US employment moves into focus as RBI cut rates again

• The focus remains on international data this week in the absence of major domestic data releases.

• As we await the release of Friday’s US employment data, markets will likely remain range-bound.

• We look at the US ADP employment data; the US ADP report is a poor guide to the month-to-month gyrations of the non-farm payroll report but a decent guide to the trend.

• At the moment, the 12-month trend is a bit more than 220k – close to the forecast the market is making for today’s data.

• The Bank of India cut the benchmark interest rate this morning in an unscheduled meeting — the second cut in two months.

• The rand remains on the back foot since Friday’s weak trade balance data. With the US non-farm payroll data out on Friday, we do not expect any major strength in the rand before then.

International developments

The Bank of India cut the benchmark interest rate this morning in an unscheduled meeting — the second cut in two months. The repo rate in India now stands at 7.5%. CPI in January came in at 5.11% — the RBI was targeting CPI below 8% in January. The disinflation was driven to a large extent by the decline in the oil price, as well as food prices. India has been struggling with a wide current account deficit in in especially 2012 and 2013 which, like in the case of South Africa, provided the Indian Rupee with a weakening bias. The Indian current account reached -5.4% of GDP in Q4:12. The Indian rupee experienced substantial weakness against the dollar during this period which helped push Indian inflation up to above 10% in 2013. The repo rate reached a high of 8.5% in late 2011. Since then, the Indian current account has compressed to -1.3% of GDP in Q3:14.

The Bank of Canada is expected to leave rates unchanged today, but we think that this may not be a straightforward decision. The Bank cut rates 25 bps at its previous meeting in response to the slump that we have seen in oil prices, and so today we will see if this was really part of a 50 bps reduction, with another 25 bps cut. Governor Poloz said recently that the cut last time was the “appropriate” response given the tumble in oil prices and the impact that this would have on the economy – Canada has a large oil and gas sector. As oil prices have not moved too much since then, the market seems to be going with the view that the 25 bps cut last time is still all the BoC needs to do — at least for the moment.

Earlier in the day, we will see the Eurozone retail sales data for January. The market looks for a 0.2% m/m rise in the month but Steve notes that Germany’s data showing a 2.9% monthly rise yesterday could add 0.75% on its own and it is hard to think that data from other countries will take this all away and leave the Eurozone figure at 0.2% or lower. But while Steve sees a clear upside risk he also suspects that the market response will be negligible – as was the case with the German data yesterday.

The US ADP report is a poor guide to the month-to-month gyrations of the non-farm payroll report, but a decent guide to the trend. At the moment, the 12-month trend is a bit more than 220k — close to the forecast the market is making for today’s data. The trend is rising and hence Steve suspects that the risks to the data today lie slightly to the higher side. If that’s correct, it could lift the dollar a bit. However, our G10 strategist suspects that the market might respond more if the data are soft. This is because we’ve had quite a run now where much of the US data flow has been short of expectations, leading the market to think that the economy is losing a bit of momentum. We certainly saw this in the difference between Q3:14 and Q4:14 GDP, although this data is a bit volatile. Nonetheless, weaker-than-expected numbers in many areas of the economy has not been mirrored by labour market data, helping to keep the Fed on track to remove its “patience” from the statement soon. If we do start to see some cracks in the labour market numbers, the market would probably believe the apparent convergence between labour market data and other numbers, more than they would believe continued divergence.

Markets

The rand strengthened against the dollar on Tuesday, closing at 11.75, compared to Monday’s close of 11.77. The rand’s appreciation against the greenback occurred despite dollar strength, albeit mild, against some of the majors; the dollar strengthened against the euro and pound but weakened against the yen. In terms of the other major crosses, the rand managed to strengthen against the euro and sterling (-0.2%) and the dollar (-0.1%), but lost ground against the yen (-0.2%). The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, ahead of only the NOK, while the performance amongst the EM currencies was mixed. The rand traded between a low of USDZAR11.7059 and a high of USDZAR11.8165 intraday.

Metals prices fell on Tuesday. Copper fell by 1.4% on the day while gold and platinum were both down by around 0.2%. Brent gained 2.5% on Tuesday to close at $61.02/bbl. Both the developed market MSCI and MSCI EM were down on Tuesday, by 0.5% and 0.2% respectively. The ALSI was up 0.3% on the day. Non-residents were net buyers of equities (ZAR313 million). The EMBI narrowed by 3 bps and SA’s 5yr CDS spread narrowed by 2 bps on the day. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 6.3%.

Latest SA publications

SA Macroeconomics: Economics Note: Monetary policy divergence continues: PPI declines, the Fed remains patient, and Rating Agencies respond to the Budget by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (2 March 2015)

SA Macroeconomics: Economics Note: Jan trade balance –R24Bn: Exports -14%, imports -3.6% by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 February 2015)

SA Macroeconomics: Economics Note: Jan private credit 9.2% y/y: Household credit slowed to 3.5% by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 February 2015)

Credit & Securitisation Weekly: Eskom in National Budget by Steffen Kriel and Varushka Singh (27 February 2015)

SA Macroeconomics: Economics Note: Fiscal slippage & tax increases: GDP revisions lower debt to GDP by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (26 February 2015)

SA Fixed Income Budget note 2015 Budget: Trying to stick to MTBPS forecasts by Asher Lipson, Walter de Wet and Shireen Darmalingam (26 February 2015)

SA Macroeconomics: Economics Note: 2014 GDP 1.5% y/y, 1.3% q/q: Q4:14 outperforms post strikes by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (24 February 2015)

SA Fixed Income Trade Idea: Time to receive 8x11 FRA by Asher Lipson (24 February 2015)

Credit & Securitisation Flash Note: Curro Holdings Ltd by Steffen Kriel (23 February 2015)

SA FX Weekly: Budget 2015: time to deliver by Marc Ground and Shireen Darmalingam (23 February 2015)

SA Macroeconomics: Economics Note: 2015 Budget: commitment to consolidation: GDP, Budget, PSCE, PPI & Trade data to be released this week by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (23 February 2015)

Credit & Securitisation Weekly: Upcoming National Budget by Steffen Kriel and Varushka Singh (20 February 2015)