Trade data this week: we live in hope

FX

The week ahead is a busy one in terms of local data releases. These include unemployment numbers in Stats SA’s QLFS survey results for Q3:14 on Tuesday. They also include money supply and credit extension numbers on Wednesday, PPI inflation results and National Treasury’s (NT’s) Statement of Revenue and Expenditure on Thursday, and preliminary external trade data (in all cases for the month of September) on Friday.

The consensus forecast for the unemployment figure for Q3:14 sits at 25.6%, slightly up on the 25.5% registered in Q2:14. The Q2:14 reading represented the highest level seen since Q3:12. Weak growth of employment has been concentrated in the private sector; this contrasts with strong growth of employment in the public sector. The consensus forecast appears to be reasonable. Weak employment growth is consistent with an environment characterised by fragile business confidence, and consequently sub-optimal levels of private sector fixed investment spending. It appears unlikely to turn soon, given decelerating consumer demand, which will likely be amplified by the withdrawal of monetary policy accommodation and now also withdrawal of fiscal policy accommodation. While a more competitive exchange rate might offer some help, investment spending is also unlikely to turn before a more meaningful and broad-based turn in global demand and commodity prices comes into play. The willingness of firms to grow their workforce is also likely being constrained by persistent and in some cases protracted work stoppages and elevated wage settlements. Given that an election related Q2:14 rise in government employment registered in the QES survey (published last month) did not register in the QLFS unemployment reading for that quarter, an unwind of this should not be expected in Q3:14 QLFS result. Elevated unemployment numbers are ZAR negative owing to their creditworthiness and interest rate effects.

Consensus pins y/y growth of M3 lifting slightly to 6.5% in September from 6.4% in August, and of credit extension to the private sector PSCE slipping to 8.6% from 8.8%. Risks to the M3 result perhaps sit slightly to the lower side of consensus, but we would be in agreement with respect to PSCE. Y/Y growth of both M3 and PSCE will be worked off comparatively sturdy bases; both rose by around 0.6% m/m (on a seasonally adjusted basis) in September last year. Y/Y growth of credit extended by banks to corporates will be worked off a comparatively high base (it rose by an unadjusted 1.2% m/m in September 2013) mainly owing to a push in the general loans and advances line, whereas lending to households will be worked off a comparatively low base (0.2%) owing to a contraction in the general loans and advances line. Y/Y growth of lending to households embarked on a broadly decelerating trend in the late stages of 2012. It has decelerated without interruption in each of the past seven months, reaching 3.6% in August, its weakest level since 2010. In real terms, lending to households has been contracting y/y since January. Y/Y growth of lending to corporates has meanwhile broadly been on a path of acceleration since the start of this year, reaching a high of 16.3% in July before dipping to 14.5% in August. Some of the buoyancy in lending to corporates could be explained by drawdowns of loans by firms engaged in renewable energy projects, but it perhaps also reflects a shift in the appetite of lenders away from the household space, and especially from the household unsecured space. While not necessarily expecting that y/y growth lending to households will continue to decelerate in a straight line from month to month, given a falling base, we expect the bias will stay downwards, amplified by rising interest rates; signs of consumer stress, especially at the lower end of the income spectrum; still high levels of household indebtedness (versus long-term averages at least), decelerating growth of disposable incomes, and regulatory and debt rating constraints on banks’ appetite for lending, in particular to households. It remains to be seen whether buoyancy in lending to corporates will last, into weakening domestic consumer demand, a patchy outlook for external demand, and – once again – constraints on banks’ appetite for lending. The potential impact of these results should be interpreted largely via their consequences for domestic interest rates; weaker PSCE growth should be read as ZAR-negative, notwithstanding some ambiguity arising from what they mean for domestic and import demand, and thus for the current account.

Consensus foresees a deceleration in y/y PPI inflation to 6.9% in September from 7.2% in August. The call for a deceleration is likely to a large extent premised on signals of subsiding food and fuel price pressures, driven in turn by sliding dollar prices in international markets for these commodities in the months leading up to the September survey. The PPI measure offers a read on pressures in the domestic consumer price pipeline, thereby serving as a leading indicator of CPI inflation. Perhaps counter-intuitively, lower inflation results could be viewed as rand-negative, insofar as they would reduce pressure on the SARB to raise interest rates and could increase the bank’s implicit tolerance for currency weakness.

Preliminary financing figures for September, released earlier in the month, offer guidance regarding performance of the fiscal balance in September, which will be revealed in NT’s Statement of Revenue and Expenditure. Much of any potential excitement in – and thus possible market impact of – the numbers is taken out by last week’s MTBPS, given that National Treasury would already have had transparency on fiscal performance in September when finalising its estimates, and the market is most interested in whether fiscal performance is in line with official estimates. Simply observing the difference between the change in government’s cash balances between end-August and end-September against proceeds from debt issues and net extraordinary receipts, the deficit appears likely to come in at around -ZAR15.4 billion. This compares unfavourably both with the consensus forecast of -ZAR11.0 billion and with the September 2013 deficit of -ZAR10.4 billion. However, it is worth noting that guidance from preliminary financing figures is not always accurate, with discrepancies linked to the timing of transfers/payments. In August 2014, the deficit came in significantly wide of the shortfall suggested by preliminary indications. It is possible that some of this could unwind in September 2014 numbers.

Preliminary trade numbers will likely be the main focus of the market – domestic data wise – this week. Participants remain very concerned about persistent breadth in the current account deficit, and stickiness in the response of the shortfall in particular to a significant depreciation of the currency since late Q3:12, especially given likely external financing challenges posed to foreign capital dependent EMs by the prospect of Fed tightening next year. Consensus puts the deficit at -ZAR12.0 billion, to the narrow side of August’s score of -ZAR16.3 billion. Looking back over the past 10 years, there does not appear to be an obvious seasonal pattern in the trade balance between August and September results; there also does not appear to be a clear seasonal m/m pattern in exports or imports. However, observing readings for various key import and export product categories in August against recent monthly averages, it seems that the risk to the trade deficit is to the narrow side of the August result. On the export side of the account, there is some upside risk in the mineral products and the precious materials category. While weakness in bulk commodity markets, especially the iron ore market, would explain some of the softness in the former, the extremity of the August reading points to a possible partial unwind. As far as we are led to understand, PGM industry production was fully back on line at the start of September; it is possible that this could start to impact export numbers in September trade results. Elevated transport equipment export numbers for August could be repeated, given the likelihood of continued support from higher domestic production at Mercedes Benz. On the import side of the account, the risk from the mineral products category (mainly oil) appears to be more or less symmetrical. There is some risk of a m/m dip in machinery imports following a comparatively elevated August reading. We think that some of the key ingredients for current account deficit compression are already in play, including a more competitive exchange rate, slowing domestic demand (now likely amplified by monetary tightening) and signs of a recovery – albeit uneven and sub-par – in the world economy. Import volumes are already playing ball; deficit compression has been stalled to a significant extent by strikes on output of key export sectors. Any signs that export volumes are starting to normalise would be rand-positive.

Germany’s IFO survey is expected to show another fall in October, this time to 104.5 from 104.7 last time, Steve Barrow (our G10 FIC strategist) notes. The skew on this survey lies slightly to the higher side, with 17 analysts in the Bloomberg survey anticipating above-consensus figures and 15 expecting soft data. Steve is with the minority on this one. We’ve already seen the ZEW survey fall in October, and retreat back below the zero line for the first time since November 2012. Last week’s improvement in Germany’s PMI survey might have raised hopes that the IFO won’t follow the ZEW survey, but we suspect that the IFO survey will be worse than consensus both in terms of firms’ assessment of their current conditions and their expectations for the future.

In addition to the IFO survey from Germany at 09:00 GMT, there’s also the euro zone M3 data. The M3 measures are expected to edge higher, with M3 seen up 2.2% in annual terms and 2.0% on a three-month average. As usual, it will be the breakdown that is of most interest, especially private credit. Net private lending transactions, excluding sales and securitisation (a ‘core’ measure) is of most interest, and it’s been very weak since the credit crisis and pretty consistently negative since the debt crisis really kicked off in 2011. Even the more recent return to GDP growth has failed to revive credit, and that’s why the ECB has focused its most recent easing steps on stimulating credit growth. It’s too early to expect these to have success, and hence we’d expect another pretty poor figure for credit today.

There’s going to be quite a lot of information for the markets to digest this week. For, as well as chewing over the result of the weekend AQR and stress tests from the ECB, there’s important euro zone data in the shape of credit data today and CPI inflation on Friday. The Fed meets tomorrow and, while the Bank clearly won’t ease, there should be a rate cut from the Swedish Riksbank tomorrow. The US data front is dominated by Q3 GDP, which is seen up around 3%. The key issue is how all these things play out in terms of the recovery in risk assets that we saw last week. Does the recovery suggest that the mid-October plunge in things like stocks, oil and the euro was a flash in the pan Steve asks? Or was last week’s recovery in riskier assets just a correction before a deeper decline sets in? The Fed’s decision could have an important bearing on this, although we suspect that the bank might not give a huge amount away, even if the (likely) end of tapering forces the bank to tinker with the statement a bit more than usual. Steve neither thinks that recent tensions, such as those in stocks or in euro zone growth, will cause the Fed to suggest that it’s pushed back its view on likely rate hikes. But neither do we think it will change the wording of its statement in a way that raises speculation of an earlier hike. If the Fed is broadly neutral, it could make for continued recovery in risk assets, although it is also worth noting that some of those factors that have created market concerns – such as poor credit growth in the euro zone and near-zero inflation – could become even more concerning once we’ve seen this week’s data.

The rand strengthened against the US dollar for the third consecutive day on Friday, closing at USDZAR10.93, compared with Thursday’s close of USDZAR10.98. Rand appreciation against the greenback occurred into dollar weakness against all of the major crosses and into a mixed to stronger performance from the commodity and from EM currencies we monitor for purposes of this report. The dollar weakened against all major crosses, with the biggest move seen against the pound (0.4%). The rand strengthened against all of the major crosses, with the biggest move seen against the dollar (-0.4%). Three of the five commodity currencies – namely, the ZAR, AUD and NZD – appreciated, while the remaining two currencies (the CAD and NOK) depreciated on the day. Five of the nine EM currencies we monitor for the purposes of this report, appreciated on the day. The remaining four were flat – namely, the INR, which was unchanged due to a public holiday – or weaker – the IDR, THB and RUB. The rand was the best performer in the commodity currencies category and the second-best performer in the EM currency category (beaten only by the BRL). The rand traded between a low of USDZAR10.9215 and a high of USDZAR10.9978 intraday. Support from where the rand opened this morning sits at 10.9130, 10.8000 and 10.7500. Resistance levels sit at 11.0100, 11.1650, 11.2450 and 11.3100.

Commodity prices were all weaker on the day. Brent fell by 0.8%, platinum fell by 0.5%, and gold and copper both fell by 0.1%. The developed market MSCI rose by 0.5% and the EM MSCI rose by 0.3%. The ALSI meanwhile fell by 0.5%. The EMBI spread widened by 0.5 of a bp, but SA’s 5yr CDS spread compressed by 1 bp. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell by 2.5%.

Non-residents were net sellers of local equities (-ZAR646 million) and were mild net sellers of local bonds (-ZAR246 million) on the day. Selling of bonds occurred in the 12+ (-ZAR193 million), 1-3 (-ZAR92 million) and 7-12 (-ZAR48 million) year buckets. Buying was meanwhile seen in the 3-7 (ZAR87 million) year segment. Bond yields fell on the day by between 0.5 of a bp (R214) and 1 bp (R203, R208 and R186). The 3x6, 6x9 and 12x15 FRAs fell by 2 bps, 4 bps and 5 bps respectively.

FI

After the quietness of Friday, we do not think turnover or moves in the market are going to suddenly increase today. With the rand moving 5c stronger against the US dollar and not weakening in early morning trade, it should provide a small amount of support to local bonds. The R186 is trading at the bottom of our range guidance, and we would look to sell at current levels. On Friday, we published the SA FI Weekly, “Bond market positive MTBPS”. However, this week sees the Fed hold its FOMC meeting on Wednesday, and locally we have the twin deficit trade and fiscal balances on Friday. This could prolong the quiet tone in the market until Wednesday evening.

At Friday’s government ILB auction, NT issued the full ZAR800m: ZAR160m in the R212, ZAR330m in the I2038 and ZAR310m in the I2025. Bids totaling ZAR1,410m were received (bid-cover 1.76x) across the R212 (ZAR310m bid, bid-cover 1.94x), I2038 (ZAR590m bid, bid-cover 1.79x) and the I2025 (ZAR510m bid, bid-cover 1.65x). Bids were down further from the ZAR1.93bn at the previous week’s offering and the ZAR2.04bn bid two weeks prior. 21.9% of bids went to the R212, 41.8% of bids went to the I2038 and 36.2% of bids went to the I2025. All bonds cleared 1 bp tighter than their respective closing MTM levels; the R212 cleared at 1.53%, the I2038 at 1.83% and the I2025 at 1.73%. Only 22 bids were made, compared to 24 last week. Two out of three bids were successful in the R212, eight out of 12 bids in the I2038 (four in full) and five out of seven bids were successful in the I2025.

Bloomberg is reporting total market turnover of just ZAR15.4bn. The curve steepened with bond moving in a small -1.5 to +1.0 bp range. The benchmark R186 moved 0.5 a bp lower, with the curve moves led by the R204, R207 and R2032 moving 1.5 bps lower. FRAs shifted lower by 2 – 5 bps; the 1x4 is now only pricing in 7.5 bps of hikes at November’s MPC meeting. 3m Jibar remained at 6.075% for a 17th consecutive day. US Treasuries generally strengthened marginally on Friday. The exception was the yield on the 5yr UST which rose by 0.28 of a bp to 1.50%. The 2yr UST fell by under 0.10 of a bp to a yield of 0.39% and the yield on the 10yr UST fell by 0.27 of a bp to 2.27%. At the longer-end, the 30yr note fell by under 0.10 of a bp to a yield of 3.04%.

Non-residents were net sellers of nominal SAGBs on Friday for a total of -ZAR246m with only a few notable transactions recorded across the curve. Net selling was recorded in three out of the four maturity buckets, with notable net selling (in excess of ZAR100m) only recorded in the 12+ year segment, while the 3-7 year category was the only segment to record marginal net buying on the day. In the 12+ year segment, net selling was recorded in the R2037 (-ZAR316m); this was partially offset by net buying in the R2030 of +ZAR137m. Other notable transactions across the curve were seen in the R207 (+ZAR129m) in the 3-7 year segment and in the R203 (-ZAR104m) in the 1-3 year segment.

EM FI markets strengthened overall on Friday. 5yr local currency sovereign yields fell by an average of 1.90 bps and 10yr yields fell by an average of 2.49 bps. SA’s 5yr yield performed slightly weaker compared with its EM peers, with the yield declining by 1.70 bps, just shy of the EM average. This was behind stronger moves recorded in Mexico (-5.60 bps), Russia (-3.90 bps) and Indonesia (-2.50 bps). In contrast Poland’s 5yr note sold off marginally. SA’s 10yr note fell by 1.20 bps, underperforming the EM average. This was behind stronger moves in Brazil (-14.50 bps), Mexico (-4.60 bps) and Russia (-2.88 bps). In this longer-dated space, the yield on China’s 10yr note rose by 2.00 bps on Friday, followed by Turkey (+1.00 bps) and Poland (+0.20 of a bp).

EM currencies generally appreciated on Friday. The moves stronger were led by the Brazilian real, which appreciated by 1.04%; this was on the back of the release of the country’s final election result. The Brazilian incumbent, Dilma Rousseff, was returned to power in an extremely tight vote. Bloomberg is reporting a winning margin of 52 – 48, the “tightest marginal since at least 1945”. The Polish zloty appreciated by 0.56%, followed by the SA rand which appreciated by 0.43%. Other currencies to appreciate on the day were the Turkish lira (0.19%), followed by more marginal moves stronger by the Hungarian forint (0.02%) and the Mexican peso (0.01%). In contrast, the Russian ruble depreciated by 0.19%, followed by the Thai baht (0.12%) and the Indonesian rupiah (0.05%).

Latest SA publications

Fixed Income Weekly: Bond market positive MTBPS by Asher Lipson and Kuvasha Naidoo (24 October 2014)

Credit & Securitisation Weekly: Eskom features in MTBPS by Robyn MacLennan and Steffen Kriel (24 October 2014)

SA Fixed Income: MTBPS: Less accommodative, more creditworthy by Asher Lipson and Kuvasha Naidoo (23 October 2014)

SA FX Weekly: Oil price plunge & currency market spillover effects by Marc Ground and Varushka Singh (21 October 2014)

Fixed Income Weekly: MTBPS week by Asher Lipson and Kuvasha Naidoo (17 October 2014)