MPC meeting the highlight this week

The rand is back at 12.02. The 12.00 level remains key support. A close below 12 could see the currency retest the 11.35 – 11.88 range where it traded most of the year.
SARB will hold its MPC meeting this week. We expect hawkish statement and media briefing. But we expect SARB to stay on hold.
The market appears to have turned after the FOMC meeting: USTs have started strengthening. Combined with a slightly stronger rand, this should give some impetus to bonds to grind slowly lower into Thursday’s MPC.
Standard Bank expects inflation to average 4.2% y/y this year. We also believe that inflation has most likely bottomed in February.
The exchange rate remains an upside risk to the inflation outlook, vulnerable to changing perceptions of the timing of global monetary policy adjustments, and the slow pace of contraction in the current account deficit.
Equities closed higher across the board in Europe on Friday. So did the S&P and Dow in the US. Most Asia equity bourses are following suit this morning.
Overall, it is a quiet week in the international front, with few major data releases.
Tomorrow will see the release of China’s Flash manufacturing PMI for March. Overall, the data print should still indicate a manufacturing sector which is struggling in China. Expectations are for a slightly lower print in March of 50.5, down from 50.7 in February.

International developments

On the international data front, it’s a relatively quiet start to the week, although there are a couple of central bankers speaking today. ECB President Draghi is up in front of the EU’s Economic and Monetary Affairs committee today. This should prove quite an exhaustive examination of the ECB’s thinking right now. Hence, it is worth watching out for comments about the progress of QE, which started this month, as well as any comments about the ECB’s funding policies with respect to Greece. There might also be comments on the exchange rate as well. The euro has clearly fallen sharply, especially against the dollar, and Draghi might be pressed on whether this seems sufficient.

As well as Draghi from the ECB, we will also hear from Williams, the San Francisco Fed president. Steve points out his comments are always worth watching out for given that his views seem to be a bit closer to the consensus within the Fed than some of the other members that tend to lie on the fringes. This being said, after an exhaustive explanation from Yellen last week, there may be little Williams can add. In the past he has suggested that the Fed will have a serious discussion in the summer about rate hikes, which may suggest that he leans towards a June hike.

Local developments

Stats SA releases the Quarterly Employment Statistics for Q4:14 on Tuesday at 11:30. While there are no consensus forecasts available, it is likely that the q/q non-farm payrolls will rebound in the final quarter after contracting by 1.5% q/q in Q3:14. Surveying the past 10 years, the Q4 q/q number has improved in the final quarter in 7 of the past 10 years. Stats SA also releases the February PPI data this week, on Thursday at 11:30. Bloomberg consensus expectations has pencilled in a moderation in y/y PPI to 2.8% from 3.5% in January. On a m/m basis, however, we can expect PPI growth to have gathered momentum. M/m PPI is expected at 0.2% after posting -1.1% growth in January.

Later this week, the SARB will announce its rate decision on Thursday at 15:00. We stick with our view the SARB will keep rates on hold at 5.75% this week. This is in line with the unanimous prediction among those in the Bloomberg poll. Currently, the FRA market is pricing in a 25 bps hike within five months (or by the July/September MPC meeting). Just before the previous meeting, the FRA market was almost fully discounting around 25 bps worth of cuts (actually 22 bps) within four months (or, at that stage, by the May meeting).

The SARB’s rhetoric in both in its official statement after the January meeting, as well as in commentary since then, helped put paid to these market expectations for rate cuts. In January, while the Bank appeared less hawkish than previously, owing largely to interest rate friendly adjustments made to its inflation and growth forecasts, it tried to maintain a hawkish tone, saying that it was of the view that “the bar for further accommodation remains high”. It specifically mentioned “a sustained decline in the inflation rate and inflation expectations” as a precondition for further accommodation. Added to this, the Bank outlined a number of factors and arguments that appeared to be in defence of the decision not to cut.

The exchange rate remains an upside risk to the inflation outlook, vulnerable to changing perceptions of the timing of global monetary policy adjustments, and the slow pace of contraction in the current account deficit. A further upside risk to the inflation forecast comes from a possible increase in wage settlement rates in excess of inflation and productivity growth in the coming year. Food prices remain a major source of inflation pressure with increases still in excess of the headline inflation rates, while electricity constraints hold domestic growth at ransom. Given the Bank’s concerns about the current account and the vulnerability this lends the rand, which ultimately poses an upside risk to their inflation outlook, it is natural that the Bank would be cautious in moving in a way that could aggravate the situation.

Markets

Friday turnover was R18.7bn in nominal bonds, R3.2bn in ILBs. 36% of turnover was in the R186 and 10% in the R214. Another 33% of turnover was due to trade in front-end R203 – R2023 bonds. Offshore investors were net sellers of -R1.5bn of SAGBs. Selling was broadly across the curve, with -R907m in R207, -R338m in R204, -211m in the R186 and more than -R100m in each of the R159, R213 and R2032. Buying was in the R214 (+R274m), R203 (+R198m), and R209 (+R116m).

The majority of the curve shifted marginally higher by 0.5 – 1.5 bps, with the R186 unmoved at 7.77%. Belly and back-end spreads steepened slightly. FRAs followed bonds, moving slightly higher and ignoring Friday’s stronger currency move. The currency move should help bonds and FRAs this morning. US Treasuries moved stronger on Friday, with 10yr moving further below 2.0% and is now trading at 1.93%.

Over the week, the curve steepened, with all bonds strengthening. Front-end bonds led the move over the week. EM bonds strengthened by an average of 21.6 bps and 15.2 bps in 5yr and 10yr tenors respectively. Indonesia was the only EM country we cover where there was slight weakness over the week. SA performed broadly in line with the EM averages.

The rand strengthened on Friday with the local currency closing at 12.02, compared to Thursday’s close of 12.31. The rand’s appreciation against the greenback occurred in line dollar weakness against all of the major currencies; the dollar posted the largest loss against the euro (1.5%), the pound (1.4%) and the yen (-0.6%). The rand gained ground against all of the major crosses; the yen (1.9%), the euro (-1.1%) and the pound (-1.0%). The rand put in the best performance amongst both the commodity currencies and EM currencies we monitor for purposes of this report. The rand traded between a low of USDZAR12.0061 and a high of USDZAR12.3202 intraday.

Metal prices were up on Friday. Copper was up by 3.3% while platinum and gold were up by 1.3% and 1.0% respectively. The price of Brent increased on Friday, by 1.6% to close higher at $55.32/bbl. Both the developed world MSCI and the MSCI EM were up on Friday, by 1.3% and 0.5% respectively. The ALSI was down by 0.2% on the day. The EMBI spread narrowed by 6 bps and SA’s 5yr CDS narrowed by 1 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, decreased by 7.5%.

Latest SA publications

Credit & Securitisation Weekly: S&P downgrades Eskom by Steffen Kriel and Varushka Singh (20 March 2015)

SA FI Weekly: Little local driver to bonds by Asher Lipson (20 March 2015)

SA Macroeconomics: Economics Note: Jan retail sales slowed to 1.7% y/y from 2.0% y/y in December: General dealers -2.5% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA Macroeconomics: Economics Note: CPI falls to 3.9% y/y: Services and food remain sticky by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA Macroeconomics: Economics Note: CAD narrows to 5.1% of GDP: Trade data a positive surprise by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 March 2015)

SA FX Weekly: Catching a falling knife by Marc Ground and Shireen Darmalingam (16 March 2015)

Credit & Securitisation Weekly: Eskom by Steffen Kriel and Varushka Singh (13 March 2015)

Credit & Securitisation Monthly: Update on Eskom by Steffen Kriel and Varushka Singh (6 March 2015)

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