Today clearly will be about the Fed

• Today will be all about the wait until the Fed’s decision this evening. There is no scheduled media briefing for today.

• There won’t be any rate change because the Fed has “pledged” that there wouldn’t be any at the January and/or March meetings.

• The bias still seems to be one of the Fed hiking rates from the middle of the year. Any change here, which would be perceived as a dovish shift in the committee’s consensus, would likely be rand-positive.

• We note that changes in voting members would appear to give the committee a slightly more dovish tilt.

• Disappointing US durables data in the US yesterday, while US consumer confidence has surged.

• Singapore’s monetary authority eased monetary policy this morning, by reducing the slope, or pace, at which the SGD appreciates. Singapore uses the currency, as opposed to interest rates, as policy tool.

• After equity markets in the US and Europe struggled yesterday, Asia markets are mixed with the Nikkei higher, but Shanghai equities are slightly lower.

• Today is likely to see bonds on the back-foot after the fairly vicious currency move yesterday when the bond curve flattened. Markets are waiting for this evening’s FOMC announcement. Further negative news around Eskom and power supply may add some drag to the market.

• Locally, it will be a quiet day as we await the FOMC statement. Tomorrow though, the SARB’s MPC meeting concludes. We expect no change in the repo rate.

• The rand is trading around the 11.5900 level, marginally higher than our mid-point of 11.50 for Q1:15.

International developments

Today will clearly all be about the wait until the Fed’s decision this evening. This being said, there’s not going to be any rate change – as the Fed has “pledged” that there wouldn’t be one at the January and/or March meetings. The statement, though, could be tweaked a bit, as numerous things have changed since the last meeting in December, such as rate cuts elsewhere and the continued fall in oil prices. But Steve Barrow (our G10 Strategist) doesn’t think that these are sufficient to change the Fed’s policy bias, which still seems to be one of hiking rates from the middle of the year. That said, any change here, which would be perceived as a dovish shift in the committee’s consensus, would likely be rand-positive.

The usual annual rotation of regional Fed presidents means that there are a few new voting members on the FOMC. On the hawkish side, we have Richmond Fed President Jeffrey Lacker, while on the other side of the spectrum we have Chicago Fed President Charles Evans. The other new voters are Atlanta Fed President Dennis Lockhart and San Francisco Fed President John Williams.

The two noted hawks, Fisher and Plosser are no longer voting members. Both dissented at the last FOMC meeting. Minneapolis Fed President Kockerlakota, who also dissented at the last meeting, although to the dovish side, is also no longer a voting member. These changes in voting members would appear to give the committee a slightly more dovish tilt.

Before the Fed hits the wires we’re due to hear from Bank of England Governor Carney. Unlike the Fed, the BoE is arguably not quite so explicit about the likely future shape of policy, partly on account of the fact that it generally releases no post-meeting statement. However, there are other ways that the bank reveals its views, such as the quarterly inflation report and, as we will see soon, a letter to the Chancellor whenever inflation deviates from the 1-3% target range. Last month, it fell below the bottom of the range and Carney will be posting a letter to Chancellor Osborne when the next inflation report is released in February. The key today, therefore, is to determine whether the inflation undershoot has any bearing on the likely timing of rate hikes. Carney has seemed to hint in the past that it might not, but two of the bank’s hawks gave up the ghost in January, and voted for the status quo, so they seem to be taking a different view. But just whether we will get any clues from Carney today remains to be seen. His speech is a lecture to honour the late Canadian Finance Minister Jim Flaherty and, as such, may not touch on current monetary issues.

Yesterday’s release of US durables data underwhelmed, showing a -3.4% m/m fall in December (Bloomberg consensus: 0.3% m/m), accompanied by a big downward revision to the November number to -2.1% m/m from -0.7% m/m previously. The non-transport figure also fell much more than expected and there was a big downward revision here too. The data helped the rand regain some of the day’s losses against the dollar, although this relief was limited given that the market remained largely preoccupied with the Fed announcement today.

After very soft durables data, there were some very different signals from consumer confidence and home sales numbers. December saw a much larger than anticipated surge in consumer confidence to 102.9 from 93.1. New home sales were 481k against calls for 450k. The rise in confidence – to the highest levels since 2007 – is good but the Steve notes that the issue is how much of this is just a reflection of falling gasoline prices and how much a function of other positive factors in the economy (such as higher employment and slightly firmer wages). The labour component certainly improved quite a bit, with the jobs-plentiful-less-jobs-hard-to-get rising to -5.2 from -10.1, which is a good sign when it comes to payroll data.

Markets

The rand weakened further on Tuesday, closing at USDZAR11.58, compared with Monday’s close of USDZAR11.46. The rand’s depreciation occurred despite dollar weakness against all of the major crosses; the dollar weakened most against the euro (-1.3%), the pound (-0.8%) and the yen (-0.5%). The rand weakened against all of the major crosses, with depreciation seen against the euro (-2.4%), the pound (-1.8%), the yen (-1.6%) and the dollar (-1.1%). The rand put in the worst performance amongst the both the commodity currencies as well as the EM currencies we monitor. The rand traded between a low of USDZAR11.4457 and a high of USDZAR11.6145 intraday.

Turnover was R25.2bn in nominal SAGBs, R65m in ILBs yesterday. 25% of turnover was from the R186, another 26% from the day’s three auction bonds. Offshore was recorded as massive buyers of R3.2bn in nominals, but there is also almost R730m in cancelled & reissued R186 trades and R234m in the R213. -R503m was sold in the R208, -R176m was sold in the R209, but pretty much everything else was bought across the curve. +R1.2bn was recorded in the R186, but treat that with caution due to the cancelled and reissued trades. +R867m was bought in the R2048, R528m in the R2032, R394m in the R2030.

The auction saw R6,600m in bids (bid-cover 2.81x), in quite a good auction. This compares to last week’s auction of R7,325m in bids (bid-cover 3.12x). The R2044 was the star of the auction, clearing at 8.01%, 4.5 bps below its market trading level. We had thought the upcoming inclusion of the R2044 into the ALBI would provide support for this bond. There are also coupon flows at month-end for the R2030 and R2044. The R2030 cleared at 7.65%, 0.5 bp stronger than the market’s trading level, while the R2032 was the only bond to clear weaker than the market, at 7.86%, 2 bps weaker than the market trading level. R2,130m was bid in the R2030, with R900m issued; R2,020m was bid in the R2032, with R800m issued; R2,450m was bid in the R2044, with R650m issued. 39.5% of bids were allocated in the R2030, 34.1% of bids in the R2032 and 25% of the R2044 bids were allocated.

The curve flattened as front-end bonds up to the R2023 weakened by 0.5 – 4.0 bps, while the R186 and large maturity bonds strengthened by -1.0 – 6.0 bps. The R186 was 1 bp stronger. Very front-end FRAs moved 1 bp lower, but there was surprisingly little FRA movement, considering what the currency did.

US Treasuries were marginally stronger in general, with slight weakness in the 30yr bond. 5yr and 10yr local currency EM sovereign debt was on average stronger by 5.7 and 3.8 bps respectively. Russia, Poland, Turkey, Indonesia and Mexico led the moves in both tenors. South Africa, however, underperformed the EM average. Despite all the volatility in Russia debt after the S&P downgrade, their local currency debt is actually stronger over the past five days.

Commodities were mixed on the day. Gold and platinum were up on the day, increasing by 0.9% and 1.0% respectively. However, copper fell on Tuesday, by 2.9%. Brent was up by 3.0% to close at $49.60/bbl. The developed market MSCI was down by 0.4% on Tuesday, while the MSCI EM was up by 0.1% on the day. The ALSI, however, increased by 0.7% on the day. Non-residents were net buyers of equities on Friday (ZAR782 million). The EMBI spread narrowed by 1bp while the SA’s 5yr CDS spread widened on Tuesday by 1 bp. The CBOE VIX index, a volatility-based proxy for global risk appetite/aversion, increased by 11.0% yesterday.

Latest SA publications

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