Eurozone GPD data: Hoping to avoid recession

FX

The most notable data releases on the international front today are Eurozone Q3:14 GDP numbers and US retail sales. US retail sales data today will presumably get the most airtime but Steve Barrow (our G10 FIC Strategist) thinks that the Eurozone GDP data are far more important. For, while a slightly higher, or lower retail sales figure than consensus, won’t make much difference when it comes to things like Fed policy, the Eurozone GDP data could be important, especially if it is weak. This is because very soft data could put the region half-way to a new recession. First up will be the preliminary Eurozone GDP data. The consensus is for a 0.1% q/q rise, with no particular bias in analysts’ predictions – 20% of the 39 analysts in the Bloomberg survey see zero and 20% a rise of 0.2%. Steve points out that what will be key is whether GDP growth slips below the zero line, as this will bring into view the possibility that the region could slip into a triple-dip recession after the downturns of 2008/9 and 2012. The Eurozone might just escape such a fate – at least for now, given the consensus forecast – but there’s no doubting the weakness of the region. It’s something that should continue to push both yields and the euro down. Of course, Steve notes, if negative GDP arrives with today’s release, the pressure on the euro and yields could be quite intense. Weakness of the euro, and other major crosses (such as the yen), offsets the adverse impact on the rand (in trade-weighted terms) of a strengthening dollar. This is important to consider when assessing the monetary policy implications of rand weakness against the dollar – that is, the more rand/dollar weakness is offset against the other major crosses, the less concerned the SARB will be about it.

US retail sales data should show a modest increase in a bounce-back from the fall that we saw in September. Forecasts centre on a 0.2% m/m rise in both the headline figure and non-auto (or core) retail sales. However, Steve points out that the skew among the 74 analysts in the Bloomberg poll for core sales lies clearly to the downside. Some 28 analysts see a sub-0.2% print, with 24 looking for stronger-than-consensus data. Steve’s view is for relatively firm data which, if correct, could clearly lift the dollar.

Oil prices continue to tumble, with Brent crude now trading firmly below USD78/bbl, the lowest price since September 2010. The decrease in the price continues to be driven by fears that OPEC won’t cut production at its meeting on 27 November. We note that in the futures market there is seems to be sizable short-building. NYMEX aggregate open interest for Brent has been rising steadily since mid-August, while Brent prices have been declining, indicating that short positions are being established. This for now is the correct trade, but at some stage the short will need to unwind, which may drive the price higher again. Weaker oil prices should assist in narrowing South Africa’s current account deficit via the benefit they offer to SA’s terms of trade, and thus should be – broadly speaking – positive for the rand. However, a lower oil price should also act downwards on inflation. Lower oil prices might then raise the SARB’s implicit tolerance for currency weakness. In other words, we might need to see more depreciation than before to trigger further tightening from the SARB.

Local mining production data for September was released by Stats SA yesterday. Production came in at 5.3% y/y, well above consensus of -1.5% y/y, but not far off our estimate for an increase of 3.1% y/y. M/m, the momentum has improved substantially, with September production rising to 5.3% m/m in September from -3.1% m/m in August. The rise in mining production was mainly driven by iron ore, coal and manganese production. The data indicated that PGM production was a negative contributor to the y/y headline number, falling -4.1% y/y in September. According to the Stats SA data, PGM production by volume was down -17.6%, compared to last year September and, on a 3-month moving-average basis, PGM production is still 36.9% y/y lower than September 2013. This indicates that in September at least, PGM production had not yet reached levels seen before the strikes. This may provide further upside potential in the data for October and November. That said, the data does indicate that a ramp-up in PGM production continues. This is clear from the m/m increases seen over the past four months. In September, PGM production increased 24.4% m/m and, when adjusted for seasonality, the increase was 34.7% m/m.

The rand weakened against the US dollar on Thursday, closing at USDZAR11.21, compared with Wednesday’s close of USDZAR11.19. Rand depreciation against the dollar occurred into dollar strength against most of the major crosses – the dollar gained ground against the pound and the yen, but weakened against the euro. The rand similarly weakened against the euro, but strengthened against the pound and the yen, with the biggest move seen against the pound (-0.4%). Weakness of the local currency against the dollar occurred alongside a mixed to weaker performance among the commodity and EM currencies we monitor for the purposes of this report. The rand put in the second-worst performance among the commodity currencies we look at, ahead of the CAD. The rand was the fourth-worst performer among the EM currencies we monitor, beating the MXN, BRL and RUB. The rand traded between a low of USDZAR11.1617 and a high of USDZAR11.2407 intraday.

Commodity prices were lower on the day. Once again, Brent was the hardest hit, plummeting 3.1% to levels last seen in 2010. Copper and platinum lost 0.7% and 0.6% respectively, while gold was marginally weaker (falling less than 0.1%). The developed market MSCI was up 0.1%. However, the EM MSCI was down again, losing 0.3%. The ALSI climbed 0.4%. The EMBI spread widened by 3 bps and SA’s 5yr CDS spread narrowed by 1 bp. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, jumped 5.9%.

Non-residents were net sellers of local equities (-ZAR348 million) and meaningful net buyers of local bonds (ZAR1 607 million). Buying of bonds was concentrated in the long end; in the 12+ (ZAR1 190 million) and 7-12 (ZAR169 million) year buckets. Selling was seen in the 1-3 (-ZAR147 million) and 3-7 (-ZAR145 million) year segments. Bond yields rose by between 7 bps (R214 and R186) and 9 bps (R208). The 3x6, 6x9 and 12x15 FRAs increased by 1 bp, 2 bps and 3 bps respectively.

FI

This morning we are opening slightly stronger after the rally in US Treasuries overnight. The 10yr UST 3.5 bps stronger to 2.34%. Brent has also made a large move lower, breaking through $80/barrel and is trading at $77.75 this morning. However, USDZAR is trading slightly weaker in the early morning, so this could put a break on further bond strengthening.

Turnover yesterday was a fairly low R12.7bn. 47.2% was due to the R186, 8.6% from the R204 and 7.3% from the R2032. Offshore investors were net buyers of R1.07bn in nominal SAGBs, with the R2032 again leading the way (+R1.24bn). The bond has received substantial support from offshore investors this week. The R204 (+R245.9m), R2023 (+R168.7) were the only other bonds with decent offshore purchases. The R208 (-R215.7m), R207 (-R174.7m) and R203 (-R245.9m) were the bonds that offset some of the buying. The entire curve, however, weakened in an almost parallel fashion higher by 5.5 – 8.5 bps. The R186 moved 7 bps higher, while the R2032, supported by offshore buying, widened by 6 bps. FRAs followed the bonds, moving 2 – 5 bps higher.

The better-than-expected mining production number (+5.3% y/y vs Standard Bank’s forecast of +3.1% and consensus of -1.5%) had little impact on market moves. While PGMs were still negative y/y at -17.6%, this was a lower move than the recent -45% y/y we had seen in the prior two months. The improvement was led by iron ore (+38.3% y/y and contributing +5.7pp), manganese (+20.1% y/y, contributing +1.2pp) and coal (+7.7% y/y, contributing +1.8pp). Similar to the manufacturing print earlier in the week, this print suggests some promising improvements for GDP going into Q4.

Apart from the earlier mentioned 10yr UST move, the rest of the US curve also rallied by over 3.0 bps. EM FI generally saw some slight weakness in the 5yr tenor, widening by an average of 1.2 bps, while the 10yr tenor was averaged almost unchanged. South Africa underperformed EM in both tenors, while Hungary and Poland led the stronger moves in both tenors. India and Russia had the weakest bond markets in both tenors.

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