Local Q3:14 GDP data bolstered by revisions and base effects

FX

Oil markets were under further pressure yesterday following a meeting in which the oil ministers from Russia, Mexico (both non-OPEC members), Saudi Arabia and Venezuela attempted to find some common ground to provide more support to global oil prices. Brent crude declined from around USD80.50/bbl to USD78.00/bbl yesterday as it become clear that nations such as Saudi Arabia still believed that a cut in crude production was not necessarily a foregone conclusion. The oil market awaits the outcome of the OPEC meeting tomorrow where the opinion of the market, but also apparently OPEC and non-OPEC members – seems split on what the outcome will hold for oil production by the cartel. As pointed out yesterday, OPEC already produces almost 1mbpd more than its official quota; better adherence to the quota, without actually reducing production quotas for members, would already go some way to balance the market.

Although we do not see the Brent forward curve as a good predictor for future crude oil prices, we note that the Brent forward curve is now pricing an average Brent price of USD80.50/bbl for 2015. Brent crude oil in rand terms has now declined to ZAR860/bbl, down from ZAR1,100/bbl at the end of September – a 22% decline in the rand-denominated prices. This remains one of the main drivers for our view of a more benign inflation outlook into Q2 next year.

On the local front, the South African Reserve Bank released its leading indicator for September yesterday. The composite index reflected a 0.7% m/m decline to 99.8 pts, with 5 of the 10 components driving the decline. Leading the decline was the export commodity price index and the deceleration in the 12-month percentage change in the composite leading business cycle indicator of SA’s major trading-partner countries.

More significantly, Stats SA release the revised and rebased Q3:14 GDP data. The report reflected that the SA economy grew by 1.4% q/q (saar) in Q3:14 from a downwardly revised 0.5% q/q (saar) and in line with expectations. The q/q number was driven by growth in the finance, real-estate and business services industry, general government services and agriculture, forestry and fishing. As expected, the manufacturing industry pressured the quarter’s output and reflected negative growth of 3.4% and subtracted 0.4 pps from overall growth during the quarter. On a y/y basis, GDP grew by 1.4%, compared to a revised 1.3% in the previous quarter. In addition, the revisions reflected that the SA economy is 4.4% bigger than previous estimates. We think, given the upward adjustments to growth, that there is a possibility that GDP growth could print higher than our current forecast of 1.4% y/y.

Shortly after the GDP release, the BER released its Q3:14 Business Confidence index, which increased above the 50-benchmark level for the first time since Q1:13. At 51 pts in Q3:14, the BCI received support from builders and manufacturers while confidence among retailers and new motor dealers deteriorated. The overall increase, however, is in sync with the improved GDP profile thus far in H2:14.

An unexpected drop in US consumer confidence, according to Conference Board data released yesterday, might have many wondering about the strength of the US economic recovery. The headline figure fell to 88.7 in November from 94.1 in October (revised slightly down from 94.5), falling far short of analysts’ expectations which had the November reading pegged at 96.0. While the decline was widespread across all sub-components of the index, Capital Economics does not feel that this raises any alarms bells though. They note falling gasoline prices, relatively strong labour market conditions and rising equities, as well as the alternative University of Michigan’s consumer confidence measure which rose to an eight-month high in November.

Today, we have US durable goods data. The consensus call is for a -0.6% m/m fall in the headline number for October, after September’s -1.3% m/m drop. Again, the drag comes mainly from a drop in aircraft orders at Boeing. Excluding transportation goods, an increase of 0.5% m/m is expected; September saw a -0.2% m/m fall. PCE deflator numbers for October will also be published today. This is the Fed’s preferred measure of inflation from a policy calibration point of view. Analysts are expecting the headline and core figures to hold steady at 1.4% y/y and 1.5% y/y respectively. A lower than anticipated number might lift risky assets, should market participants re-evaluate their expectations regarding Fed “liftoff”. According to the Bloomberg consensus poll, analysts are predicting the first hike in the fed funds rate to occur in Q2:15.

The rand strengthened against the US dollar on Tuesday, closing at USDZAR10.97, compared with Monday’s close of USDZAR11.02. Rand appreciation against the dollar occurred in line with dollar weakness against most of the major crosses, with the biggest moves against the euro and the yen. The rand strengthened against all of the major crosses, with the biggest move seen against the dollar (0.5%) and the pound (0.5%). The rand put in the best performance amongst the commodity currencies. In the EM category, the rand was the third-best behind the BRL and TRY. The rand traded between a low of USDZAR10.9355 and a high of USDZAR11.0675 intraday. Support from where the rand opened this morning sits at 10.9000, 10.8550, 10.8000 and 10.7500. Resistance levels sit at 11.1000, 11.1650, 11.2450 and 11.3100.

Commodities were mixed on the day. Platinum reversed most of Monday’s decline, increasing by 1.7%, while gold was up by 0.3%. Copper fell by 1.0% on the day. Brent fell 1.7%, after an apparently failed attempt by Russia, Mexico (both non-OPEC) and Saudi Arabia to reach some agreement that might offer oil prices some support. The developed market MSCI was up on Tuesday, rising 0.2%, while the EM MSCI fell by 0.2%. The ALSI followed the general trend in emerging markets equities, falling by 0.5%. The EMBI spread widened by 5 bps following a largely unchanged position on Monday; SA’s 5yr CDS spread remained largely unchanged. The CBOE VIX index, a volatility-based proxy for global risk appetite/aversion, fell 2.9%.

Non-residents were aggressive net sellers of local equities (-ZAR1 544 million) and net buyers of local bonds (ZAR804 million). Buying of bonds was seen in the 12+ (ZAR1 169 million) year segment, while selling was seen in the 3-7 (-ZAR288 million), 7-12 (-ZAR44 million) and 1-3 (-ZAR31 million) year buckets. Bond yields increased by between 4 bps (R203, R208, R186) and 5 bps (R214). The 6x9 and 12x15 FRAs rose by 1 bp and 3 bps respectively, while the 3x6 was unchanged.

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