SARB: Holding steady

FX

This SARB concludes it monetary policy deliberations today. Our view is that the MPC will keep rates on hold at 5.75%. The median forecast, according to the October Reuters survey, was for a 25 bps hike in November (16 out of 26). However, the Bloomberg poll, which reflects more up-to-date views (submissions were made last week), shows a much smaller number of analysts now predicting a rate hike (6 out of 23). The major impetus for this change in analysts’ views most likely has been the considerable and persistent weakness in global oil prices. While the SARB might not take the full extent of this fall into account when determining its outlook on local inflation (perhaps concerned about its sustainability), it is reasonable to think that this might prompt a downward revision to its inflation forecast or, at the very least, allow the SARB to keep its forecast unchanged and express this rather as a downside risk to its outlook. We think that he MPC will be hard pressed to justify taking another pro-cyclical hiking step unless it is required at one meeting or another to push its inflation forecast up again (as was the case in July).

It is possible that there is some concern that new leadership at the SARB, and a thus altered MPC, could tilt the committee’s bias to the hawkish side. While accepting that this development is not immaterial to the outcome, we think that it would be stretch to argue that the SARB’s policy response function is in for a step-change. First, only one member has left, which means that the change in the composition of the committee is not dramatic. Second, whereas it does matter more that the change applies to the governor’s position, it is not clear how much of a difference this will make (except in the case of an impasse), given the apparently collegiate style of the decision-making process. Third, the SARB’s level-headed response to external financing challenges posed by Fed policy normalisation, at least thus far, appears to have been the right one – that is, enough to keep its inflation fighting credentials intact, while not incurring an unnecessarily heavy cost to growth. Fourth, and most importantly, the SARB is unlikely in the foreseeable future to alter its basic policy approach; that is, its flexible application of the inflation targeting mandate, and its data-dependency emphasis. It will likely continue to consider the cost of not doing something against the cost of doing something, and it is important to remember here that it is sailing close to the wind, not only with regard to inflation, but also with regard to growth.

Local CPI data was published yesterday. In line with Bloomberg expectations, headline CPI remained unchanged at 5.9% y/y in October. On a month-on-month basis, CPI increased to 0.2% in October from unchanged (0.0%) in September. Core CPI increased slightly to 5.7% y/y in October from 5.6% y/y in September. Food inflation fell to 7.8% y/y in October from 8.5% y/y in September (contributing 1.2 percentage points). Transport inflation increased to 4.8% y/y (0.3% m/m) in October from 4.2% y/y (-1.5% m/m) in September (contributing 0.8 percentage points). Within transport, petrol inflation rose to 2.4% y/y in October from 1.1% y/y in September.

The minutes of the 28-29 October FOMC meeting revealed a committee slightly more concerned about the inflation outlook and inflation expectations than the statement released after the meeting portrayed. The statement put paid to any views in the market that a fall in oil prices had significantly changed the committee’s view on inflation. It noted that while “inflation in the near term will likely be held down by lower energy prices and other factors”, it still assessed “the likelihood of inflation running persistently below 2 percent [as having] diminished somewhat since early this year”. Concerns over falling inflation expectations, which some Fed officials had expressed prior to the meeting, were also downplayed. The FOMC’s statement acknowledged that “market-based measures of inflation compensation have declined”, but added that “survey-based measures of longer-term inflation expectations have remained stable”. However, the minutes revealed that “many participants” felt that the committee “should remain attentive to evidence of a possible downward shift in longer-term inflation expectations”. “Some” noted that “if such an outcome occurred, it would be even more worrisome if growth faltered”. Despite these slightly dovish comments, it is clear that the committee consensus has not shifted in a decidedly dovish direction. Consequently, any knee-jerk support that risky assets enjoyed after the minutes were released soon faded. Market participants’ expectations for the timing of the first rate hike remain around Q3:15 (according to the median Bloomberg consensus).

On the international front, we have a pretty full-on day for data releases today. First up, the preliminary Eurozone PMI surveys for November (with some individual countries set to release before the Eurozone data). The consensus is for the manufacturing survey to rise to 50.8 from 50.6. But Steve Barrow (our G10 Strategist) points out that the skew on this forecast is to the high side in the 39-person Bloomberg survey. With Germany’s ZEW survey surprising to the high side earlier in the week, this bias appears understandable. Steve agrees that the data for both manufacturing and services could be a bit firmer than the consensus, which could give some support to the euro.

US CPI data will be released later. The consensus is for a fall of -0.1% m/m in the headline figure, but a rise of 0.1% m/m when food and energy are stripped out. Clearly, gasoline prices have come down sharply, which will help lower headline prices. On the core CPI figure, Steve notes there is a substantial skew to the high side among analysts’ forecasts. In other words, if there is a miss most of the market is betting the core rate will have risen 0.2%. Even if it does, Steve doubts that there will be a huge market reaction.

The rand weakened against the US dollar on Wednesday, closing at USDZAR11.06, compared with Tuesday’s close of USDZAR11.03. Rand depreciation against the dollar occurred despite dollar weakness against most of the major crosses – the dollar lost ground against the pound and the euro, but strengthened against the yen. Likewise, the rand weakened against the pound and euro, and strengthened against the yen. Depreciation of the local currency against the dollar occurred alongside weakness amongst all the commodity currencies we monitor, and a mostly weaker performance among the EM currencies we look at for the purposes of this report. The rand put in the best performance among the commodity currencies, and took up the middle ground in the EM category. The rand traded between a low of USDZAR11.0015 and a high of USDZAR11.0775 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.

Commodities were all lower on the day. Precious metals were the hardest hit, with platinum and gold losing 1.4% and 1.2% respectively. Brent was down 0.5%, and copper fell 0.1%. The developed market MSCI was down 0.2%, but the EM MSCI climbed 0.1%. The ALSI lost 0.5%. The EMBI spread narrowed by 6 bps and SA’s 5yr CDS spread narrowed by 1 bp. The CBOE VIX index, a volatility based proxy for global risk appetite/aversion, fell 0.7%.

Non-residents were net sellers of local equities (-ZAR483 million) but were net buyers of local bonds (-ZAR541 million). Buying of bonds concentrated in the front end; in the 3-7 (ZAR708 million) and 1-3 (ZAR580 million) year buckets. Selling was seen in the 7-12 (-ZAR607 million) and 12+ (-ZAR139 million) year segments. Bond yields across the curve were largely unchanged. The 3x6, 6x9 and 12x15 FRAs fell by 1 bp, 3 bps and 6 bps respectively.

FI

We expect the SARB to keep rates on hold today. The two most recent CPI prints of 5.9% y/y, inside the 6.0% target band and the pessimistic growth forecasts, should allow the committee to keep the repo at 5.75%. The SARB could reduce its 2014 growth forecast from 1.5% to National Treasury’s forecast of 1.4%. We also expect some decreases to the SARB inflation forecast for 2015. In the two meetings this year at which the SARB has hiked rates (January and July), the bank increased its inflation forecasts; we believe that a weakening inflation forecast is a prerequisite for a hike by the SARB. The market is likely to be fairly quiet going into this afternoon’s MPC meeting.

The at-consensus CPI print (5.9% y/y, 5.9% consensus, 5.9% prior, 6.0% Standard Bank Research forecast) did little for bonds yesterday. There was some slight strengthening in the belly of the curve, but front and back-end rates remained unchanged. FRAs moved lower after the inflation print despite marginal USDZAR weakness. Turnover was recorded at R17.9bn, 37.4% coming from the R186 and 15.0% from the R204. Offshore investors were net buyers of R541.6m, with large purchases in the R203 (+R570m), R204 (+R317m), R186 (+R297m), R207 (+R233m), R209 (+R231m) and R208 (+R179m). This was offset by selling in the R2023 (-R607m), R2030 (-R483m) and the R2037 (-R227m).

US Treasuries weakened slightly in overnight trade, with the 10yr trading at 2.35%. EM local currency sovereign bond curves flattened yesterday as average moves of +1.3 bps and -0.1 bps were seen in the 5yr and 10yr debt respectively. Turkey and Indonesia were amongst the outperformers in both tenors, while SA was in the middle of the pack. Hungary and Poland had the weakest EM markets in both tenors.

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