MPC announcement due today

• The FOMC April meeting minutes were released last night. As we said yesterday, since the April meeting US data has been rather a mixed bag.

• It seems as if a rate hike in June is now very unlikely. The minutes either provided very little new information or the market generally believes that the information in the minutes was stale. We still pencil in a hike in September.

• The yield on the 30y and 10y USTs declined only marginally, while the dollar reacted very little in the hours after the meeting.

• Domestic bond yields also sat rather steady, with the R186 strengthening only marginally to around 7.97% on the back of the government wage deal and the lower-than-expected inflation print for April.

• The rand remains range-bounds within the 11.80 – 11.90 range ahead of the SARB’s MPC meeting today. We maintain that the rand should be approached from the short side, with support for the USDZAR at 11.8200 and 11.7500. Resistance is at 11.9200 and 11.9750.

• Stats SA’s release of the April CPI data yesterday confirmed that we have reached the bottom of the cycle.

• Yesterday’s retail sales data fell short of expectations, coming in at 2.0% y/y in March.

• We expect retail sales to grow moderately in 2015, with PCE averaging 1.7% y/y from a revised 3.7% y/y in February (previously 4.2% y/y).

International developments

Last night saw the release of the FOMC minutes from the April meeting. As pointed out yesterday, since the April meeting there has been a mixed bag of data out of the US; US non-farm payrolls data (which came in below expectations), hourly earnings (which came in below expectations) University of Michigan long-term inflation expectations (which increased), retail sales (which disappointed), industrial production (which disappointed) and housing starts (which beat expectations).

It appears as if the minutes provided very little new information, or that the market generally believes that the information in the minutes was stale. The yield on the 30y and 10y USTs declined only marginally, while the dollar reacted very little in the hours after the meeting. Domestic bond yields also sat steady, with the R186 strengthening only marginally to around 7.97% on the back of the government wage deal and the lower-than-expected inflation print for April.

The rand remains range-bounds within the 11.80 – 11.90 range ahead of the SARB’s MPC meeting today. We maintain that the rand should be approached from the short side, with support for the USDZAR at 11.8200 and 11.7500. Resistance is at 11.9200 and 11.9750. We expect the MPC to keep rates on hold. A repo rate that remains unchanged, combined with a real interest rate which will fall as inflation rises into 2016 is, on balance, rand-negative.

The tone of the minutes was set in the first paragraph on the Staff Review of the Economic Situation. The minutes indicated that staff believed that growth which only “edged up” in Q1:15 was likely caused in part by “transitory factors”. This includes the cold winter conditions and strikes at ports on the West Coast. FOMC members generally shared this view. The minutes also indicated that the “pace of improvement in the labor market conditions moderated some-what”. Staff adjusted their inflation forecast slightly higher in the near term partly due to higher oil prices. However, the minutes also indicated that the inflation forecast for 2016 and 2017 was projected to move closer to, but remain below the 2% long term target of the Fed. FOMC members once again generally shared this view.

That said, there was some discussion on why the current weakness may persist. Reasons mentioned were a strong dollar and the earlier decline in oil prices which may dampen investment spending. There were also concerns that the anticipated household spending boost form lower energy prices remain elusive. Although a “few participants” indicated that they believe the downside risk to economic growth has risen, “most participants” indicated that the risk to the economic growth outlook and the labour markets remains “nearly balanced”. That said “many participants” believed the pace of improvement in the labour market conditions had slowed.

Regarding the Fed funds rate participants “expressed a range of views”. Members indicated that “it would be appropriate to raise the target range for the federal funds rate when they had seen further improvement in the labor market and were reasonably confident that inflation would move back to tis 2 percent objective over the medium term”. “Many participants” thought the information available would not be sufficient enough to raise the fed funds rate in June, but the possibility remains on the table. It does seem as if a rate hike in June is now very unlikely. We continue to pencil in a hike in September. Currently the Fed Funds futures assign practically no probability of a hike in June.

It is worth noting that China’s Flash HSBC manufacturing PMI for May was released earlier this morning. The data continues to show a struggling (in fact contracting) manufacturing sector with the data coming in at 49.1, only marginally higher than the 48.9 seen in April. The data out of China continues to paint a consistent picture; the economy is slowing. Recall that earlier this month China added further stimulus to its economy with the Peoples Bank of China (PBoC) cutting the benchmark interest rate by 25 bps. This was the third cut in five months. We would expect the stimulus to provide some support but, with both the productive side and the consumption side of the economy at multi-year lows, a sharp turnaround seems unlikely.

Local developments

The SARB concludes its MPC meeting today. We do not expect any changes in interest rate policy (in line with consensus expectations). In the March MPC statement, the Bank appeared more convincingly hawkish, as was most apparent in what might be characterised as “stagflation revisions” to inflation and growth forecasts. We see stagflation as a circumstance in which an inflation-targeting central bank would usually prefer to stand still, and would hike only if inflation risks were sufficiently pronounced to endanger its credibility – that is, if it felt forced to. That is why we believe that the SARB will place increasing emphasis on inflation expectations as the Bank looks beyond any temporary breach of the inflation target band.

It is important to note the fact that the SARB sees 6.7% in Q1:16 as only a “temporary one-quarter breach of the inflation target”. This breach of the upper level of the target band, combined with a decline in inflation to 5.5% y/y in Q4:16, is in our view not enough to justify a rate hike. We expect interest rates to remain on hold in 2015.

Stats SA’s release of the April CPI data yesterday confirmed that we have reached the bottom of the cycle. CPI inflation came in at 4.5% y/y in April from 4.0% y/y in March and against Bloomberg expectations of a 4.6% y/y increase. The increase was largely driven by the 156c/l increase in the petrol price, in part due to 82c/l in additional levies. Petrol deflation moderated in May to 10% y/y from 11% y/y in April and will add 5bps to May’s headline rate.

Food inflation was in line with expectations at 5% y/y, down from 5.9% y/y in March driven by meat inflation, which dropped sharply in April to 6.4% y/y from 8.4% y/y, in line with lower yellow maize inflation. Our economics team believes that meat inflation may be near its bottom. Bread and cereals slowed to 2.4% y/y from 3.7% y/y in line with the slowing trend in wheat inflation – the feed-through from wheat to bread and cereals takes on average 9 months and seems to have looked through the rise in prices in the first half of 2014. Diary (milk, eggs & cheese) also slowed, to 8.4% y/y from 9.7% y/y in March; due to the 16 month lag between yellow maize and dairy (and the relatively tenuous relationship. They further believe that food inflation faces upside risks over the next few months as yellow maize prices rise.

Core inflation moderated to 5.6% y/y in April from 5.7% y/y in March. Our economists expect core inflation to continue falling this year as the lower petrol price filters through the inflation basket more broadly. This is particularly important from a monetary policy perspective as it supports our view that rates will remain on hold at the conclusion of today’s MPC meeting and that rates will remain on hold in 2015.

Yesterday’s retail sales data fell short of expectations, coming in at 2.0% y/y in March from a revised 3.7% y/y in February (previously 4.2% y/y). The slippage comes on the back of deteriorating consumer sentiment in Q12015 and Eskom’s power cuts. Sales of durables accelerated to 5.4% y/y up from 5.0% y/y in February, driven largely by hardware sales growth which increased to 9.9% y/y in March from 9.5% y/y in February and contributed 0.7 ppts to sales growth in March. Furniture sales contracted 1.6% y/y in March and subtracted 0.1 ppts from sales growth. Sales of semi-durables good (textiles + other) slowed to 1.7% y/y from 2.7% y/y in February. Textile sales slowed to 0.7% y/y down from 2.2% y/y in February and added 0.1 ppts to retail sales growth. Other retailers slowed to 3.4% y/y from 3.7% y/y in February and contributed 0.4 ppts. Sales of Non-durable goods (general dealers+ food + pharmaceuticals) slowed significantly to 1.4% y/y in March down from 3.9% y/y in February.

We expect retail sales to grow moderately in 2015 with PCE averaging 1.7% y/y, but notes that there are risks, including deteriorating consumer sentiment, job losses in the mining and manufacturing sector, load shedding and interest rate increases (which we do not anticipate as our base case).

Markets

The rand strengthened on Wednesday, closing at 11.84, compared to Tuesday’s close of 11.91. The rand’s appreciation against the greenback occurred despite dollar strength against most of the major currencies; the dollar posted gains against the euro (-0.5%) and the yen (0.6%), but weakened against the pound (0.6%). The rand ground against the major crosses: the yen (1.2%), the euro (-1.1%) and the pound (-0.5%). The rand put in the best performance amongst the commodity currencies we monitor for purposes of this report, and put in the third-best performance amongst the EM currencies, only behind the BRL and IDR. The rand traded between a low of USDZAR11.8092 and a high of USDZAR11.9701.

Commodity prices were up on Wednesday. Platinum and gold were up by 0.5% and 0.2% respectively, while copper was largely unchanged. The price of Brent closed 1.6% higher, at $65.03/bbl. The developed world MSCI was up only fractionally on Wednesday while the MSCI EM was down by 0.5%. The ALSI was down by 0.3% on the day. Non-residents were net sellers of equities (ZAR91 million) on Wednesday. Both the EMBI spread and SA’s 5yr CDS narrowed by 1 bp. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 0.2%.

Latest SA publications

SA Macroeconomics: Mar retail sales 2.0% y/y, down from a revised 3.7% in Feb: Hardware grew 9.9% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 May 2015)

SA Macroeconomics: CPI 4.5%, below expectations: Core starts to moderate by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 May 2015)

SA Macroeconomics: SARB to remain on hold: Relatively resilient SA consumer; wage negotiation risks and EM assets weather the storm by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (18 May 2015)

SA FIC Weekly: Three risks facing the SARB by Walter de Wet and Shireen Darmalingam (18 May 2015)

Credit & Securitisation Weekly: Tariff decision timelines announced by Steffen Kriel and Varushka Singh (15 May 2015)

SA Macroeconomics: Broad based rebound in March manufacturing to 3.8% y/y: Q1 growth contracted 0.6% q/q by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (12 May 2015)

SA Macroeconomics: SA deindustrialisation continues: SA deficit revised to 3.5% amidst global bond market volatility by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (11 May 2015)

SA FIC Weekly: The exchange rate pass-through; what you need to know by Walter de Wet and Shireen Darmalingam (11 May 2015)

Credit & Securitisation Monthly: Focus on: SA Municipal Sector by Robyn MacLennan Steffen Kriel (8 May 2015)

SA Macroeconomics: SA’s trade deficit to narrow: Global data continues to drive local and EM assets by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 April 2015)

Credit & Securitisation Weekly: Eskom’s acting CEO comments by Steffen Kriel (24 April 2015)

SA Macroeconomics: CPI surprises to the downside: Food inflation slowed to 5.9% y/y, and core to 5.7% y/y by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (22 April 2015)

SA Macroeconomics: March CPI to rise to 4.1% y/y: EM assets receive mixed signals from US & Chinese data by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (20 April 2015)

Credit & Securitisation Weekly: Escalating municipal electricity debt by Steffen Kriel (17 April 2015)