October CPI inflation: touching the ceiling?

FX

Local CPI inflation data will be published today. Consensus pegs the October print holding steady at 5.9% y/y. SBGS economist Kim Silberman expects headline inflation to rise to 6.0% y/y in October from 5.9% y/y in September, mostly as a result of petrol-price inflation. Kim notes that, although the petrol price rose by only 2c/l in October, due to base effects, the petrol price inflation rate accelerated from 1.05% y/y in September to 2.7% y/y. This on its own will add 0.09 of a ppt to the headline print for October. Kim has forecast food inflation to remain flat at 8.7% y/y in October, averaging 8.3% y/y in Q4:15 and 6.2% y/y in Q1:15. However, risks lie to the upside, due to the lagged feed-through from higher wheat and maize prices in the first quarter of this year. A higher than anticipated inflation print, in that it is interest rate unfriendly, could be a positive for the rand.

On the international front, minutes of the 28-29 October FOMC meeting will be of particular interest today. The statement that followed the last meeting did not change dramatically. It did seem slightly more hawkish but Steve Barrow (our G10 FIC Strategist) points out that since the dissenters switched from being two hawkish objections, to one dovish objection, suggests that the discussion at the meeting might have been a bit more hawkish than the statement implied. If this comes across in the minutes it could spook the markets, although Steve thinks that the market is at least partially prepared for a change in tone. Steve’s view is still that the Fed will shift to slightly more hawkish language again at the upcoming December meeting, by replacing the words “considerable time” (before a rate hike) with “patience” (in delivering the first hike). We have seen some members of the FOMC agree with this sort of idea, but whether it’s a majority view yet, is hard to say – just as it is hard to say whether it will occur in December or not. Even if it does occur, it should be accompanied by Fed insistence that rate policy is not calendar-determined but data-dependent. Markets will try to glean from today’s minutes just whether such a wording change is being set up for the 16-17 December meeting.

Before we hear about the deliberations of the Fed that took place at its last meeting, we will receive the minutes of the last BoE meeting. The previous three meetings have seen 7:2 votes in favour of unchanged rates with Weale and McCafferty the two dissenters. Since August some members, including Governor Carney, have suggested that the timing of the first rate hike has been shifted back a good few months. However, Steve notes that Weale and McCafferty have given no such indications and hence it seems likely that they still voted for a rate hike at the November meeting. But even if two were pushing for higher rates, it seems clear that the tone of the minutes will be cautious, especially bearing in mind that the bank’s inflation report released this month was more downbeat on growth and inflation. The market, though, should be prepared for such dovishness, and hence Steve only expects a significant (and negative) reaction in sterling if one, or both, of the dissenters should switch sides.

The rand strengthened against the US dollar on Tuesday, closing at USDZAR11.03, compared with Monday’s close of USDZAR11.13. Rand appreciation against the dollar occurred despite 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 strengthened against all the major crosses, with the biggest move seen against the yen (1.1%). Appreciation of the local currency against the dollar occurred alongside strength amongst all the commodity currencies and all but one of the EM currencies we monitor for the purposes of this report. The rand put in the best performance among the commodity currencies we look at, and the third-best in the EM category (behind the BRL and HUF). The rand traded between a low of USDZAR11.0007 and a high of USDZAR11.1339 intraday. Support from where the rand opened this morning sits at 11.0000, 10.9600, 10.9200 and 10.8500. Resistance levels sit at 11.1300, 11.2000, 11.3250 and 11.4000.

Metals prices were all higher on the day. Gold, platinum and copper climbed 0.9%, 0.4% and 0.2% respectively. Brent was down 1.1%. The developed market MSCI was up 0.8% and the EM MSCI climbed 0.3%. However, the ALSI lost 0.3%. The EMBI spread widened by 1 bp but SA’s 5yr CDS spread narrowed by 3 bps. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell 0.9%.

Non-residents were net sellers of local equities (-ZAR633 million) but were meaningful net buyers of local bonds (ZAR1 499 million). Buying of bonds was seen in the 12+ (ZAR1 145 million), 3-7 (ZAR261 million) and 7-12 (ZAR114 million) year buckets. Selling was seen in front end; in the 1-3 (-ZAR21 million) year segment. Bond yields fell by between 4 bps (R208 and R186) and 6 bps (R214). The 3x6, 6x9 and 12x15 FRAs fell by 2 bps, 3 bps and 9 bps respectively.

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