SA CPI, and US FOMC

Today is as likely to be quiet and range-bound as yesterday, ahead of this evening’s release of the FOMC statement. While the SA CPI release at 10H00 could cause short-term market moves, essentially the market will wait for the Fed.

Regarding the August CPI number, the median call is for a dip to 6.2% y/y (from 6.3%) in the headline measure and a steady reading of 5.7% in core inflation. SGBS economist Kim Silberman is more optimistic; she expects that the headline measure to dip to 6.1%, owing to a view regarding food prices that is likely more sanguine than consensus regarding food prices pressures. The headline result should also be pulled lower by a base effect of a sizeable fuel price hike in August last year against a flat fuel price in August this year; but, given the transparency here, the market has likely fully factored this in. To the extent that the relative optimism in our view on the headline CPI is likely explained by differences pertaining to food prices, we do not expect a surprise in the outcome for core. Needless to say, today’s CPI outcome will have a material bearing on the probabilities surrounding Thursday’s MPC outcome – in particular, whether or not it suggests that the peak in headline inflation is done or is still to come.

Moody’s has released an issuer comment following the government’s announcement on the package of solutions to provide financial certainty to the SOE. Eskom is rated Baa3, with a negative outlook, by the agency, on both its foreign and local currency long-term debt ratings. The rating agency notes that the announcement is positive as ”it shows that the government is taking steps to address Eskom’s weak balance sheet”. However, the agency also states that more clarity will be required to determine “the extent to which Eskom’s financial position can be improved permanently”. Moody’s rates Eskom two notches lower than the sovereign’s rating Baa1 rating. Thus, any downgrade to the country’s rating is likely to lead to a technical downgrade of the SOUE utility.

This afternoon will also see Deputy President Cyril Ramaphosa answer questions in the National Assembly from around 14H00.

The approach to this week’s FOMC meeting, with the statement released tonight, has been largely responsible for the general risk-off sentiment we’ve seen over the past week, which kept emerging market currencies on the back foot against the dollar. The Fed is widely expected to pare back its asset purchases by another USD10 billion, keeping it on track to end the programme by the October FOMC meeting with a final USD15 billion reduction. However, the market is undoubtedly more interested in, and more anxious about, whether the Committee will decide to alter its forward guidance this week, as well as if Fed Chair Yellen will provide more details on the Committee’s plans regarding policy normalisation. Committee participants will also be updating their economic projections– a summary of these projections will accompany the release of the FOMC Statement. A notably hawkish change in the Fed’s perceived stance today would most likely intensify the pressure on EM currencies. But Steve Barrow (our G10 FIC Strategist) is not sold on the idea that the Fed will do this. In fact, he still leans more to the view that the Fed will conduct the transition to tougher language and higher rates in a way that does not cause significant damage to global markets. He does acknowledge that this is going to be a bit of a minefield for the Fed, and one wrong step could clearly cost EM currencies dearly. There might be the odd miss-steps, but he does not expect a repeat of the problems that global markets had last year as the Fed began to talk about tapering in May.

It is difficult to predict whether the Committee will already be able to reach agreement on any new wording although, given that a press conference follows this week’s meeting, it does offer Yellen the opportunity to explain that any change in the language of the Statement does not necessarily mean that “liftoff” would be occurring sooner than the Committee previously anticipated. If the consensus decides to hold off on changing the “considerable time” reference, it will be interesting to see if more Committee members choose to dissent. Of particular interest for markets will be FOMC participants’ projections for the fed funds rate – that is, the “dot plots”. As of the June meeting, the median consensus among participants put the end-2015 fed funds rate at 1.00%, unchanged from the consensus at the March meeting. In June, there was a marginal upward drift in end-2016 predictions for the fed fund rate, with the consensus at 2.50%, up from 2.25% at the March meeting. However, this was offset by a drop in participants’ consensus view of the longer-run fed funds rate, put at 3.75% in June from a long-standing 4.00% in March.

Turnover in the SAGB market was a fairly low ZAR20.6bn for an auction day. The R186 only accounted for 27% of turnover, compared with Monday’s almost 60% contribution to turnover. The three auction bonds of the R2032, R2044 and R2048 only accounted for 23.5% of turnover. Offshore investors were net buyers of ZAR1.6bn of SAGBs, with large purchases in the front- and back-end of the curve. Less than ZAR100m was sold in the R186, a particularly low number for that stock. The auction stocks saw particularly large purchases; +ZAR140m in the R2032, +ZAR571m in the R2044 and +ZAR435m in the R2048. There were also good purchases of +ZAR418m in the R158 and +ZAR211m in the R159. The curve, however, barely moved, with six out of 16 nominal bonds, including the benchmark R186, closing unchanged on the day. FRAs did tick slightly higher. The currency came in stronger, with USDZAR remaining below 11.00 for the day. The currency remains a key risk to tomorrow’s MPC outcome, depending on its reaction to the FOMC announcement.

Yesterday’s auction of longer-dated bonds was a particularly strong auction, with all bonds clearing below market trading levels. ZAR900m R2032, ZAR750m R2044 and ZAR700m R2048 were on offer, with an average time till maturity of 26.8 years. ZAR10.03bn was bid at the auction for a bid/cover ratio of 4.27x. Bids were split into the R2032 (ZAR3.115bn), R2044 (ZAR3.175bn) and R2048 (ZAR3.740bn). This compares to the ZAR9.09bn bid at last week’s auction, split across the R2032 (ZAR3.405bn in bids), R2044 (ZAR2.635bn) and R2048 (ZAR3.050bn). The top performer was the R2044, which cleared at 8.82%, 5 bps stronger than market levels at the time of the auction, while the R2048 cleared 4 bps stronger at 8.82% and the R2032 2 bps stronger at 8.70%. The tail on the bids was however quite long, with a 20 bps tail on the R2032, 28 bps on the R2044 and 17 bps on the R2048. The R2044 is still eligible for 100% non-competitive auction allocation, while the other two bonds have a 50% non-competitive auction option.

EM FI markets were slightly stronger on the day, with moves in the 5yr space led by Turkey and Hungary, while the 10yr space was led by Brazil, Hungary and Turkey. Average moves stronger were -1.5 bps and -2.6 bps in the 5 and 10yr local currency sovereign bonds respectively. In both tenors, South Africa had a middle of the pack performance.