Weak local data, strong US data

• The rand is on the back foot, or rather, the dollar is on the front foot, after another round of good US data and weak local data.

• Risk aversion seems higher, too. Not only did the VIX index spike 20 bps from 12% to 14.06%, US bonds were bid, with the 10-year UST yield falling to 2.14% despite good data in the US which may imply a Fed rate hike sooner rather than later (we still expect a September rate hike).

• Local bonds were also under pressure and could not find support even on the back of stronger USTs.

• Risk aversion possibly comes from markets that remain uncertain about how to read the possibility of a Fed rate hike, but also from the Greece debt negotiations.

• From our perspective, the source of risk aversion is not all that important as the rand remains vulnerable to any increase in global risk aversion due to the current account deficit South Africa is running.

• The stronger dollar has put downward pressure on commodity prices too, notably platinum as well as Brent crude.

• GDP growth data undershot expectations and disappointed in the first quarter of this year.

• Yesterday’s release of the Quarterly Labour Force Survey (QLFS) for Q1:15 also presented disappointing labour market data. The unemployment rate came in at 26.4% in Q1:15 from 24.3% in Q4:14.

• USDZAR support is at 11.9820 and 11.8432. Resistance is at 12.4450 and 12.2050.

International developments

The rand is on the back foot or rather the dollar is on the front foot after another set of good US data yesterday. Durable goods orders excluding transport, as well as durable goods orders excluding defense related items, beat expectations by a wide margin. Durable goods orders excluding transport came in at 0.5% m/m in April, compared to expectations of 0.3%, and up from a contraction of -0.2% in March. Durable goods orders excluding defense related items was up 1% m/m, compared to expectations of 0.3%. The latest set of data would be in line with the last FOMC minutes that indicate that the Committee thought the slowdown in Q1:15 was largely seasonal.

Risk aversion seems higher, too. Not only did the VIX index spike 20 bps from 12% to 14.06%, US bonds were bid, with the 10-year UST yield falling to 2.14% despite good data in the US which may imply a Fed rate hike sooner, rather than later (we still expect a September rate hike). German 10-year yields were also lower, in line with USTs.

The fact that risk appetite is waning could be seen in the equity markets too, with all major indices in the US and Europe closing lower yesterday.

Risk aversion possibly comes from markets which remain uncertain about how to read the possibility of a Fed rate hike, but also from the Greece debt negotiations which continues to drag on. However, from our perspective, the source of risk aversion is not all that important as the rand remains vulnerable to any increase in global risk aversion due to the current account deficit South Africa is running.

Local bonds were also under pressure and could not even find support on the back of stronger USTs. Apart from domestic factors such as a weaker rand, it is worth noting that the EMBI spread also moved higher, confirming that appetite for EM bonds in general has been on the back foot since the start of the week.

The stronger dollar has put downward pressure on commodity prices too, notably platinum as well as Brent crude. PGM is South Africa’s largest merchandise export, while oil is the country’s single largest import. As far as Brent cure is concerned, we note that the speculative length in the futures market has increased substantially since February this year. If the dollar continues to strengthen, it may trigger some long liquidation, which could put the oil price under pressure.

Local developments

GDP growth data undershot expectations and disappointed in the first quarter of this year. Stats SA’s release of the Q1:15 GDP data saw growth coming in at 1.3% q/q (saar) from 4.1% q/q (saar) in Q4:14. Bloomberg expectations were for growth to have moderated to 1.5% q/q (saar). The moderation in growth comes largely on the back of load-shedding in the quarter, a contraction in spending by government and a drought which caused value added in the agricultural sector to plummet.

Agriculture contracted 16.6% q/q, down from an average growth rate in 2014 of 6.9%. This is the lowest q/q growth rate in agriculture since Q2:09. Our economics team had expected a contraction in utilities (electricity, gas and water). However, the sector grew 0.7% q/q, suggesting that weakness in electricity sales may adversely impact the Q2:15 GDP data. Construction was weaker than expected, growing by 0.8% q/q in Q1:15, down from an average growth rate of 3% q/q in 2014. Financial services growth was relatively healthy, and grew by 3.8% q/q, up from an average of 2.1% q/q in 2014. General government contracted 0.8% q/q. This is the first time that government spending has recorded negative growth since 2004. Taxes less subsidies added 0.3ppts to GDP versus our expectation of 0ppts, in line with Q1:14.

On a y/y basis, however, growth picked up to 2.1% in Q1:15 (in line with expectations), from 1.3% y/y in Q4:14.

Looking at where we are in the business cycle, Kim believes that we may have reached a peak in GDP in Q1:14 lead by cyclical GDP, which has been slowing since Q2:13. The non-cyclical GDP index which lags cyclical GDP by a year, also appears to have peaked, in Q4:13. Our economists note that historically an increase in the non-cyclical sectors as a percentage of GDP, a trend which we see emerging, has suggested the start of a downward phase of the business cycle. The leading economic indicator which pre-empts movements in cyclical GDP by 2 quarters also suggests that cyclical GDP will continue to slow. We expect GDP to increase to 2.0% in 2015 from 1.5% in 2014.

Yesterday’s release of the Quarterly Labour Force Survey (QLFS) for Q1:15 also presented disappointing labour market data. The unemployment rate came in at 26.4% in Q1:15 from 24.3% in Q4:14. Bloomberg consensus pencilled in a deterioration in the unemployment rate to 24.8%. The unofficial unemployment rate increased from 34.6% in Q4:14 to 36.1% in Q1:15.

The number of unemployed increased by 626,000 in Q1:15 to 5.535 million. The largest contributor to the rise in unemployment in Q1:15 was trade, which shed 201,000 jobs. Two other significant contributors to the rise in the unemployment rate were transport (-53,000) and community services (-51,000), while 12,000 jobs were shed in construction.

The largest positive contributor was finance, which added 156,000 jobs, while agriculture added 150,000 jobs in Q1:15. Private households grew jobs by 69,000 and utilities added 40,000. Manufacturing (29,000) and mining (16,000) also contributed positively to employment in Q1:15, although we expect these sectors to shed jobs overall in 2015.

Kim notes that with the high wage settlements in the mining industry last year and public sector wage agreements recently concluded, we anticipate further job losses as the GDP growth outlook remains constrained at 2.0% due to electricity supply shortages.

Markets

The rand weakened on further on Tuesday, closing at 12.08 compared to Monday’s close of 11.94. The rand’s depreciation against the greenback occurred in line with dollar strength against all of the major currencies; the dollar posted gains against the yen (1.3%), the euro (-1.0%) and the pound (-0.6%). The rand lost ground against all of the major crosses: the pound (0.7%), the euro (0.3%) and weakened marginally against the yen. The rand put in the second-worst performance amongst the commodity currencies we monitor for purposes of this report, only ahead of the NOK and put in the fourth-worst performance amongst the EM currencies, only ahead of the HUF, RUB and BRL. The rand traded between a low of USDZAR11.9284 and a high of USDZAR12.0935.

Commodity prices closed lower on Tuesday. Platinum and gold were down by 2.1% and 1.3% respectively, while copper was down by 0.9%. The price of Brent closed 2.7% lower, at $63.72/bbl. Both the developed world MSCI and the MSCI EM were down on Tuesday, by 1.3% and 0.9% respectively. The ALSI was down by 1.9% on the day. The EMBI spread widened by 10 bps, while SA’s 5yr CDS widened by 4 bps. The CBOE VIX Index, a volatility-based proxy for global risk appetite/aversion, increased by 15.9%.

Latest SA publications

SA Macroeconomics: Unemployment rises to 26.4%: Trade sheds 201k jobs; finance adds 156k jobs by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 May 2015)

SA Macroeconomics: Q1 GDP slows to 1.3% q/q: Is SA in a downward phase of the business cycle? by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (27 May 2015)

SA Macroeconomics: GDP to slow to 1.0% q/q and the trade deficit to widen: Details of public sector's wage deal indicate fiscal slippage by Kim Silberman, Thanda Sithole and Kuvasha Naidoo (26 May 2015)

SA FIC Weekly: Public sector wages: the real deal not all that bond-positive by Walter de Wet and Shireen Darmalingam (25 May 2015)

Credit & Securitisation Weekly: Clarification on e-tolls by Steffen Kriel and Varushka Singh (22 May 2015)

SA FIC: MPC Comment: The MPC “stands ready to act when appropriate” by Walter de Wet (22 May 2015)

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)