which depreciated by 0.47%. Other currencies to depreciate on the day were the Brazilian real (0.36%), Polish zloty (0.36%), Turkish lira (0.10%) and Indonesian rupiah (0.08%). This morning, the Russian ruble has opened significantly weaker.

On Friday afternoon, ratings agency Fitch affirmed Russia’s BBB local currency and foreign currency ratings. However, in a negative move, the country ceiling was lowered to BBB from BBB+. Bloomberg quoted the agency as noting that Russia’s balance sheet remains “largely intact” amid sanctions. SA is rated the same as Russia on a local currency basis (also BBB), but one notch higher than Russia on a local currency basis (at BBB+).

In a third reactionary monetary policy move this year, Russia’s central bank hiked its key benchmark interest rate, the overnight deposit rate, by 50 bps to 7.00% on Friday. According to the Russian central bank, Friday’s rate hike occurred on the back of an increase in inflation risks “due to a combination of factors, including, inter alia, the aggravation of geopolitical tension and its potential impact on the ruble exchange rate dynamics, as well as the potential changes in tax and tariff policy”. It was also noted that “[t]he build-up of these risks will lead to inflation expectations remaining heightened and creates threats of inflation exceeding the target in the coming years.” Russia CPI inflation was recorded at 7.80% y/y in June, from 7.60% y/y in the prior month. The central bank noted in its statement, that the intention of the rate hike is to slow CPI to a target of 4.00% in the medium term. Notably, the Bank stated that “[i]f high inflation risks persist, the Bank of Russia will continue raising the key rate.”

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