Weak growth eases monetary policy concerns

FX

Local GDP data for Q2:14 was released by Statistics SA yesterday. Growth slowed in y/y terms to 1.2% from 1.6%, slightly below SBGS economist Kim Silberman’s forecast of 1.1% and well below the consensus expectation for a steady reading of 1.6%. Q/Q growth swung positive to a nevertheless paltry rate of 0.6% (saar) after a contraction of -0.6% in Q1:14. This was in line with Kim’s forecast, but below consensus (0.9% q/q).

The biggest drags on the q/q numbers remained the mining and manufacturing sectors, although the contraction in both of these sectors did ease compared to Q1:14. Mining contracted -9.4% q/q owing to ongoing PGM industry strike impacts, but this represented an improvement on the -24.7 q/q recorded in Q1:14. Mining subtracted -0.4 of a percentage point (pp) from the overall q/q GDP figure. Manufacturing fell -2.1% q/q, subtracting -0.3 of a pp from overall growth. Wholesale, retail and motor trade; catering and accommodation was just less than flat, falling -0.2% q/q. Transport, storage and communication and general government services were the largest contributors to q/q growth, each adding 0.4 of a pp, growing 4.0% q/q and 2.9% q/q respectively. Construction was once again the fastest growing sector in Q2:14 (up 5.0% q/q), followed by agriculture (4.9%).

Weaker economic growth is rand-negative mainly by virtue of its impact on the SARB’s willingness to tighten monetary policy. The SARB will with little doubt be concerned about the slight contraction in the retail and wholesale trade, catering and accommodation sector, which offers a read on the health of the local consumer. It is also rand-negative via the disincentive it introduces to growth motivated inward capital flows (equity purchases by non-residents and inward FDI), the encouragement it offers to outward capital flows, and its adverse consequences for the country’s creditworthiness. Our baseline expectation is for the SARB to hike rates by another 25 bps before the year is out, but we would acknowledge that weakness in economic growth, a dip in CPI inflation in July, a steady rand exchange rate, falling international oil prices and ongoing signs that food price pressures are easing diminish the chances of this occurring at the September MPC meeting.

US durables goods orders data released yesterday showed a remarkable 22.6% m/m (sa) jump – the largest monthly rise since the data has been published in its current form starting in 1992. Almost all of the rise was due to an extraordinary 318.0% m/m increase in commercial aircraft orders. This was due to 324 aircraft orders placed at Boeing in July, up from the 109 placed in June. Capital Economics points out that these orders will not contribute to GDP growth until the aircraft are actually delivered, which is likely to be only later this decade. Motor vehicles orders also supported the headline number, climbing 10.2% m/m. Stripping out transportation, orders for durable goods fell -0.8% m/m, far short of (Bloomberg) consensus which had anticipated a 0.5% m/m rise. Offsetting this disappointment somewhat, the increase in June was revised upwards to 3.0% m/m from 0.8% m/m. Overall the numbers signal sustained expansion of the US economy, and continued support to growth from rising business investment. Non-transport, non-defence capital goods shipments rose to 1.5% m/m in July, an improvement on the upwardly revised 0.9% m/m increase in June (from a previous -1.0% m/m).

The Conference Board’s measure of consumer confidence climbed to its highest level since before the recession. The August reading came in at 92.4, up from July’s 90.9 and well above the anticipated 89.0. The data adds to evidence that the US economy continues to strengthen, and perhaps more rapidly than many, including the Fed, have anticipated. The dollar strengthened after the release, most likely as markets contemplated what this signals regarding Fed monetary policy – that is, that tightening could come sooner. Capital Economics also notes that the continued increase in the number of people saying that jobs are plentiful against another decline in those saying that jobs are hard to find, makes the Fed’s argument that there is “significant” slack in the labour market less convincing. Indications that the Fed might be moving towards policy normalisation faster than currently discounted by the market will likely be negative for rand as it might lead market participants to question the sustainability of SA’s current account deficit position. Consensus pegs the first hike in the fed funds rate occurring in Q3:15. Pricing in the fed fund futures market implies a slightly earlier “liftoff” in Q2:15.

The rand strengthened against the US dollar yesterday, closing at USDZAR10.68, compared with Monday’s close of USDZAR10.71. This was despite the release of local GDP growth figures for Q2:14 that undershot consensus expectations. The rand appreciated despite dollar strength against the major crosses, thanks at least in part to aggressive purchases of local bonds. But its bias was consistent with a mild lift in risk appetite, and with a mostly stronger performance from commodity and EM currencies. The dollar strengthened against the euro, the pound and the yen, with the biggest move seen against the pound (-0.2%). The rand appreciated against all of the major crosses, with the biggest move seen against the pound (-0.5%). Three of the commodity currencies we monitor for purposes of this report – namely the CAD, the ZAR and the AUD – appreciated on the day. The remaining two currencies – namely the NOK and the NZD – depreciated. All but two of the EM currencies we monitor appreciated on the day. The exceptions were the RUB and the HUF. The rand occupied the second slot in the commodity currencies category (rerating only against the CAD), and ranked fourth among EM currencies (beaten by the MXN, the TRY and the BRL). The rand traded between a low of USDZAR10.6671 and a high of USDZAR10.7211. Support from where the rand opened this morning sits at 10.6600, 10.6000 and 10.5250. Resistance levels sit at 10.7600, 10.7910, 10.8350 and 10.9400.

Turning to commodity prices, copper, Brent and platinum fell by 0.3%, 0.2% and 0.1% respectively. Gold meanwhile rose by 0.3%. The ALSI rose by 0.6% and the EM MSCI rose by 0.2% on the day. The EMBI spread and SAs 5yr CDS spread both compressed by 3 bps. The CBOE VIX index, a volatility proxy for global risk appetite/aversion, fell by 0.6%.

Non-residents were marginal net buyers of local equities (ZAR16 million), but were aggressive net buyers of local bonds (ZAR2 016 million). Buying of bonds was seen in the 12+ (ZAR3 008 million) and 7-12 (ZAR115 million) year buckets. Selling was meanwhile seen in the 3-7 (-ZAR994 million) and 1-3 (-ZAR113 million) year segments. Bond yields fell by between 7 bps (R203 and R214) and 9 bps (R208 and R186). The 3x6, 6x9 and 12x15 FRAs fell by 6 bps, 10 bps and 11 bps respectively. Foreign interest in the local bond market and falling bond yields were likely fuelled by weakness in GDP numbers, which – from the adjustment in the FRAs – appears to have eased concerns about further pro-cyclical monetary tightening from the SARB. This appears to have overridden concerns about the headwinds to government revenues and thus pressure on fiscal metrics implied by growth underperformance relative to February 2014 Budget estimates explicitly mentioned by Finance Minister Nhlanhla Nene earlier this week.

FI

This morning, we open with the R186 slightly below 8.10%, a level last seen in late July. Direction for bonds this morning should come from the currency and offshore investor flows, after the JSE recorded offshore investors as buyers of over ZAR2bn in SAGBs yesterday.

The Tuesday SAGB auction boosted turnover to slightly over ZAR20.5bn of nominal bonds and an additional ZAR545m of inflation-linked debt. 25% of turnover was in the three auction bonds of R2032 (10% of turnover), R2044 (9%) and R2048 (6%), while the R186 constituted 23% of turnover and the R204 12% of turnover. The market was helped by a good auction in the morning and then rallied further after the below consensus Q2 GDP print of +1.0% y/y, +0.6% q/q (saar). This compares to the consensus forecasts of +1.2% y/y, +0.9% q/q (saar) and Standard Bank’s forecasts of +1.1% y/y, +0.6% q/q (saar). The entire curve rallied, with the front-end flattening and belly and back-end spreads steepening. The R207 and R208 led the rally, moving 9 bps lower, while the R186 strengthened by 8.5 bps. Breakeven rates have continued to fall, with 10yr now trading at 6.2%. The stronger currency also saw FRAs move lower, with less than 5 bps now priced as a hike into September’s MPC.

We saw a strong nominal government bond auction yesterday, with robust demand coming through for the R2032, R2044 and R2048 on offer. Pricing action was competitive, with all three bonds clearing below market levels. The R2044 was the outperformer of the auction, clearing at a yield of 8.84%, 4.00 bps below the market, while the R2032 cleared at 8.73%, 3.00 bps below the market and the R2048 cleared at a yield of 8.85%, also 3.00 bps more competitively than where the market was trading at the time. Total auction bids remained high, but fell below the ZAR9.00bn-mark, to ZAR8.82bn, from ZAR9.05bn at the previous auction (auction bid/cover ratio of 3.8x yesterday). The R2032 received the majority of investor bids, with 39% of the auction’s bids allocated to the bond. The R2048 received 31% of the auction bids, while the R2044 also received an almost equitable 30%. Bidding was quite aggressive, with only a small percentage of total bids being fully allocated. The R2032 received 62 bids, of which only 7 were fully allocated (11%), while the R2044 and the R2048 received 52 bids and 48 bids respectively; the R2044 allocated only 2 bids fully (4%), while the R2048 allocated 9 bids fully (19%). With the amounts outstanding in the R2032 and the R2044 still under ZAR10.00bn, market participants are eligible to take up 100% of their allocations in these two bonds at tomorrow’s non-competitive auction. However, the R2032 is likely to only have one more auction at which it is still eligible for the 100% non-competitive auction option. Foreigners appear to have been fairly significant buyers of the auction stock.

Non-residents were significant net buyers of nominal SAGBs yesterday, for a total of +ZAR2.02bn, in what was the first five-day trading period since 18 July that foreigners have been reported as net buyers of SAGBs. Foreigners sold bonds comprising the front half of the curve, and purchased bonds at the back half of the curve. Notable net selling was recorded in the R157 (-ZAR113m) comprising the 1-3 year segment, and in the R204 (-ZAR377m), R208 (-ZAR322m) and R203 (-ZAR260m) comprising the 3-7 year segment. +ZAR3.00bn was purchased in the 12+ year segment, due to foreign interest in the R186 (+ZAR853m), R2032 (+ZAR814m), R213 (+ZAR509m), R2044 (+ZAR476m), R2048 (+ZAR276m) and R2030 (+ZAR140m). +ZAR115m was also purchased in the R2023 in the 7-12 year segment.

USTs continued to deliver a mixed performance on yesterday, with the curve steepening overall. Yields fell at the shorter-end, with the 2yr UST declining by 0.82 of a bp to 0.49%, and the yield on the 5yr UST declining by 0.50 of a bp to a yield of 1.66%. However, yields rose at the longer-end, with 10yr note increasing by 1.42 bps to 2.40% and the 30yr note rising by 3.09 bps, to a yield of 3.16%.

EM FI markets strengthened on balance yesterday. At the short-end, 5yr yields fell by 1.95 bps on average, and at the long-end, 10yr yields fell by 3.71 bps on average. SA’s FI market recorded the best performance in the 5yr space, with the yield declining by 9.90 bps. In the 10yr space, SA’s local currency bond yield recorded the second-best performance, declining by 10.20 bps, behind a larger -21.00 bps move in Turkey’s 10yr yield. Poland was the second best performer in the 5yr space (-3.60 bps) and the fourth-best in the 10yr segment (-1.50 bps). Hungary’s FI market delivered the third-best overall performance, with the 5yr and 10yr yields declining by 3.00 bps and 4.00 bps respectively. Hungary’s Monetary Council left the country’s interest rate unchanged at 2.10% yesterday. Thailand and Mexico also recorded stronger FI markets yesterday, while FI markets in Russia and Indonesia recorded mixed performances, and India’s FI market weakened marginally.

EM currencies strengthened overall, with the rand appreciating by 0.25% on the day. This followed stronger moves by the Brazilian real (1.17%), Turkish lira (0.59%) and Mexican peso (0.41%). Other EM currencies to appreciate on the day, were the Indian rupee (0.21%), Thai bhat (0.13%), and to a marginal extent, the Indonesian rupiah (0.06%). In contrast, the Polish zloty depreciated by 0.35%, while the Hungarian forint depreciated by a more marginal 0.13%. The Russian ruble sold off slightly, recording a depreciation of 0.04%.

The Monetary Council of the Central Bank of Turkey (CBT) will announce its decision on the country’s interest rates today. Bloomberg consensus forecasts are calling for an unchanged benchmark repurchase rate, which is currently at 8.25%. The market also expects that the CBT will leave both the overnight lending rate and the overnight borrowing rate unchanged, at 12.00% and 7.50% respectively.

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